The Reject Shop raises $30 million for expansion: Five lessons from the discount group

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The Reject Shop turned a few heads in the retail sector yesterday when it announced plans for a $30 million capital raising in order to open a further 35 stores.

The announcement is surprising not only for The Reject Shop’s sudden announcement of such an ambitious plan, but also as yet another sign the retail market is beginning to find its feet.

In a statement yesterday after the company had placed its shares in a trading halt, managing director Chris Bryce said the company had continued to trade well even during challenging conditions.

He repeated that sentiment to SmartCompany this morning, saying the retail sector is showing mixed signs.

“You never know what’s around the corner, particularly with the next six months with the election coming up, which has not traditionally been great for retail,” he says.

“There are signs in both directions sometimes. It’s been okay, but not outstanding, and every so often you get a good couple of weeks, then a disappointing couple of weeks. It’s difficult to predict.”

Now is a good time for The Reject Shop to expand. Comparable sales growth increased 6.2% in the third quarter of the year, and during the first half net profit after tax jumped 21.2% compared to the previous corresponding period.

The discount chain has been in a good position. During the retail downturn shoppers have flocked towards low-price options.

The company’s new expansion strategy is calculated to take advantage of market trends.

Here are five lessons we think you should take from its plan:

Taking over an unused space

The decision to expand with a further 35 stores could be explained away as part of the company’s significant growth. But the actual reasoning is much more calculated.

In the company’s most recent accounts, Bryce noted the gap in the market left by the trouble over at Retail Adventures – and he even specified this provided a “unique opportunity to accelerate our long-term store expansion”.

He says the company could buy some of those Retail Adventures stores, (the storefronts themselves, not the businessses), if the opportunity became available.

“We’ve had interest from Retail Adventures landlords on this. Understandably they’re a bit nervous about protecting their assets,” he says.

Expansion for expansion’s sake can be fine, but it’s much better when an opportunity presents itself. The Reject Shop has showed it is able to spy an opportunity, and then act on it.

Staying away from online

One of the most curious parts of The Reject Shop business is that it has stayed away from an online presence.

Here at SmartCompany, we’ve never been shy about underlining the importance of having a good digital strategy. But in this, The Reject Shop actually has a point.

Given the low-cost nature of the product, the company may end up spending more money to ship the goods than it’s actually paying for them. As The Reject Shop tends to be an impulse buy option, maybe a detailed online presence is redundant.

That isn’t to say the company is discounting an online strategy. In its latest reports, the business said it continues to look at how an eCommerce strategy could work.

It can be tempting to rush into a digital strategy without any thought. At the very least, The Reject Shop is putting careful thought into how it sells its goods.

Prepare yourself for growth

The Reject Shop has been planning growth for about four or five years, opening multiple sites every 12 months.

Bryce says, as a result, yesterday’s announcement doesn’t come without any strategy. The business has been investing in infrastructure, including building a new distribution centre in Queensland.

“We’ve started to build that infrastructure over the past few years when we knew that growth was ahead of us,” he says.

But it isn’t just distribution centres that The Reject Shop is building. There has been substantial investment in IT equipment and store fit-outs to prepare for the expansion.

Having a plan to grow is great. Actually anticipating that growth and putting infrastructure in place to accommodate it is even better.

Reducing debt

Back in The Reject Shop’s half yearly results, the discount retailer noted it had reduced its debt “considerably” during the six months, noting a “conservative approach to capital management” ahead of the store expansion program.

There’s nothing wrong with debt to get you moving, but The Reject Shop has taken the right move paying its own debt levels down before embarking on a risky project like an aggressive expansion plan.

Look for good prices

Bryce told SmartCompany this morning not only has the downfall of Retail Adventures played a part in the company’s willingness to expand, but the general downturn in retail has meant property prices are at a good level.

“Store opportunities are becoming more open than they have in the past, and we expect that to continue,” he says.

Spying an opportunity in a downturn is the mark of any good entrepreneur. The Reject Shop’s strength lies in the company’s ability to snap up bargains when others are dropping away.

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Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.

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