Open a Clearance Supermarket

Today I am going to provide you with a blueprint for what is possibly the only way to compete with a large retailer using a modest amount of capital.

What is a clearance supermarket
A clearance supermarket sells products that are overproduced, short-dated and past due date (past its “best before” date). While in a similar niche, in the local market a clearance supermarket is distinct from a distressed/salvage food operation. Food salvage operations are mainly smaller, cottage industries which specialise in damaged packaging and expired goods. It is also important to differentiate between a clearance store and a “discount” store locally. A discount store refers to something in the mould of Shoprite’s Usave, which is usually found in less affluent areas and townships which sells a limited range of basic foods to lower-income consumers, they are a “no-frills” retailer, don’t have fancy shelving etc. Kind of like Aldi overseas but smaller.

A clearance store is able to sell products for far cheaper than a traditional retailer and even a budget store like Usave, due to its business model relative to the supply chain. It sells goods that manufacturers, importers and other retailers are selling to recoup some of their investment, sometimes it is sold below cost. There are some disadvantages to this model, and that is your product mix & variety, unlike normal retailers you don’t really have much control or choice what product you can sell and due to its nature and often end up with unpopular products, or products that did not do too well in traditional retailers. But due to South Africa’s economic situation, there is a big market nonetheless…

The market opportunity
South Africa used to have a relatively prosperous middle class, that could afford to shop at wherever they pleased, but when you are as incompetent and corrupt as the South African government, not only are you unable to lift the poor out of poverty, but you will eventually drag the middle class down to poverty as well, which is exactly what is currently happening in South Africa. South Africa’s middle class is so overburdened and stretched with taxes, levies, electricity increases etc. That not only are they cutting down on luxuries, but they are also shopping at cheaper shops. Not because they want to because they have to: Some are close to being homeless and will do whatever they can to maintain their lifestyle and that of their children. I say all this as this clearance model is better suited aimed at a middle class market.

Business Model
To understand where a clearance supermarket fits in, it’s important to understand the food supply chain. You have manufacturers, importers, distributors and then you have the retailers who sell to the end-user or consumer.

Sometimes the manufacturer makes too much of a product and don’t sell it all as it has reached too close to the “best before” date, or they could introduce a new product to the market which doesn’t do too well, importers import products that couldn’t get retailers to sell it locally, and even retailers who have returned stock that has not sold well.

As we are speaking now there is food sitting in warehouses, unsold, approaching its expiry date, even past already, this food is destined for the clearance market and even the salvage market.

These are the places a clearance store gets its stock from.

Competitive Advantage
The big retailers (PicknPay, Checkers) will not sell* these products as it goes completely against their business model: fresh, quality, branded products, at a price of course. But the problem is they are catering to a market that is shrinking fast in South Africa.

*Retailers fight back somewhat
Retailers, Checkers, PicknPay and even Woolworths are starting to sell short-dated stock and even expired stock at discount prices. This is food that would have ended up in the salvage stream or even donated to charities a few years ago are now being sold, retailers have no choice, they too need to make something back even if it’s 50%. But even then, they cannot compete with a clearance store, because the products they buy from manufacturer or distributor does not have the same discount attached: a discount that is meant for it to sell quickly. People wanting a specific item, let’s say chicken noodle soup, they might not get it at a clearance store where they might have to settle for a less popular variety maybe butternut soup but at a fraction of the price.

Now you are probably thinking if this is such a great business model why it is not being done in SA, it is, but mainly in a small scale, here in Cape Town we have a few shops here and there but it has also been picked up by larger retailers the most prominent being Giant Hyper. Giant Hyper operates on a hybrid model, they have some of the usual offerings of other large retailers, of which they are not really the cheapest compared to other shops, then they have what they call the “clearing lines & job lots”, these are the products (both local and international) that are sometimes expired and sell for as little as a fifth of retail value. You will often see the usual suspects that end up in salvage stores: food from Turkey and Poland, they even sell chakalaka made in China; these will often be found next to local products that are not doing so well in the market but are being sold at a steep discount (you can’t be too picky in this economy). Not only are they clearing local products but international as well, Poland is going through an economic boom, they are manufacturing like crazy and often overproduce. Pallets and pallets of Polish-made goods are ending up in local warehouses. In a better economy, they would have been accused of dumping but this is SA’s future as locally produced foods will get more expensive and unaffordable to most due to our macro environment.

This business is a bit harder to start than a food salvage operation, it requires contacts and more importantly: capital, capital as in cash money, you not going to be fronted product, there are no credit lines here; you need to be able to take product off sellers hands immediately (this forms part of a business model known as “opportunistic buying”). The money will help with contacts and getting you through the door, if suppliers have excess stock you won’t be turned away, in an economy like South Africa is currently in, a bird in hand is worth ten in the bush. Other than that it has the same requirements as opening any supermarket.

To summarise if you have not been following: the best model for this business is a clearance/retail hybrid operating in a middle class area. Being a hybrid will also put you in touch with suppliers that can let you know if they have excess stock, it also gives you best of both worlds – you make a good profit on both sides, your normal stock does not have to be the cheapest, people will buy anyway due to convenience. This business will suit being operated in a middle class area, or a formerly middle class area that is seeing a bit of decay, that would be preferable than to a poor or “emerging” (to use market research parlance). As sad as it sounds poor people being poor will still buy branded products and moan about expiry dates (all foods are still good to eat after the “best before” dates). But a higher income group will have more common sense, they have more to lose, they care more and are willing to do what needs to be done to maintain a reasonable quality of life for them and their children.

This is a great business to look at; shops like PickPay and Checkers (let alone Woolworths) are too expensive for the majority of South Africans. To give you an idea of the current situation: there is a Woolies shop close to me, you should see how crazy it gets around the time (night or day) when they mark down their products, people phone ahead and start loitering, people that live in multimillion-rand houses clamouring for discounts. A lot of quality products end up in clearance stores which makes sense as people are spending less – this is a business that ticks all the right boxes in this challenging economy.

Related Businesses
Buy & Sell Distressed / Salvage Food Products

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