Bargain Shop Business Model

Photo by Jennifer Uppendahl on Unsplash

One of my hobbies is to look for bargain businesses that are not hyped up yet. Another hobby of mine is to study business models, why they succeed and why they don’t.

Today I present to you a bargain shop business — the Ollie’s Bargain Outlet! Let’s use OBO for short.

Let me present the agenda for today:

• What is the business about?
• What is its value proposition?
• What are the Financial metrics that we can analyse?

Business model

OBO is a retail brand that sells a wide range of products at a cheap price. They have 388 stores that average 33,000 sq ft across 25 states in US. They have opened about 40 stores per year over the past 3 years. The products that OBO carries in their shops are brand name merchandises that are at a drastically reduced price and they have a large variety of products in different categories.

The shop gives customers a treasure hunt shopping experience where they go to the shop not knowing what to expect and find something expensive that is selling cheap. OBO also sells closeout merchandises, hence the product range changes based on the closeout deals. This ensures that product range keeps changing and creates an urgency in customers to purchase them before they are gone.

To have a clearer picture of what OBO sells, I have attached a pie chart of the products that OBO carries in figure 1 and the breakdown of each category is shown in figure 2.

Figure 1: Taken from OBO’s 2020 annual report — Pie chart showing the % of products that OBO carries

Figure 2: Taken from OBO’s 2020 annual report — Breakdown of categories

Value proposition for customers

We can study the value proposition of OBO to understand who are their target audiences and whether their needs are met. For OBO, there are 2 groups of people who will shop there and they are customers who want cheap quality products and an enjoyable shopping experience. As we can see in table 1 below, OBO seems to be able to meet the demands of their shoppers in these 2 categories.

Table 1: Value proposition of OBO

Financial metrics (against competitors)

To measure a business’s profitability based on physical stores, we use the following metrics, I have summarised the values in table 2 below:

Table 2: Metrics for OBO, Walmart, Target and Dollar Tree

Based on the data in table 2, OBO has the lowest revenue per square feet at $130/sq ft. What this means is OBO is able to generate $130 per square feet physical space in the shop by how it utilises each square feet. I feel that this can be attributed to it not being on the e-commerce platform. They are unable to meet the demands of customers who just want to order the products online and have them delivered to their doorstep. Therefore much of the revenue that is missing could be mostly due to the e-commerce sales.

Besides, as OBO is an extreme value shop, they are expected to sell their products at a up to 70% lower than other retail outlets. Therefore this may cause the revenue per square feet to be low.

For the inventory turnover ratio, we take the number of days in a year divide by the inventory turn ratio to find out the number of days the goods is in the warehouse. OBO’s number of days that the inventory is in the warehouse is 119, this is 3 times longer than Walmart, 2 times more than Target and 1.5 times more than Dollar Tree. People generally go to Walmart and Target for the fresh produce and daily necessities, hence this may be the reason why the inventory days are shorter as everyone needs fresh food on a daily basis. Therefore a fair comparison may be to compare with Dollar Tree. However, Dollar Tree has higher inventory turn than OBO perhaps due to its presence on the e-commerce platform.

OBO’s Gross margin return on investment (GMROI) is 205%. This means that they are able to generate 2.05 times of profit from each unit of inventory in addition to the inventory cost. This is a very good sign for profitability based on the goods they are selling.

OBO does very well in gross and net profit margin and it has the highest out of the 3 other competitors. This could be due to the fact that OBO has managed to keep its cost really low.

Conclusion

Given that OBO has 388 stores, they are slowly increasing their stores year by year and has plans to increase to more than 1050 locations. The targeted initial cost of investment per new store for OBO is $1 million and targeted sales is $4 million per new store. Therefore, the return on investment per store is 25%.

Besides, OBO is cash rich with zero debt unlike its competitors. This means that OBO has the ability to weather through difficult times. Being an extreme value shop, this already ensures that it will have a thriving business in good and bad times. Based on psychology, everyone loves a bargain and customers would want to walk out of stores knowing that they have saved money from buying expensive products. When recession hits, bargain shop gains more customers as people start to look for ways to save money on their shopping.

Figure 3: Return on stock prices as compared to SPY 500, VCR, WMT, TGT and DLTR

I have plotted the stock price returns over the past 5 years as shown in figure 3 above. The dark blue line shows OBO’s stock price return and the comparison are: S&P 500, Vanguard Consumer Discretionary ETF (VCR), Walmart (WMT), Target (TGT) and Dollar Tree (DLTR). We can see that OBO is much higher than its competitors, the index (S&P 500) and market competitors (VCR). This means that over the past 5 years, other than Target which caught up this year, OBO’s return is twice higher than its comparisons!

Therefore based on my analysis, I am confident about the future of OBO and it can be a good bet in good and bad times!