With 5,000 outlets and a turnover of 270m last year, charity shops are at the heart of the high street.
While other high street retailers may grumble that the charity shops bring down the tone of an area and offer unwelcome, and they say unfair, competition, a new report from market researchers Mintel says they do not present a serious threat to high street retailers. The charity shops account for a tiny portion of total consumer expenditure, according to Mintel.
Nevertheless, their turnover has more than doubled and store numbers have increased by two-thirds over the past six years. Unfortunately this growth is leading to difficulties in obtaining donated goods. It is crucial for charity retailers to ensure that they receive sufficient donated goods to stock their increasing number of shops. With the public becoming better educated on the value of secondhand goods, and the fact that today you can sell your secondhand goods (for instance, through commercial secondhand shops and car boot sales), people are donating less to charities.
A more commercial approach may be needed by charities in the collection of donated goods, and one charity has already examined the possibility of obtaining donations and secondhand goods for resale from mainland Europe.
One of charity retailers’ greatest fears is that the Government may introduce VAT on donated goods. This would slow down growth, and could lead to the closure of some of the weaker charity shops. A spokesperson from one charity retailer tells Mintel’s researchers: “If VAT goes onto donated goods we’ll have to look at how to recover it. Whether our customers will pay more is questionable.” Mintel estimates that imposition of VAT on donated goods would cost charity retailers 33.75m, equivalent to 46 per cent of profits.
Over the next few years, charity retailers will open more specialist shops. Already, there are bookshops and gift-only shops operated by a number of charities and in the future specialist secondhand electrical and computer shops will be opened. Differentiation and niche marketing will become the name of the game for some of the major charity shop operators.
If charity retailers do embark on an expansion of the sector, exploiting new facias, and increasing the number of new goods sold, they may have to contend with the possibility of paying tax and standard business rates, in order not to contravene current legislation, and to placate increased opposition from commercial retailers.
All the major, and several of the smaller, charity shop chains use branding and corporate image to attract customers to their shops and to create awareness of the existence of their retail outlets on the high street. Branding is likely to become one of the main differentiators among charity shop retailers.
Local hospice shops seem to attract a loyal group of customers and donors, where the work that the parent charity does is highly visible and can be appreciated by the local community. Obviously the major charity shops do have a core of loyal customers, but people are prepared to shop around and buy something that offers value from any charity shop they can find it in.
The major charity organisations are starting to look at customer loyalty programmes, possibly aligning these with charity credit cards, and in the future there could be some innovations from the more go-ahead charity retailers by way of their own customer loyalty programmes.
Regular charity shoppers know where to shop for the best deals, they will look in certain charity shops and not others, so charity shops do clearly compete among themselves. They also have to compete these days with commercial secondhand shops and other high street neighbours. Charity retailing will become more competitive at all levels in the future.
Contrary to widely held perceptions that charity shops do not make money, Mintel’s financial analysis of main operators indicates that most are generating a surplus. Inevitably, some, as with all commercial operations, make more money than others, but in the main Mintel estimates that charity shops make an average return, or net surplus/profit, of 27 per cent.
Larger operators are expecting to increase steadily the number of shops they operate. Smaller ones may have to use different tactics, and in the short term may choose to grow slowly as the UK economy expands.
A new niche marketing trend is emerging among certain charity shop retailers. Oxfam has started to open books-only stores in university towns, and craft-only shops in tourist areas such as York, Chester, Canterbury and Bristol. This is a trend that is likely to be taken up by other charities.
The sector at present is diverse. Most charity shops are located in high streets, or secondary shopping sites, often away from the main areas of “footfall”. The types of charity shop found varies from the well fitted out major national charity shop, such as Scope’s chain, to the smaller charity shop operated by a local charity. The basic product remains the same, namely donated pre-owned goods, with new goods mixed in where appropriate.
Charity retailers need to develop a point of difference from their rivals and from other retailers. Differentiation is seen by marketers as being the way to generate an increase in profits. The aim is to make a retailer distinct from the opposition. How can charity retailers achieve this, on limited budgets? One way is by providing a more varied product mix, another is by increasing the number of new goods sold. Both of these strategies will help charity shops to become different from the opposition.
Alternatively, charity retailers may decide to open new goods-only stores. To sell fair trade goods, an area that Oxfam is starting to develop, or sell new gift items, something Barnardo’s has started to do. Whatever route is chosen, the aim is to make shops stand out.
The high correlation between personal disposable income and charity shop sales dispenses with the notion that improving prosperity may curtail the customer base, or at least reduce expenditure in the outlets.
The introduction of more new items in the product mix of many shops and the general overall improvement in the condition and presentation of goods sold means that they are less reliant on second- hand goods.
Between 1990 and 1996, the turnover of charity shop retailers more than doubled, which, at constant prices (using the RPI), was equivalent to 71 per cent in real terms. As the report has amply illustrated, this was at a time of exceptional growth, both in numbers of outlets and in the turnover per store.
While not achieving the dynamism experienced in the past six years, the forecasts do indicate a further increase of a third; equivalent to 12 per cent in real terms. Mintel has forecast that total retail sales between 1996 and 2001 will grow by 27 per cent, indicating that charity shops will achieve a better growth rate than the retail sector as a whole.
Nevertheless, turnover will remain minute when compared with the total (some 0.16 per cent of UK retail turnover in 1996). Even if charity shops devote much larger portions of their stock to new products, the threat to mainstream retailers will remain very small.