Essential Vs Non-Essential Retail

The retail sector is often considered to be a part of a single industry that has similar characteristics. However, this is not necessarily the case.

It needs to be understood that the retail sector is very diverse. There are many different types of businesses which operate in this sector. These businesses have considerably different characteristics.

The most basic bifurcation of the retail sector involves splitting retail between essential and non-essential retail. In this article, we will have a closer look at the financial characteristics which differentiate essential retail from non-essential retail.

Difference Between Essential and Non-Essential Retail

Essential retail refers to retail businesses which sell products which are required for day-to-day existence. These products include food products, grocery, hygiene products, medicines and other such items. The inability of people to procure such products in a timely manner poses a danger to their existence. Hence, essential retailer includes businesses such as Walmart, Costco and Sears.

On the other hand, non-essential retail products are items which do not have a direct impact on the survival of human beings. Examples include products such as luxury apparel, footwear or accessories. Brands such as Gucci, Prada, Louis Vuitton fall into the category of non-essential retail products.

The diverse nature of the products in consideration becomes very apparent when the relevant brands are listed down. Let’s now try to analyse the different financial characteristics of these products.

1. Cost Based Vs Experience Based: Firstly, it needs to be understood that when it comes to essential retail products, the market is largely commoditized. This means that most of the grocery and hygiene products being sold are generic in nature. It is true that there is some degree of differentiation between the brands.

   However, the differentiation is not significant. It is for this reason that lower cost of products is the number one competitive advantage in essential retail. Companies like Wal-Mart have built their entire business strategy based on reducing the cost of products.

   On the other hand, brands such as Louis Vuitton and Chanel do not compete on cost. Instead, they try to create an air of exclusivity about their products. Non-essential retail producers compete on the experience that they can provide to their user. As a result, the supply chain cost structure of both these types of businesses is very different.

2. Availability of Financing: There are many retailers that have themselves either ventured into financing or they have tied up with luxury brands in order to provide the necessary financing to end users to buy their products.

   It needs to be understood that most of the non-essential brands have an aspirational positioning. They try to sell expensive products to upper middle class who may not have the money to pay for it. Hence, the ability to provide convenient financing can drastically increase sales for a non-essential retail item whereas the same cannot be said about essential retail items.

3. Inhouse Brands: Essential retail stores sell a lot of brands for the same product category. For instance, they may sell many different types of detergent. It is therefore quite common for essential retailers to do backward vertical integration and create in house brands since they control the sales.

   On the other hand, non-essential retail is more about branding. Hence, customers have a high degree of brand loyalty and the existing brands do not face a credible challenge from in house brands.

4. Margins: This point is a corollary of the first point mentioned above. Since essential retailers compete on price, they tend to have very low margins. They earn their income by increasing their turnover. On the other hand, non-essential retailers sell a small quantity of goods. However, they tend to have a high margin on each sale.

5. Big Box Vs High Street: On the one hand, essential retailers try to create big box stores. They buy or lease large land parcels in the outskirts of the city. On the other hand, non-essential retail products are mostly sold at high streets. This means that the products are sold at the most prominent locations of the city which may attract the most affluent crowd. Having large stores at these expensive locations is a part of the aspirational positioning of these brands.

6. Elastic Vs Inelastic Demand: It also needs to be understood that the basic nature of demand of these two types of products is very different. On the one hand, essential products have an inelastic demand. This means that regardless of the price of these products, there is always a certain amount of demand for them. Also, the demand for these products remains more or less constant regardless of the economic cycle.

   On the other hand, the demand for non-essential drops drastically in a downward economic cycle. Whenever, the market sentiment is negative, people stop buying these non-essential products. This was witnessed during the covid-19 crisis when the demand for essential products skyrocketed due to excessive hoarding by people but at the same time the demand for non-essential products dropped considerably.

The fact of the matter is that essential retail and non-essential retail products are very different from one another. The economical and financial aspects of these two lines of business is very different from each other. It is important to understand these differences in order to thrive in this business.

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