How do budget shops such as ValuDollar earn money if everything they sell is so cheap?

You've surely seen those "MOVING OUT SALE" banners plastered inside (and outside) budget shops such as ValuDollar.

Despite the proud announcements of "Fire Sale!" and "We Lose Money You Save!" in the form of red capital letters on bright yellow banners, we realise that these shops still exist in the same location a few months later.

In these budget shops, you will find food and everyday items at heavily discounted prices. A tin of potato chips cost as little as $1, compared to a price tag of $3.20 at major supermarkets. Branded chocolates and shower products are also some of the popular items among the crowd. It is not uncommon to see baskets loaded with 10 packets of Kit Kat to be given away as gifts.

But if every item is so cheap, how do budget shops manage to pay wages, rent, earn profits, and even expand to more outlets? Here are four reasons why budget shops can still thrive, despite their low, low prices.

1. OFF-BRAND PRODUCTS

This is when an item is imported from a cheaper country instead of its original country of origin.

Here's a fictional example. Tim Tam biscuits are a brand of chocolate biscuit made by the Australian biscuit company Arnott's. In some budget shops, Tim Tams might be imported from countries such as Vietnam, Cambodia, or the Philippines.

This does not mean that the biscuits are fake or inedible. It could mean that the ingredients used for the biscuit and chocolate coating are of lower quality, which might explain why certain food items - ifyou were to do a taste test with the same item in major supermarkets - will taste different.

Last year, Eatbook published a video where participants tried out five different types of snacks from two different places, NTUC and ValuDollar. The participants noticed variations in taste and texture in some of the products, which makes us wonder - how similar are the products in budget shops compared to supermarkets?

2. GREY MARKET RETAILING

If you have ever wondered why some shops are able to sell luxury, yet authentic, goods to customers at 50 per cent off the original price, it's because of a phenomenon known as grey market retailing.

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In every production chain, there are wholesale distributors who are permitted to sell their goods to authorised retailers. For instance, a vegetable distributor in Singapore will sell vegetables to supermarkets such as NTUC and Cold Storage.

But when these wholesale distributors have extra stocks, they might reach out to grey market dealers and offer to sell these purchases at heavily discounted prices. Hence, grey market dealers manage to get hold of and sell the same products that other authorised retailers sell.

It can be argued that grey market dealers partaking in the sale of goods is morally wrong - they could cause honest retailers to lose business. But, with no hard laws in place, it is difficult for authorities to clamp down on this complex phenomenon with such a pertinent grey area.

For the case of budget shops, this can range from food items such as Kinder Bueno to feminine products such as sanitary napkins.

3. ECONOMIES OF SCALE

Some suppliers may choose to import a high volume of items so that they can achieve economies of scale. This refers to the cost advantages that suppliers get - with increasing scale, the cost per item is cheaper.

A quick search online reveals that the parent company of ValuDollar is DD Private Limited, which was founded by Radha Exports in 2005. Radha Exports is a supplier specialising in high-quality fast-moving consumer products at highly competitive prices.

If Radha Exports buy goods in bulk, they will likely achieve economies of scale, and will hence be able to sell these goods to ValuDollar at a cheaper cost.

Radha Exports also diversifies the countries it buys from. This includes Malaysia, Indonesia, China, India, The Philippines, the UK, the USA, the Middle East, and local products from Singapore. This gives Radha Exports the choice to choose the cheaper option always.

4. EXPIRY DATES

Ever heard of the saying that if it sounds too good to be true, it probably isn't true? The same goes for buying items in perfect condition at extremely low prices.

Some budget shops sell their goods at low prices, but these items might have defects. The low price incentivises people to look beyond minor defects and buy the product. At the same time, the budget shop gets to clear stock that would otherwise be thrown away.

Minor defects can include dents on a bar of soap or tears on a packaging. Some products, especially food items, might also be approaching their expiry date and will hence be sold at a lower cost. Despite the items' less-than-ideal appearance sometimes, the cost savings are great.

Major supermarkets and food outlets also practice slashing prices if they are going to close for the day. Some sushi stalls even drop their prices by more than 80 per cent. This window at night helps them clear stock and gives you greater cost savings.

BUDGET STORES ARE STILL A FAVOURITE GO-TO PLACE

Budget shops are a popular shopping destination, with its success evident from the number of outlets springing up in our neighbouhoods the past few years.

If you are lucky, you might find limited edition items or products exclusive to one country at budget shops such as ValuDollar. Some major supermarkets do not match the level of variety that budget shops possess.

As a consumer, always exercise caution when purchasing products. For food items, conduct your own taste test before deciding if you are comfortable consuming the product.

This article was first published in Dollars and Sense.