While there has been plenty of copy about retail giants Coles, Woolworths, and Harvey Norman, last year the best-performed retail stock on the ASX slipped below the radar.

During 2006, shares in The Reject Shop moved from $4.40 to $10.53 and shot past $11 this morning. Not even the resource stocks have done that well.

The retail gold medal goes to TRS with a jump of 150%; JB Hi-Fi wins silver with +100% and David Jones bronze with +92%. On the podium are two cheapies and one very upmarket merchant.

Steve Ogden-Barnes of Monash University’s Australian Centre for Retail Studies says that discount retailers do well in the US because there is a larger pool of poor consumers there. “They don’t have a welfare system and so there is a larger percentage of target consumers,” he said.

In the US there is one discount store for every 12,000 shoppers, while in Australia the ratio is about one to 30,000. This growth potential for TRS is just one reason many analysts and investors like the stock.

However there is a second factor operating. Although Australian society is more middle incomed than the US, we are witnessing a “barbell” effect with the top and bottom of the market growing away from a shrinking middle ground.

There was once a tendency to describe shoppers as upmarket or discount. However, it seems that each of us operates in both sectors of the market. While some will buy jocks from Kmart in a seven pack and drive them home in a $150K car, others will spend hundreds on underwear and sign the credit card with a 20c ball point. We purchase some merchandise categories at the top end and others at cheap and cheerful.

While the top (DJs) and the perceived discounters (TRS and JBH) have prospered, the middle market got squeezed. And it is this market in which Target operates; hence the recent hype about the Stella McCartney clobber. What we are seeing is Target scrambling upwards, away from the middle, toward the department stores, leaving its Kmart sibling to mine the discount end.

It’s not just consumers who like dollar stores. Now we read that Coles suitor Kohlberg Kravis Roberts is in the dollar store business, paying US$6.9b for Dollar General, a recently struggling retailer which is ripe for a barbarian makeover.