Take a look up and down any high street in the UK and you can bet your bottom dollar you’ll see a pound shop or discount retailer. From Poundland and Poundworld to 99p Stores and Wilkinson or Poundstretcher, bargain basement shops are everywhere.
They’re raking it in too. According to the latest published figures, Poundland reported an operating profit of £21.5 million in 2010 - up 81.5% from the previous year. Rival Poundworld posted record profits of £5.4m in the year to 31 March 2011 on sales of £133m.
Meanwhile 99p Stores Ltd is currently up for sale with a price tag of between £50m and £60m.The value retailer, which started as a single store in Holloway, London in 2001, reported last year that pre-tax profits had jumped from £1.8m to £6.3m.
So how are these companies expanding when those around them, including some household names, are collapsing?
Making millions from pennies
Single-price discount retailers all work on a simple premise: Everything costs £1 (or 99p) and the goods are bulk-bought cheap and stacked high. Low prices mean just pennies are made on some sales and even when gross margins are 30%, which is typical, you’re still only making 30p a sale – before costs – so volumes are important.
On the plus side, this price consistency helps keep costs down; while other retailers have to decide on the price of each individual product and display this to customers, pound and 99p shops simply move stock from warehouses to shelves and customers always know how much something costs. So no confusion, no missing price tags and no price changes.
Because the shops buy goods cheap, stack them high and sell large volumes they need suitably-sized outlets that can handle large amounts of stock. When you bear this in mind it’s no surprise that the majority of Woolworths’ stores were replaced by pound stores when the retailer went bust three years ago.
The discount chains also have big buying power. At the last count – and all three chains are expanding all the time – Poundland had 389 outlets, 99p Stores had 173 and there were 125 Poundworld stores.
Big buying power, the ability to source products cheaply and low costs were highlighted by PoundWorld marketing director Martyn Birks as key to the firm’s growth when he took part in Channel 4’s Undercover Boss last year.
“As we have so many stores we have very strong buying power and we offer lots of top brands including Cadburys, Coca Cola, Britvic, Heinz and Johnsons,” he told Channel 4.
The recession has also helped pound shops thrive. Increasingly stretched household budgets mean even those perceived as well-off are starting to look for bargains. In a sign of Poundland’s increasingly middle-class customer base, the retailer started accepting American Express last month despite the credit card traditionally being associated with high earners.
Poundland said that research by Pagma from spring 2011 revealed that 13% of middle and upper middle class consumers in the UK shop in Poundland.
"As the economy has become more difficult we continue to see the ‘squeezed middle’ class shopping in our stores as they seek better value for their money. As soon as they realise they can buy their favourite brands and understand that we deliver amazing value, trust and confidence is built and they become loyal shoppers, as well as recommending us to family and friends,” explained Poundland chief executive Jim McCarthy.
Poundland currently has 389 stores but it plans to open a further 50 in the financial year 2012-13, almost one a week. It also has a chain of “D€alz” stores in the Republic of Ireland and the Isle of Man (which don’t stick to a single price).
Poundworld opened on average one store a week last year, and plans to open a further 40 stores by the end of 2012 and rival 99p Stores has gone from one shop in Holloway, London, in 2001 to 173 across the UK now.
Dealing with rising prices
The best-selling items in these shops range from batteries and cleaning products to branded chocolate (Toblerones and Maltesers), milk and cans of coke.
But despite the success, the single-price model comes with a risk. When the standard rate of VAT increased to 20% in January 2011, most shops could raise their prices to compensate. Pound shops couldn’t.
The same is true when inflation generally pushes up the price of goods – but if you think this means pound stores will have to increase prices, think again: Instead the stores simply reduce the quantities they offered on some products. For example, 99p Stores used to sell 200g Toblerones but now the chocolate bars weight in at 170g.
If that isn’t possible, they can either negotiate harder with suppliers or switch to selling different products.
So, with even inflation unable to stop the rise of pound shops, their assault on the high street looks set to continue.