How pound shops make money

Big supermarkets and well-known high street stores might be finding the aftermath of the recession tough but one particular type of shop is raking it in: Pound shops. But how do these pound shops make their money?

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. So much so that Poundland is planning a £750 million floatation on the stock exchange in March. The 500-store chain, which sells more than 3,000 products, including about 1,000 branded goods, had sales of £880 million last year, with pre-tax profits rising 29%.

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.

[How Ryaniar makes money and stays cheap]

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 Poundland had 500 outlets, two years it had 389.

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 series.

“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.

Booming business

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.

Chief executive Jim McCarthy said better-off shoppers were making up a growing proportion of his customers. “Our single price point and our amazing value are appealing to an increasingly broad section of shoppers with 22% of our UK customers now coming from the [richest] AB demographic."

Poundland currently has around 500 stores, but is planning to double that to 1,000 in the UK as well as expanding overseas.

[Multi-millionaire Martin Lewis: 'I still shop at Poundland']


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.

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Yahoo Finance UK | Photo by Lewis Whyld/PA Wire
Mon, Feb 17, 2014 15:00 GMT

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