KamLibrary - The Rise and Rise of Pound Shops

In a recession, consumers cut back on spending and go on the hunt for bargains. While such a shift invariably hurts the overall retail industry, it acts as a boon to a particular section – discounters. And very specifically, to the so-called ‘pound stores’, so named for their practice of listing all their products at a low price point (usually rounded off to the nearest pound).

Pound stores are a relatively new phenomenon in the UK, with the oldest of the major chains having only been established around two decades ago. After relatively modest growth until the new millennium, their numbers have exploded across the country in the past decade, and show no signs of letting up.

What’s causing the growth?

The surge in the number of pound stores has been largely due to three main factors – 1). Larger store networks; 2). More varied product range (including major brands) made possible by the greater scale of the chains; and 3). Wider acceptance amongst more affluent consumers, who earlier disdained from buying at such outlets.

Pound stores today are a significantly different creature than the ones that first opened in the UK. The original iterations of these chains sourced excess inventory and end-of-stock lines in non-food (often seasonal), which often led to an ad hoc product offer, and led to them being the custom of lower-income and impulse buyers. However, as the chains have grown, suppliers have been willing to strike dedicated deals with them and this has seen pound stores stock more focused lines on a more regular basis.

This has allowed them to offer more products that a regular supermarket would, which in turn has attracted more consumers, while encouraging existing customers to buy more. The feedback from the customers (and the desire to expand the average ticket spend) has seen the chains gradually branch out into non-perishable food and, recently, chilled foods and beverages.

A lesser-recognised reason for the growth of pound stores in the UK has been the knock-on effect of the popularity of hard discounters such as Aldi, Lidl, and Netto. These chains, which have moved from less-affluent areas of the country to establish a national network, have made British consumers grow used to their regular basket costing less than what the traditional supermarkets charge. Further, consumers are also more ready to shop at no-frills outlets, with stocks piled high, places that were earlier derided as “downmarket”.

However, the real boost to these stores has been the economic crisis that began in 2008. While pound stores had seen a gradual expansion until the recession struck, their numbers have simply exploded since then. At the end of 2009, there were an estimated 742 pound stores across the UK, a number that grew to over 1,500 by 2010 and is now estimated to have surged to just over 3,000 stores as of end-October 2011 (source: Local Data Company). Interestingly, the rise in the number of outlets has coincided with a sharp drop in the number of fascia names - from 130 in 2004 to 88 in late 2009 (Source: Experian).

This growth has not been fuelled partly due to the drop in consumer spending, and the shift to lower-priced products. However, the impact of the slowdown on retailers in other categories (such as fashion) and on the overall real estate market in the UK has offered them an unprecedented chance to expand. The collapse of Woolworths in particular saw many pound stores swiftly move in to occupy the gap left by the iconic chain, both physically and in terms of market positioning. Pound stores are estimated to have acquired more than 150 former Woolworths outlets, a significant addition to their overall numbers. Meanwhile, landlords have also become more accepting of such outlets, realising that pound stores remain one of the few retail formats that deliver consistently high footfalls – a crucial plus point in the UK market, which has seen shopping malls and city centres devastated due to the number of outlets forced to shut.

Interestingly, pound stores have also benefited due to other seemingly-unrelated moves, such as the decision by major fashion chains to move into larger shopping malls to save on rent. This led to a glut of empty, medium-sized outlets in and around major high streets, a development that was quickly capitalised upon by the pound stores.

Finally, the collapse of all the other retailers has led to a massive amount of stock lying around, which the chains have been able to pick up relatively cheap (sometimes up to 20% of the original price). The profits generated from the sale of such stock has inevitably led to the chains being encouraged to invest further in their stores and expanding their network, kicking off a cyclical reaction.

Trends in Shopping

Not surprisingly, a recent YouGov survey found that the most popular products seem to be impulse buys and household items, such as detergents and cleaning products (21%), toiletries (18%), confectionery (17%), and snacks/crisps (13%). The biggest reason, unsurprisingly, was found to be saving money (60%), especially amongst consumers aged 55 and above. But significantly, the study found that the clientele of such shoppers are not restricted to C2Des, but also include affluent ABC1s.

Regular surveys have found that nearly a third of adult consumers in the UK had shopped at a pound store in the previous three months. Another quarter are known to have purchased products from one or more of key categories, and were spending less at supermarkets/ other stores in at least one category as a result. Most encouragingly for pound stores, the majority of people questioned in these surveys (up to 75% in some cases) said they would continue shopping at a pound store even if the economy improves.

The popularity of these retailers is also believed to be behind the several single price-point ranges that have been introduced recently at the major supermarkets chains in the UK.

The Major Players

Poundland: Established in 1990 by Dave Dodd and Stephen Smith, the 330-store chain claims to be the largest single-price discount retailer in Europe. Its outlets stock around 3,000 home and kitchen-ware, gifts, healthcare and other products across 16 categories. The chain’s Croydon outlet is estimated to be the busiest single-priced discount outlet in the world, visited by 30,000 customers a week and generating more than £9m in revenue per year. For the most recent fiscal year, ending February 2011, it generated sales of £642m (+25.8%), with underlying EBITDA of £316m (+33.9%).

Poundstretcher: Established in 1981 by Paul Appell and Stephen Fearnley, the 354-store chain also has a Pik N Mix shop-in-shop, besides the regular product range. For the year ending 2 April 2011, it generated sales of £308m (-6.1%), with pre-tax profits of £1.4m (reversing a loss in the previous year).

99p Stores: Founded in 2001 by entrepreneur Nadir Lalani, the chain has expanded rapidly to over 150 stores, including 12 under the Family Bargains banner (larger stores that a broader range of general merchandise including toys and soft furnishings). The chain is set for a massive expansion, having recently received an extra £20m in credit lines to double the size of its business and move into Ireland. For the year ending January 2011, it generated sales of £231m (+26%), with pre-tax profit of £6.34m (+254%).

Poundworld: The chain operates nearly 130 stores, including around 15 under the new ‘Discount UK’ fascia, which offers products at various price levels. The chain has also recently launched an ‘Express’ format, and is aiming to open 40 new outlets in 2012. It said it will also expand its offer of groceries, and is looking into a possible partnership with Birds Eye to provide frozen food. For the year ending March 2011, it had sales of £132.9m (+42%), with pre-tax profit of £5.2m (+342%), and is targeting sales of £200m for the current fiscal year.

Home Bargains: The last of the ‘Big Five pound store chains, The TJ Morris-owned fascia operates over 260 outlets at present. The chain has recently launched an online shopping site, through which it offers a limited amount of food and non-food items. The chain has plans to open an additional 250 outlets over the next five years.

What lies ahead?

Pound stores have now become a permanent fixture of the UK retailing landscape, and are only set to entrench themselves further. Their small size means they are likely to become more visible in urban areas and city centres, taking over the space left vacated by more stores going into administration.

The chains, which already offer products such as sandwiches and milk, are also introducing some own label products, a clear sign that they have arrived and are here to stay. Further, the success of their offer has also encouraged some chains to start looking at larger outlets, covering 10,000 sq. ft. and 15,000 sq. ft., compared to outlets of around 5,000 sq. ft. These larger outlets are expected to stock a larger amount of groceries, as customers become more comfortable with shopping for such items at pound stores. Crucially, several chains have announced plans to start offering frozen goods, which could dramatically change customer shopping habits.

While pound stores are still only a small threat to major supermarkets and small independent grocers, their aggressive growth is being watched with some concern by specialist retailers (such as Clinton Cards) and health & wellness chains. The £1 price point is proving too irresistible for customers who would normally spend significantly more at High Street chains, and – coupled with the general slowdown in discretionary spending – could see more specialist outlets going out of business.

This impact is likely to cause pound stores to face growing resistance from town councils across the UK, which will look to protect local independent stores. Some councils have also being protesting that their bright fascias lower the tone of their high street. However, these are minor – and potentially far off – hiccups. For now, pound stores continue to offer a bang for the buck (to mix a metaphor), and customers are simply lapping it up.

Published: December 2011

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