As pound shop profits take a pounding, is the format flawed?

Against the current economic backdrop, the pound shops should still be prospering. Between them the three biggest single-price operators alone have nearly 900 stores in the UK and all plan future expansion.

But there are signs that competition is catching up with the sector, with family-run discounters Poundworld and 99p Stores posting respective profit declines of 34% and 55% in their most recent financial periods.

“The market is over-saturated right now and the sector has been far too limited by its single price point, making the likes of Home Bargains and B&M the more comprehensive option,” claims Richard Brown, retail director at property agent Jones Lang LaSalle.

A lot of the ideas at the family-run discounters are simply stuck in the past, adds retail analyst Nick Bubb.

“It’s all right opening more stores but if the deals and the IT systems remain outdated, the businesses simply won’t be as profitable. Poundland has prospered as with CEO Jim McCarthy at the helm it has a retail man with forward-thinking ideas, while the likes of B&M benefit from the resources of the Arora brothers and the experience of Sir Terry Leahy. The family-run businesses don’t have that same level of ambition.”

With EBITDA soaring 15.6% to £45.4m last year and a float imminent, Poundland continues to go from strength to strength, but the sector’s strugglers are ripe for consolidation over the next 12 months, according to Jones Lang LaSalle. “There will be store closures and amalgamation in the single price discount sector this year it is just a question of who will be linking up with who,” claims Brown. “Some towns have five or six pound shops and it just isn’t sustainable.”

Poundworld trading director Chris Edwards Jr says: “We are always actively reviewing our property portfolio and closures or consolidations aren’t something we would rule out. Competition is fierce but we’ve been investing in stores, technology and additional new cost-saving processes to improve efficiency in 2014.”

Bubb believes “99p Stores has gone a little crazy opening too many stores next to a Poundland,” but store closures and mergers are not “likely” according to Hussein Lalani, commercial director at 99p Stores. The single-price retailer recently received £25m funding from Barclays Bank as it looks to expand its estate and set up a transactional website, and Lalani insists that a dip in profitability for the pound shops has just been a “natural result of rapid expansion”.

So how can the strugglers revitalise demand? The key is in multi-price formats, according to Kantar Retail’s Bryan Roberts, who points to the US where discounters Dollar General and Family Dollar have both seen a surge in profits since moving away from their historic fixed price models. “With inflation going nowhere, the UK retailers will have to move away from single pricing as it is too restrictive,” says Roberts. “Poundworld owns Discount UK, 99p stores has Family Bargains and Poundland has Dealz, so it wouldn’t surprise me if they each convert the whole estate to those multi-price brands and take an American-style approach.”

Planet Retail’s David Gray disagrees. The single-price discounters will prosper as long as they provide an attractive alternative to c-stores. He cites 99p Stores, which recently announced a partnership with Nisa as it looks to increase its chilled food lines, as a positive move. “The average pound store has around 40% food and with each of their fmcg offers set to grow, you’d be a fool to bet against them stealing more customers from the supermarkets ’ increasingly expensive convenience offerings,” says Gray.

Maybe there is strength left in the pound after all.