This week yet another retailer fell victim to the gruelling conditions on the high street when Poundworld plunged into administration, putting 5,100 jobs at risk.
Around five years ago the discount market was viewed as the Holy Grail of retail, with the recession and a change in consumers’ attitudes heralding a new era for value discount stores. Lidl and Aldi and pound stores catapulted ahead with new openings, much to the dismay of the supermarkets.
But on Monday, despite serving two million customers a week, Poundworld was forced to appoint Deloitte as administrator. Does this signal that the end is nigh for the discount market, or did Poundworld lag behind its value rivals?
The Brexit factor
On first sight, Poundworld’s collapse is down to the same pot of ingredients as many other recent retail victims, such as Toys R Us and Maplin: falling consumer confidence, a decrease in footfall, plus rising sourcing costs following the Brexit vote.
Deloitte attributed the blame to a whole flurry of reasons. “Like many high street retailers, Poundworld has suffered from high product cost inflation, decreasing footfall, weaker consumer confidence and an increasingly competitive discount retail market.”
Poundworld’s owner TPG added: “Despite investing resources to strengthen the business, the decline in UK retail and changing consumer behaviour affected Poundworld significantly.”
The Brexit factor cannot be overstated. Value retailers, particularly those that sell at single price points such as £1, operate on wafer-thin margins.
Sterling fell to a 30-year low against the dollar in the months following the UK’s vote to leave the European Union. The pound has recovered somewhat since then, but the impact of the weak currency has been stark.
Most goods in value shops are sourced overseas and paid for in dollars, pushing up the cost price. Unlike grocers, which can raise prices to swallow those increases, pound shops have little wriggle room, and already knife-edge margins are, in Poundworld’s case, wiped out altogether.
In 2016/17, it posted a pre-tax loss of £17.1m.
However, Poundworld has diversified slightly, with the launch of multi-price stores called Bargain Buys, designed to compete more effectively against B&M and Home Bargains.
SWOT analysis: Poundworld
Strengths
Scale – Poundworld has achieved considerable scale in a short period of time and now operates over 350 stores, with annual turnover of around £490m.
Value positioning – The format is in tune with current shopping habits as consumers across all socio-economic groups become accustomed to seeking out value in the weaker economic climate.
Multi-format strategy – The retailer operates through three fascias – now also including the convenience-led Poundworld Express and multi-price format Bargain Buys – which has given it flexibility in terms of the locations it is able to take on.
The move into multi-price retailing has also improved its ability to manage margins by not being constrained to a single price point.
Investment in IT systems – Poundworld has commenced a major overhaul of its IT systems in recent years as it seeks to increase its technological capability and create a platform for further growth and to achieve greater economies of scale.
Weaknesses
Low margins – The retailer’s margins have generally been lower than those of its main single-price rival Poundland, while it has reported pre-tax losses over the last two financial years as a result of exceptional costs.
Management team – The group has not had a stable management team following the departure of founders Chris and Laurie Edwards. The retailer is on the hunt for a new CEO after Gerry Gray left the business in December 2017.
Ecommerce – Poundworld launched transactional sites in April 2015 under the Poundworld Plus and Bargain Buys brands, but it has been unable to make these work and they were discontinued towards the end of that year. Poundworld continues to operate a transactional wholesale site though.
Opportunities
Operational efficiencies – Poundworld lags behind main rival Poundland in terms of its sales densities, so there appears to be scope to improve this measure.
Threats
Intense competition – Competition within the sector is set to increase as many of the major discounters in the UK are continuing to expand their store networks.
The rebranding of the Discount UK format has underlined the level of competition within the sector and perhaps indicates that the move into multi-price retailing has not gone as smoothly as anticipated.
Reduced scale following administration – The group entered administration in June 2018 after a potential CVA and acquisition by Alteri Investors failed to materialise. There remains some optimism that a proportion of the group could survive if buyers can be found for parts of its business during the administration process.
However, the discounter would be a much smaller operation, unable to compete with other discounters in terms of scale.
Economy – While a weakening of the economic climate as a result of Brexit may benefit retailers that have a strong value proposition, it also raises a number of challenges for Poundworld, most notably in sourcing due to the weakening of sterling.
This is a particular area of concern for Poundworld since it still generates a large proportion of sales through its single-price format.
Source: Retail Week Prospect
How are its rivals faring?
When Poundworld was founded in 2004 there were only a few players in the discount market; now you can’t visit a high street or retail park without seeing a store selling cut-price goods.
Retail research firm The Local Data Company says the number of pound shops has almost doubled since 2010.
Meanwhile, B&M has opened more than 200 shops over the past five years.
But how are its competitors finding it? Poundland’s own financial situation is clouded by its troubled South African owner Steinhoff International, which is facing criminal and tax investigations.
In January, Pepkor Europe, the European owner of Poundland, organised a two-year loan facility from a US investment firm, which meant they were no longer reliant on their owner.
Looking at day-to-day trading, the chain said it enjoyed a record performance over Christmas, with like-for-like sales up 5.6%.
However, pre-tax profits fell 84% to £5.9m in the year to March 2016 – its last reported financial year – after it bought loss-making 99p Stores.
SWOT analysis: Poundland
Strengths
UK market leader in expanding single-price sector – With UK sales of over £1.3bn, Poundland is the clear market leader in one of the fastest-growing segments of UK retailing.
Poundland’s acquisition of rival 99p Stores led to consolidation across the single-price retail sector, leaving Poundworld as its only major single-price rival.
Trusted brand with broad appeal – Poundland benefits from strong brand value, brand recognition and customer loyalty, with about 22% of its UK customers now coming from the AB socio-demographic. Prompted brand awareness stands at 95%.
Scalable business model with strong infrastructure – Further expansion is being supported by continuing investment in infrastructure. A 350,000 sq ft distribution centre came on stream in 2014 to service its network in the South, increasing distribution capacity to 750 stores.
A fourth distribution centre was opened in Wigan in June 2016.
Weaknesses
Like-for-like sales under pressure – Like-for-like sales went into decline in 2015/16, underlining the intense competition within the sector.
The retailer said conditions had remained challenging at the start of the 2016/17 financial year, but it did achieve “positive” like-for-like sales growth during the first six months of ownership by Steinhoff.
Declining sales densities – Increasing average store size and the high proportion of immature space has seen a sharp decline in its UK sales densities, and – while these are still ahead of the competition at about £330/sq ft in the year to March 2016 – management will be keen to halt the slide.
Staff costs to sales ratio – As a low-margin business, it is crucial for Poundland to keep a lid on its staff costs. However, the staff costs to sales ratio has been on an upward trend over the past few years and at 15.3% in 2015/16 stands at a high level for a discounter.
Opportunities
Growing sector – Poundland is well placed to take advantage of the continued structural shift in consumer behaviour towards value, aided by the ongoing improvement in store standards and merchandising.
Taking advantage of the increased acceptance of hard discounting in food, Poundland has extended its grocery offer, helping to drive footfall.
International expansion – Having established a foothold in Ireland, the retailer is now looking to move into continental Europe and has commenced trading in Spain and France. A trial in Eastern Europe is also due to take place in 2018 under parent company Pepkor.
However, after Poundland severed its financial ties with owner Steinhoff in early 2018 – following a major accounting scandal at the South African business – the retailer has indicated that it would not be completely business as usual. So it remains to be seen what will come of Poundland’s international ambitions.
Store format development – While an earlier dalliance with multi-price retailing proved short-lived, in 2016 Poundland commenced a trial with a new ‘Poundland & More’ multi-price format in the Family Bargains stores that formed part of the 99p Stores acquisition.
It has also increased the number of out-of-town Poundland stores – these stores having a much higher average transaction value than the currently low £4 to £5 in high street stores.
Pep & Co shop-in-shops – Poundland opened 150 Pep & Co concessions across its network in 2017 and plans to double this total in 2018. The introduction of a strong value clothing offer should encourage footfall and drive significant incremental growth.
Economic outlook – A weakening of the UK economy as a result of Brexit could potentially benefit value retailers as consumers become more cautious in their spending.
Introduction of multi-price in core format – From March 2017, Poundland has started adding multi-price areas to all Poundland stores, where it sells products for 50p, £2 and £5.
This has allowed it to move into categories where it couldn’t move into previously such as bedding and toys, although the initial focus appears to be on larger pack sizes. It could also help to boost its relatively modest margins.
Threats
Economy – While a weakening of the economic climate following the referendum on the EU may benefit retailers that have a strong value proposition, it also raises a number of challenges for Poundland, most notably in sourcing due to the devalued pound.
This is a particular area of concern for Poundland since its primarily trades under a single price point.
Rising competition – While Poundland remains the clear leader, competition in the discount sector is continuing to increase, with all of the key players expanding their store networks.
Adherence to single-price format – Notwithstanding the recent trial of a new multi-price format, Poundland is still very much dependent on its single-price USP. This could put pressure on margins – especially if the cost of commodities start to rise again.
However, the retailer is now in the process of introducing a multiprice area to all of its Poundland stores, with product prices at 50p, £2 and £5. The rapid roll-out of shop-in-shops from stablemate Pep&Co will also be helpful.
Aldi and Lidl – With their marketing focusing on quality, Aldi and Lidl have so far proved less of a threat to Poundland than they have to the big four grocers. But a change in focus from the German discounters could present Poundland with one of the toughest tests in its history.
Source: Retail Week Prospect
GlobalData lead analyst Emily Stella says the 99p Stores acquisition, which added around 250 shops to its estate, has helped boost the retailer’s buying power.
Poundland has smartly widened its price proposition beyond the single price point to help alleviate margin pressure.
The chain has introduced 50p, £2 and £5 price points and has introduced a wider range of categories, including clothing via its growing number of Pep & Co concessions.
Stella says: “The problem with pound stores is that they can’t pass on the prices, they are fixed prices that they can’t pass onto their consumers, unlike multi-price retailers.
“So whenever there’s rising import costs they have to suck up the costs, they can’t increase prices so their margins are squeezed. However, Poundland has extra scale and can buy items at a lower cost.”
There’s mixed fortunes over at Poundstretcher. In its latest full-year results sales were down 7% to £397.4m in the year to March 31; however, pre-tax profits jumped 13% to £2.7m.
The retailer revealed it had closed older, smaller stores in less attractive locations over the year, focusing instead on opening larger modern ones in out-of-town locations and retail parks, similar to its rival B&M.
However, Poundstretcher owner Crown Crest Group is understood to have had its credit cover cut by leading insurer Euler Hermes earlier this year.
Meanwhile, Wilko’s profits plummeted 80% to £5.2m in the year to January 28, 2017, which it put down to the post-Brexit sterling plunge along with the introduction of the national living wage.
B&M and Home Bargains – the stars of the sector
While many value retailers are floundering, B&M is truly bucking the trend and is one of the fastest-growing retailers in the UK.
Sales surged 22% to almost £3bn in its last financial year, as pre-tax profits jumped 25% to £229.3m.
SWOT analysis: B&M
Strengths
Strong management team – Management has proved spectacularly successful to date, raising the group’s overall sales from some £70m in the mid-2000s to more than £3bn in the year to March 2018.
This has given it considerable scale, although gross margin has come under pressure as the relatively low-margin grocery category accounts for an increasing proportion of sales.
Buying power – The range comprises no more than 5,500 items, allowing for a concentration of buying power. Further scale has been created through the 2014 acquisition of the Germany-based Jawoll Handels.
The company also benefits from strong relationships with leading FMCG suppliers and has a well-established network of manufacturers in the Far East.
Multi-price strategy – B&M’s flexible pricing strategy means it is able to offer non-grocery products at disruptive prices and enables it to manage potential inflationary pressures. With only 18% of the offer priced at 99p or £1, competition from single-price retailers is relatively limited.
Low cost base – The retailer’s profit margins are among the highest in the discount sector as it benefits from a lean cost structure, with management having a strict focus on its cost base.
Investment in infrastructure – B&M has a well-invested infrastructure, including its IT systems and supply chain, which gives it a competitive advantage and presents a significant barrier to entry for potential new competitors.
It added further capacity in 2015 by opening two new distribution centres, while the Jawoll warehouse was extended in the first half of 2016/17. A third DC will come on stream in Bedford in 2020.
Weaknesses
Heron Foods’ impact on margins – The acquisition of Heron Foods will put downward pressure on the group’s profitability due to the format’s focus on lower-margin grocery products.
Opportunities
Further UK expansion – As a listed company, management intends to expand the network to 950 outlets in the UK – up from some 550 in late 2017.
The company claims that 66% of the population does not currently have easy access to a B&M store, so there is still plenty of potential to extend coverage, particularly in the South where its presence is still relatively limited.
Market share gains – As one of the stronger-performing discounters in the UK, there is an opportunity to continue to increase the company’s market share in the sector, as it leverages its customer loyalty, moves into new product categories and expands its store network.
Germany – In early 2014 management realised its ambition to expand internationally through the acquisition of an 80% stake in Jawoll Handels, a general merchandise discounter based in the Northwest of Germany.
B&M is supporting further growth of the existing Jawoll and Hafu fascias into southern Germany, while the business has also started accessing B&M’s supplier base in the Far East.
Ecommerce – Given the development of the Homestore range, which covers higher ticket lines such as bulkier homewares and furniture, there may be scope to launch a transactional site. B&M’s current online presence is used to enable price comparisons and drive footfall to the stores.
Brexit – While the impact of the EU referendum has yet to feed through into the performance of the UK economy, the retailer has said that it feels confident that it will be able to prosper in an uncertain economic climate – as it proved during the previous recession.
Heron Foods acquisition – The acquisition of Heron Foods in August 2017 will allow B&M to make a major push into chilled and frozen food, while it will increase its scale in ambient foods. The business will also help expand Heron Foods outside its Northern and Midlands heartland.
Threats
Over-expansion – There is always the threat of over-expansion, but given the rapidly increased scale of the business in the past few years, and solid financial performance, it would appear that the management team is well-equipped to clear such challenges.
Intense competition – Competition looks set to increase further as many of its main rivals are also expanding their store networks. However, B&M is among the strongest-performing and most dynamic discounters in the UK and is therefore very likely to emerge as a winner if a shake-up in the discount sector does materialise.
Source: Retail Week Prospect
B&M’s multi-price format with a huge range of items, such as microwaves priced at £59.99 and unicorn toys at £9.99, means the retailer isn’t rigid on price, which helps to stretch the unbelievably tight margins some pound stores operate on.
It also has its own growing own-brand offer, which helps keep prices low while maintaining a strong margin.
B&M success also comes from its shrewd acquisition of new stores. Two-thirds of these shops are purpose-built and offer the retailer “substantially higher revenue and profit potential” because of more affordable rent alongside the improvement in the quality of the stores themselves, according to boss Simon Arora.
Its growing number of stores also boosts its buying power. This is further enhanced because the retailer keeps its buying tight, with a range that comprises no more than 5,500 products.
B&M also keeps a rigid focus on costs and benefits from a lean cost structure, which keeps its profit margin among the highest in the discount sector.
Home Bargains is also going from strength to strength, reporting sales of £1.87bn for the year to 30 June 2017, up 17% on the year before.
Again, one of the key reasons behind its success compared with the pound stores is its business model. Its focus has never been on flogging low-margin items worth £1.
And the business spends much more on stores – up to £500,000 on the fit-out of a new store, and it may take up to four months for a new store to be opened; compared with two or three weeks for some of its rivals. The investment clearly pays off.
What now for Poundworld?
What happens to Poundworld remains to be seen. Chris Edwards – the founder of Poundworld – has come forward as a potential saviour to the embattled firm.
For him, the blame doesn’t lie in external problems but more on its management.
“B&M Bargains hasn’t gone, Home Bargains hasn’t gone, Wilko hasn’t gone,” he told BBC Radio 5 Live. “So for every store that goes down, others are still thriving. It’s about management style, that is what makes the business work.”
Could Edwards be the one to bring the business back from the brink?
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