Analysis: Five things you need to know about value giant Poundland

Shortly after hailing its success at reaching a multi-price strategy milestone, with more than a third of its sales made at prices other than £1, Poundland announced that it will be leaning more heavily into its “iconic” £1 price-point to help consumers hit by rising inflation. 

Managing director Barry Williams said: “It’s clear customers are shopping more intentionally and that’s why we’re leaning into our £1 price point.

“While we don’t have a magic trick up our sleeves to counter inflation, we know that those who work hardest to keep costs low will end up winning customers’ trust.”

Poundland’s top line increased by 4.6% to £1.5bn in the year to September 26, 2021, as it recovered from the impact of reduced footfall during the pandemic. Sales edged up 0.1% on a two-year basis.

The retailer’s value credentials leave it well-positioned to benefit as the cost of living soars, but with stiff competition from value-focused supermarkets such as Asda, Aldi, Lidl and Iceland, as well as discounters such as B&M, Home Bargains and The Range, can it win consumers’ increasingly cautious spend?  

Our Retail Week Prospect analysts highlight five things you should know about Poundland. 

1. Back in the black with healthy margins

Poundland was back in the black during the 52 weeks to September 26, 2021, recording a pre-tax profit of £33.5m compared with a £27.6m loss the previous year, having made strong strategic progress despite ongoing pandemic-related challenges and supply chain issues.

Margins at pre-tax and operating levels have come under pressure in recent years, but Poundland’s gross margin of 37.8% in 2020/21 remains at a healthy level for a discount retailer, reflecting its expanding mix of clothing and general merchandise sales, and the broadening of its offer into price-points higher than £1.

Its proposition has been enhanced by the ongoing expansion of shop-in-shop openings by Pep&Co – its fashion stablemate within the Pepco Group – and the launch of the Pep&Co home range in 2020.

However, gross margins could be challenged as inflation makes consumer behaviour less predictable.

Pepco Group has already cautioned that consumers are scaling back on essentials and said it is looking to reduce costs to offset inflationary pressures and keep prices down for shoppers.

Furthermore, as a low-margin business, Poundland will need to keep a lid on wages to bring down its staff cost-to-sales ratio, which has consistently hovered at a relatively high level for a discounter, spiking at 17.6% in 2020/21.

2. Single price to simple price – and back again?

Since 2017, Poundland has been gradually moving away from its namesake single price point while maintaining its value credentials.

Products are now available for between 50p and £5 as part of the retailer’s drive to better meet customer requirements and “deliver a compelling and competitive multi-price offer”, embracing a ‘simple price’ label over ‘single price’.

Variable price points have allowed the retailer to widen its offer in health and beauty, household and grocery.

As recently as December 2021, Pepco Group highlighted a “notable milestone” as 36.2% of Poundland’s sales came at prices other than £1 – up from 26% the previous year.

As well as facilitating an expanding product range, this varied pricing architecture is tied into the retailer’s store renewal programme, in which its diversified product offer is emphasised.

While Poundland is unlikely to revert back to its £1 heritage entirely, particularly as the result could be margin-dilutive, it has arguably backtracked.

In June, it revealed it was “resetting” its store estate to better meet the needs of consumers amid rampant inflation, adjusting ranges and displays so that 60% of its products are £1 or less. 

It is also focused on the value of single items as people trade down and reduce basket sizes in volume terms, freeing shoppers “from the tyranny” of being driven to buy in bulk to make savings. 

3. Store refreshes and new formats

Poundland’s 850-strong estate of UK stores gives it vast nationwide coverage and the retailer has been refreshing its shops as part of a major transformation programme kicked off in July 2020.

More Pep&Co fashion shop-in-shops have opened and the rollout of chilled and frozen food – a proposition bolstered by the £25m acquisition of Fultons Foods in 2020 – has been accelerated.

The addition of a fresh meat and fish range for the first time at the end of August further enhanced the retailer’s grocery offer as its growing breadth of products entices shoppers on a budget to choose it for their weekly shop. 

Poundland’s latest store concept is also geared up to this end. Its first large-format store, opened in February in Nottingham, is a one-stop shop offering a wealth of fresh food alongside Pep&Co fashion and homewares, as well as a Costa Express self-service bar.

The store has enjoyed “record-breaking basket sizes”, according to Poundland, so it is perhaps no surprise that more large-format stores are planned.

The retailer has reaffirmed its commitment to the high street at a time when other operators are having to abandon their physical footprint or at least curtail spending in this area.

4. Group strength and IPO 

As part of discount giant Pepco Group, which has massive scale across Europe, Poundland is in good company alongside Dealz and Pepco.

The group is well versed in buying and operating with ruthless efficiency, allowing it to pass savings on to customers. 

In a busy, fiercely competitive market, Poundland will need to take advantage of its access to group resources.

Pepco Group’s annual revenue increased 17.2% to €4.12bn (£3.56bn) in the financial year to the end of September 2021 as like for likes rose 6.5%.

But family dynamics can be complicated and Pepco Group has financially distanced itself from parent company Steinhoff International Holdings after the latter became embroiled in an accounting scandal in 2017. Pepco settled all outstanding loans with Steinhoff and has floated on the Warsaw Stock Exchange.  

Pepco’s IPO in May 2021, which valued the group at €5bn (£4.3bn), reduced Steinhoff’s shareholding in the company and allowed Pepco to diversify its shareholder base.

Furthermore, as well as helping it recruit and retain key management and employees, Pepco Group believes the listing will give it access to a wide range of options for raising capital in the future, which could be critical given the group’s bold ambitions to more than triple the size of its store portfolio. 

5. Playing digital catch-up

Poundland is not alone in being late to the ecommerce game. Value giant B&M initially maintained that its low-cost business model would not support a transactional website before going live with a very limited online home-delivery trial in mid-2022, while Primark is only poised to launch a click-and-collect trial later this year.  

Having acquired online discount retailer Poundshop.com in March, Poundland has made this the platform for its transactional website, which is now live following a pilot in limited postcodes in 2021.

The acquisition has given Poundland the extra fulfilment infrastructure necessary to facilitate nationwide home delivery, with Pep&Co fashion and homewares being added to its online operations. 

But Poundland will need to further build its online expertise while keeping a close eye on profitability. 

In a savvy bid to maintain a grip on last-mile overheads, it is encouraging shoppers to buy more. It charges shoppers a £5.95 delivery fee on orders between £20 and £29.99, and £3.95 for orders between £30 and £39.99. Orders of more than £40 cost £1 for delivery.  

An earlier foray into ecommerce with a trial site offering 2,000 products in 2015 was short-lived and Poundland pulled the plug on the venture in early 2017.

The current inflationary environment brings great opportunity for Poundland, but its transactional site will need to be heavily promoted to ensure greater success this time.