While its parent company Pepco is flying, Poundland has problems. Why is the high street value staple performing so badly at a time when it should be going from strength to strength?
Earlier this week, discount giant Pepco dropped into the red after the poor performance of Poundland weighed heavily on its results. The Warsaw-listed retailer swung to a €554m (£456.8m) loss, compared to a €154m (£126.9m) profit the previous year.
While much of the Pepco Group is flying, it’s the UK high street staple Poundland that is at the heart of the retailer’s downturn. Like-for-like sales at the value chain dipped by 3.6% in the year to September 30, compared to Pepco revenues which jumped by 10.2% for the year.
With an 836-strong UK store estate and a much-loved brand, Poundland should be enjoying the current trading environment. While the UK is technically out of the cost-of-living crisis, consumers are still price conscious on every category from food to apparel and beyond, which should all play into its hands.
Yet Poundland has dropped the anchor and looks to be dragging its parent company back. So, what’s going on, and can the retailer turn it around?
Uneasy alliance
Pepco chief executive Stephen Borchert touched on some of the issues that Poundland are experiencing – singling out an uneasy switch over to the value chain stocking more of its parent group’s products in its clothing and general merchandise offerings.
“[Poundland] was impacted by declines in clothing and general merchandise following the transition to Pepco-sourced product ranges at the start of the year,” he said.
“With the transition to the Pepco ranges I think the business lost a bit of its DNA, so we are working now as a team there to bring this back.
“We are taking swift action to get Poundland’s performance back on track.”
Pep&Co chief executive Stephen Borchert
One source close to Poundland agrees with Borchert’s assessment, saying the retailer has “made some missteps on clothing and general merchandise” but insists “those are being corrected”.
“FMCG sales are positive like-for-like,” they added. “And Poundland still delivered over £2bn in revenue, which stayed flat year on year”.
While Poundland and Pepco insist that they’re working on solving these issues, one City source insists the transition has done more damage beyond dragging on sales.
“Before the Pepco acquisition, Poundland had one of the best buying teams in retail,” they say. “Particularly around that £1 price point. Because of that restriction, the teams really had to design and think about a lot of products, to make sure they worked for that £1 consumer.
“Now there are so many Pepco products, and it doesn’t sit well with the classic Poundland customer. There’s also an imbalance, particularly in the smaller stores.
“They’ve pushed too much clothing and home into those smaller stores, which means they don’t have the old Poundland USP.”
City source
By forcing Poundland stores to carry more of its clothing and homewares ranges, Pep&Co has put the retailer in the tough position of now being in direct competition with value-focused fashion giants like Primark on one side and the buying firepower of grocery fashion lines like Tesco and Sainsbury’s.
“For the group to see an improvement in the performance of its Poundland fascia in its FY2024/25, Pepco must rethink its range strategy in its Poundland stores as it addresses a very different market to that of its Central European arm,” says GlobalData retail analyst Sophie Mitchell.
“Poundland must also reconsider the mix of products it has in its stores, avoiding allocating too much space to clothing until awareness of its ranges has improved”.
Goodwill stunting
While Poundland and Pepco’s uneasy marriage is causing ranging issues, the other big elephant in the room is a £642m hit from a non-cash impairment charge related to the acquisition back in 2016.
The source closed to the business described it as a “goodwill” payment and its effectively cratered Poundland’s overall value, at a time when it’s already struggling not just with its ranging issues, but with absorbing new Wilko stores and battling stiff competition across multiple categories.
That’s all before you add on other burdens, like the Budget and the ongoing international shipping issues plaguing the Red Sea.
Where then does that leave Poundland and its future within the Pepco Group? It’s clear that the parent company sees its future in Central Europe, which it made abundantly clear by listing on the Warsaw stock exchange back in 2021.
And it’s hardly surprising, as the city source notes the Polish economy is going gangbusters compared to the UK. “Poland is growing at something like five times the pace of the UK. Also, the shrinkage in Poland is far smaller than in the UK. So, if you’re Pepco, where are you going to focus your attentions?”
“It’s no wonder all the capex is flowing to the Central European part of the business.”
City source
While Pepco chief executive Borchert wouldn’t be drawn directly on whether the group may look to sell Poundland in the future, he did say that it would keep “every strategic option” on the table.
While a sundering may be in the best interests ultimately of both Pepco and Poundland, the city source worries that the value retailer may not be the enticing option for prospective new owners that it once was.
“It’s a bit of a nightmare there at the moment. You can’t sell Poundland separately. You can’t list it. I think Pepco are just thinking let’s try and get some synergies out of it and lump a lot of Pepco stuff in it.
“That’s not a very good way to run that business”.
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