Why are pound stores in decline?

The discount retailer Poundworld has gone into administration, following two years of losses – a few years ago, it was expanding aggressively, but it now looks to be another casualty of the high street. With the latest data showing that the discount sector’s growth has slowed over the past year, with an almost 4% fall in the number of shops opening, is this a sign that pound stores may have had their day?

The stores’ key disadvantage is also their biggest selling point – everything costs a pound. That this is so inherent to the business model, to the extent that it features in their name, means the stores are trapped at this price point – prices cannot simply be changed when costs go up.

Many of the pound stores are large enough that they can deal directly with the distributors, receiving smaller versions of their normal products to keep the price under a pound, but this is not always possible. The stores rely heavily on high turnover because the profit margin is so minute. Add in the fact that Poundworld has been importing a lot of their products – the weakness of the pound has pushed up the price of imports and, because the pound stores cannot increase their prices by definition, the squeeze on profits can be dramatic and sudden.

Is the decline of Poundworld symptomatic of a more general decline in the high street?

Poundworld has also been a causality of an increasingly crowded marketplace. The store has had to compete against its larger rival, Poundland, as well as numerous other 99p stores, but supermarkets and other discounters have also entered the playing field. B&M in particular is dominating the discount field at the moment. Poundworld also made the call to increase its store portfolio on the high street at a time when many of its rivals have been moving to larger, out-of-town sites or retail parks. There has been a big shift in the UK retail trading environment, and Poundworld has failed to react particularly well.

Pound stores have previously done quite well at times when other high street stores have struggled – during the 2008 recession, Poundland’s total shares increased by £65 million. Poundland is Poundworld’s major competitor, and its continued success implies that it is poor practice at Poundworld itself that is the problem.

According to Professor Jonathan Reynolds, academic director of the Oxford Institute of Retail Management: “Given the buoyant discount market, it is hard to understand Poundworld’s failure, particularly given the continuing strength of its major competitor. For me, blaming the firm’s demise on weaker consumer confidence and a poorer performing High Street serves to hide underlying commercial weaknesses.”

A key question remains here – is the decline of Poundworld symptomatic of a more general decline in the high street? In the same week, we saw House of Fraser announce that it was closing 31 of its 59 stores, and this year has already claimed such high-profile names as Toys R Us and Maplin. High rent, high business rates, less footfall and a steep rise in online retail have all hit the high street hard – the Centre for Retail Research has predicted that this year will be the “worst year for bad retail news since the recession in 2008”.

Poundworld’s decline shouldn’t necessarily be understood as the end of pound stores

However, there are reasons to be optimistic – 80% of retail sales in the UK take place in-store, and some retailers (like Primark and Aldi) are continuing to thrive despite a general increase in footfall. The issues hitting the high street are also having a negligible impact on coffee shops, hairdressers and independent stores.

Mike Jervis, a retail specialist at PwC, said: “With prices on the up and less disposable income available to the average British consumer as a result, retailers will need to be versatile and savvy to increase footfall to their stores….However, despite the fall in new store opening, consumers continue to place value on the in-store experience, with the number one in-store attribute being shop staff with a deep knowledge of their product range. As we look ahead, the ‘total retail’ experience looks to be defined as simple and streamlined; one that maintains a human touch, blending the best of technological advances with helpful and expert staff both in-store and online.”

Poundworld’s decline shouldn’t necessarily be understood as the end of pound stores, or a harbinger of doom for the high street. But, unless retailers can understand the changing retail environment and adapt to it, it could be a terrifying reflection of things to come.