Economics of the Pound shop

When I was young (let say the 1980s) a Pound shop was a bit of a novelty.

Battle_of_the_pound_shops

Visiting Morecambe, a seaside resort, there would be one or two Pound shops. I only remember being struck how low quality everything was, they were a bit tacky, mainly some useless novelty items and a stick of Blackpool Rock. No self-respecting middle class consumer would consider doing the bulk of their weekly shop at a Pound shop. But, in recent years, Pound shops have emerged as one of the fastest growing retail outlets in the UK. Suddenly the High Street is awash with shops offering everything for a £1. It raises some interesting economic questions:

  • How do Pound shops manage to sell so many goods for £1?
  • Why have they become so successful in recent years?
  • To what extent can they challenge traditional retail, like the Supermarket Giants?
  • Are they good for society or should we be worried about the proliferation of Pound Shops?
  • Is there growth sustainable?
  • What happens when inflation reduces the value of a Pound?

The success behind the Pound shops

The reason Pound shops can sell so many goods so cheaply is due to basic economic principles.

  • Buying in bulk. Bulk buying is a classic economy of scale. The more that you purchase, the lower the average costs involved. Large global Pound shop chains can buy whole containers directly from China at a much lower price than buying through distributors.
  • Cutting out distributors. Typically, retail shops will buy from a distributor, who in turn buys from the source. This saves shops having to deal with many suppliers. But, Pound shops can buy in sufficient bulk to be able to get direct from the manufacturers, often in China / Asia.
  • Small margins. Pound shops run on very small margins. Small margins only work with high volume and a tight control of costs. The high volume in turn enables firms to continue bulk buying at low cost.
  • Low cost encourages more purchases. On the BBC series about Pound Shop Wars – I liked the quote from one customer who said his ‘Pound shop was most expensive shop in town. – I always see something more to buy.’

Why have Pound shops become so successful in recent years?

  • Changing consumer patterns. The difficult few years have encouraged consumers to seek bargains and low prices. In the past five years, we have experienced cost -push inflation, stagnant real wages and falling living standards. The squeeze on disposable incomes have made Pound shops increasingly attractive.
  • Strength of Chinese manufacturing. The relentless growth of low cost Chinese manufacturing has enabled an increase in the choice of low cost manufactured goods.
  • External economies of scale. The growth of the whole industry has encouraged manufacturers to consider producing specifically for the Pound shop market. Manufacturers are increasingly prepared to prepare products which can fit in with the Pound Shop model. Also, the growth of Pound shop chains have enabled them to gain internal economies of scale as they grow – leading to lower average costs for the big chains.
  • Little internet competition. In contrast to big ticket items, like electronic goods, Pound shops face little competition from the internet. Amazon do relatively little trade for items costing a £1 – Post and packaging become a bigger % of the price the cheaper the good is. Many retail shops have closed down due to internet competition, these retail spaces have often been taken by Pound Shops.

Can they challenge the Supermarket Giants?

At £1, Pound shops are limited. They don’t sell fresh produce. They cannot offer a comprehensive range of goods. But savvy consumers will begin to cherry pick doing half their shop in Pound shops and buying the remainder elsewhere. It will definitely reduce the profits of supermarkets, though I can’t see them being replaced.

What is the impact on the growth of Pound shops?

  • For consumers, generally they are good for keeping prices low. They offer a range of cheap goods, but also put pressure on other supermarkets to match the low prices. It is reducing the market power of the big Tescos and Sainsbury’s
  • Big Pound retail shops are squeezing smaller independent retailers who cannot compete with the costs of Pound shops. Though they face competition from a range of other sources, such as supermarkets.
  • Pound shops can actually be controversial. Some towns, e.g. Harrogate have seen protests against Pound shops for fear that it ‘reduces the value of the town’. Pound shops give an impression of being low quality, cheap and cheerful. Not everyone likes the idea of a High Street being dominated by Pound shops, squeezing out higher class traditional shops.
  • They put pressure on suppliers to keep reducing their costs to remain competitive. It squeezes the profit margins of big traditional firms. 

Is their growth sustainable?

The market segment is going through a strong growth period. But, we are likely to see this growth tapering off. In particular, when the economy recovers, and real incomes begin to rise. Pound shops may lose out as people turn away from ‘inferior goods‘ and choose more expensive goods – and a more attractive shopping experience.

What happens when inflation reduces the value of a Pound?

The thing which keeps striking me about Pound shops is what happens when inflation reduces value of the Pound? Even if inflation stays low at 2% – the value of money will steadily fall making it more difficult to keep finding goods to sell for a Pound.

Using an inflation calculator a Pound in 2004, would now be worth £1.30.

Inflation has been lower in manufactured goods. But, still the danger is Pound Shops will have to keep offering lower quality /smaller goods as time progress. Yet consumers may actually be wanting more. I guess they could change to the £2 shop. But, that’s a big jump.

Personal experience of Pound shops

  • I wouldn’t make a specific trip to a Pound store, but if I go past I sometimes go in and buy stuff. There is a buzz to getting things for a £1 which could cost £2 of £3 elsewhere. I often end up buying things just because they are a Pound. Somewhere I have a pack of 10 dusters (gathering dust because I don’t use them)
  • I’m put off shopping in Pound shops because there is often a long queue. You want to buy a few quick items, but because they are trying to cut costs there are long queues. I frequently want to buy something at the Oxford 99p store, but when I see a queue of 10 people and 1 assistant I don’t bother going in.
  • I once bought some washing up liquid for a £1, but it was so low quality, I felt it was poor value, this discourages me from going there.

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3 thoughts on “Economics of the Pound shop

  1. Very informative article, I work in the FMCG industry and the rise of the pound shops is being well noticed by global consumer good companies like Unilever who previously never considered selling their products in Pound Shops as they believed it would devalue their brands. The other thing I would like to add is that the makers of these consumer products are now creating and offering smaller size product formats just to fit into the Pound shop model. The Pound Shop format also fits in nicely around Convenience shopping as today’s modern shopping is now buying smaller baskets but more frequently as opposed to the big weekly grocery shop previously. Please keep the articles coming!

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