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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.  Continue Reading →
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Why Are UK Retail Sales Increasing?

Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?

According to the Office of National Statistics for March 2008

  • Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
  • Manufacturing grew at only 0.9%
  • Services grew at 3.2%

latest statistics at ONS

I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.

Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.

  • However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.

Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.

  • However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.

Continue Reading →