The strength of the pound shop

They are the ultimate value retailers. James Thompson reports on how the recession has been the catalyst for a dramatic increase in the number of pound shops on Britain's high streets

Two days before Christmas, Sheffield's landmark shopping centre Meadowhall was a frenzy of last-minute shopping activity. But on the ground floor, the single-price retailer Poundland's store seemed busier than most, as shoppers from across the social spectrum filled baskets with everything from milk to books.

But to simply attribute this to hard-pressed consumer behaviour during a downturn would be wide of the mark, as pound shops have been on the march for much of the last decade. Yesterday, Experian, the data specialist, revealed that the number of shops with "pound" in their name in the UK has nearly doubled over the past decade, from 380 in 1999 to 742 at the end of last year.

Jonathan de Mello, the director of retail and property at Experian, said: "The success of value retailers is not simply a recent knee-jerk reaction to the pressures of the recession. It is part of a longer-term trend across the whole of the UK in favour of budget shopping options that will last beyond the recession." It found that 628 pound shops were trading by 2004 – long before the credit crunch shook UK plc to its core.

Furthermore, not all pound shops have held their finger on the store expansion button during the downturn. For instance, the number of different fascia names has fallen significantly, from 130 in 2004 to 88 in late 2009, found Experian. Chains such as The Pound Shop have not grown their store numbers, while Poundzone has shrunk over the past five years.

However, for the likes of Poundland and 99p Stores the recession and the collapse of Woolworths has added a turbo-charger to their growth plans. Their growth has been aided by a growing realisation among landlords that well-run pound shops represent their best chance of filling vacant units left by a swath of retail administrations. Value fashion retailers such as Primark and Peacocks have also prepared the way for the shift in attitudes that has seen consumers unashamedly seeking out value over the decade.

Ciaran Bird, the head of UK retail at the property company CBRE, said: "In the past pound operators simply couldn't find stores of a size and location they desired. Landlords were not keen on the use and in some instances the strength of the covenant on offer. Businesses such as 99p stores and Poundland offer the customer great value."

While it has become a hackneyed phrase in retail circles, the "Woolies effect" cannot be under-estimated in the expansion of Poundland and 99p Stores. Martin Crossley, a retail partner at King Sturge, the international property consultancy, said: "If you look at the pound stores and other bargain operators, such as B&M, they have vacuumed up lots of the Woolworths stores and have been a bit of the saviour of the high street over the past 18 months."

Hussein Lalani, the co-founder and commercial director of 99p stores, said in January 2009 that the chain budgeted for opening between 25 and 30 stores last year. But it eventually acquired 53 sites from the defunct pick'n'mix retailer, accounting for the bulk of the 61 stores it opened last year. CBRE, which acts as the agent on the Woolworths stores, said that pound shops have so far acquired 151 former Woolies stores.

But Mr Crossley says the pound stores have also filled high-street shops vacated by fashion retailers. "As fashion retailers, such as Next, River Island and the Arcadia Group, have moved into the big shopping centre schemes, the pound shops have had the run of the surplus stores on the high street," he said.

The pound stores are also taking bigger stores sized between 10,000 square feet and 15,000 sq ft, compared to outlets of around 5,000 sq ft previously, says King Sturge.

The single-price retailers have also benefited from being able to snap up cheap stock left behind by collapsed chains. Mr Crossley says: "Every time a retailer goes bust that stock has to go somewhere. It creates a massive amount of stock that they can sometimes buy for 20p in the pound. If you have lots of stores and a huge amount of stock, it is happy days for the pound shops."

But both Poundland and 99p Stores have sophisticated business models. For instance, they constantly evolve their offer, partly responding to changes in inflation.

Poundland has also moved aggressively into food, such as sandwiches and two litres of milk, and its impact is thought to have prompted a range of single-price products sold by the likes of Asda. But overall, Mr de Mello says the pound shops pose the biggest threat to retailers of commodity health and beauty products and gift cards, such as Superdrug and Clinton Cards, respectively.

Certainly, Mr Lalani says, 99p Stores' offer of branded lines and some own-label products has attracted a growing army of middle-class shoppers during the downturn.

He says: "If you are on income support and really struggling your situation might not have changed, but if you are middle class and have taken out a second mortgage, extension on your house or bought a new car you have to look into different areas where you can find commodity products cheaper."

But Mr de Mello strikes a cautionary tone on the pound shops over the coming years. "There could be problems if they have taken on too many stores. I can see a tipping point in three years' time in terms of growth slowing." He says a key threat will be the continuing expansion of the supermarkets, particularly into smaller-format stores.

Pound shops are also likely to come up against further resistance from councils, some of whom have already protested that their bright fascias lower the tone of their high street. But for the time being the big single-price chains are on a roll and look set to continue powering ahead.

Coining it in: Who's who in the 'fixed price' sector

99p STORES

The growth of 99p Stores has been nothing short of meteoric. It was founded by entrepreneur Nadir Lalani in 2001, but as recently as 2005 had just nine shops. The single-price chain now has 126 stores and plans to hit 200 this year. Co-founder Hussein Lalani said the Woolworth estate represented a "fantastic opportunity". He says: "It was just a mad grab." While it sells primarily branded lines, such as Pepsi and Kit-Kat, it also offer own-label products, including its Deli Fresh Virgin Olive Oil. Mr Lalani stresses it was growing before the recession, but admits the availability of cheap property has fuelled its growth.

Poundstretcher

Poundstretcher has not matched the expansion story of its discouunt retail rivals during the recession. In contrast to 99p Stores and Poundland, Poundstretcher is not a single-price retailer and some of its products sell for more than £100. However, it opened just four net new stores last year, taking its total to 315. The group – and half of its fascias – were known as Instore until it was bought out by the cash and carry group Crown Crest last summer. It is now reverting all its Instore fascias back to the original Poundstretcher brand.

Poundland The 254-store retailer revealed that its underlying festive sales jumped by 4.4 per cent for the five weeks to 3 January. Poundland has been owned by the private equity firm Advent International since 2002, but the timing of a sale is unclear. Jim McCarthy, the chief executive, took the helm in 2006 after leaving Sainsbury's.