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The rise of Poundland and reflections on price elasticity of demand

Wednesday, July 04, 2012
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Yesterday I saw that Poundland was about to open its 400th store.  I was also re-reading a Business Café article I wrote in 2007 which commented on the behaviour of supermarkets and the problems ASDA was experiencing:

Four decades ago, almost a quarter of household expenditure went on groceries, compared to just 9% now … A 2006 study by IGD a grocery-industry think tank, found that just 42% of shoppers consider cost when choosing which foods to buy, down from 46% in 2003.

“(ASDA) talk more about cheap prices than about quality food,” says Nick Harrison of Mercer Management Consulting. “That just reinforces a perception that the quality may not be as good.” A lot of people think that Asda have missed out on other trends like the rise of celebrity chefs and ‘posh’ food, including organic groceries.

How times change.  In this example, I’m particularly interested to reflect on how attitudes and consumer responses to pricing has changed significantly.  The link between price and demand is measured by price elasticity.

A bit about Poundland first.  According to a Guardian article, an influx of squeezed middle-class shoppers has propelled profits 27% higher.  The business opened its 400th store in the UK and is expanding across Europe. (There it trades under the Dealz name, as this has proven popular in consumer research with continental shoppers - “Euroland” might have been the obvious choice – but “we found that consumers are not happy with anything associated with the euro in Ireland and continental Europe,” according to the CEO).

If you were talking about the new appeal of Poundland (now, as compared to 2007), you would almost certainly want to discuss price elasticity of demand.  What seems to be happening is that demand is becoming more price elastic, or more sensitive to price changes.  The Poundland CEO suspects that the proportion of shoppers from socio economic groups A and B is growing. “Recession-induced penny-pinching has taken hold in the national psyche and will carry on even when the economy recovers from its four-year downturn … a few years ago there weren’t many Aldis and Lidls, TK Maxxes and Poundlands.  Now there are price comparison sites and people shop with their smartphones. There is definitely some structural shift going on in shopping values”.

This has profound implications for pricing and is a driving force behind the rise of the discounters in our shopping malls.

Is the Poundland CEO right?  Or will the good times return, and consumers slip back towards far less price sensitivity?  If this does occur – and demand becomes relatively more price inelastic – the discounters will lose a good deal of their advantage and we might shift back to the attitudes expressed by Nick Harrison of Mercer Management Consulting at the start of this blog.

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