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In the News

Poundworld's problems - how many can you spot?

Penny Brooks

12th June 2018

It is possible that Christopher Edwards, the founder of discount retailer Poundworld, will be able to buy back and save some of its stores, after it collapsed into administration yesterday. Poundworld, which has 335 stores across the UK, expanded rapidly after the 2007 recession by targeting shoppers who were in desperate search of low prices. However, sales have now fallen; losses for the financial year 2016-17 were £17.1m, up from £5.4m the year before. No business can survive that kind of trend.

So why has it gone from tapping in to a market need to closedown? In 'What's eating the pound shops?', the BBC analyses the problems. The first issue is the name. If you call your store Poundworld, or Poundland, or Poundstretcher, or the 99p Store, you make it difficult to charge more than £1 for your goods. So you have little chance to raise your selling price.

Now imagine that you are sourcing those goods from overseas, for example from the Chinese town of Yiwu, a so called "commodity city" dedicated entirely to the production, exhibition and sale of the thousands of small products like vases, fishing nets, bags and jewellery which can be made for less than £1, bought by the container load and shipped back to the shelves of pound shops. But then the exchange rate of the pound falls, so that the cost of buying them rises - and your contribution is immediately squeezed, as variable costs rise.

Add that to the rising minimum wage and to higher business rates and high street rents, and fixed costs are up as well. Higher fixed costs and a smaller contribution makes break-even point harder to achieve - particularly when you can't respond by raising the selling price to match the rising costs.

Next, you are facing almost twice as much competition as before. Figures show that between 2007 and 2016 the number of pound stores nearly doubled. While this initially did make it easier for them to make special deals with manufacturers, who were willing to make smaller versions of their normal products to keep the price under a pound, now that customers real wages have been falling and sales have done the same, negotiating this kind of deal is tougher for discounters. So the margin of safety gets squeezed again.

And your competition doesn't only come from other high street pound stores but also, significantly, from online retailers who can minimise the costs of rental and wages, and offer an easier option for customers. 

Back to Christopher Edwards, the founder of Poundworld, who sold the business in 2015. He blames the current management style of the business, and said that a decision to introduce multi-price products after 20 years of only selling goods for a pound had confused shoppers.

"B&M Bargains hasn't gone, Home Bargains hasn't gone, Wilko hasn't gone. So for every store that goes down others are still thriving," he told BBC Radio 5 live. Noticeably, however, those stores all have names that don't limit their pricing - so perhaps the main problem was naming the business as Poundworld in the first place?

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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