Poundland and the 99p Stores

Poundland wants to buy 99p Stores and I was invited, along with retail analyst, Kate Hardcastle, to discuss this with Naga Munchetty and Charlie Stayt on BBC Breakfast this morning.

Poundland has around 600 stores and plans to take-over all 251 99p Stores. This ambitious expansion strategy is typical of many UK retailers and, as a result, we have a very concentrated retail landscape. As a nation, a high percentage of retail sales are transacted through a relatively low number of multiple retailers.

Growth through acquisition is somewhat inevitable; Poundland now has to keep a very impatient set of shareholders happy. Since it was floated on the stock exchange last year, shares in Poundland dropped 3.7% as the company saw a slowdown in growth, mainly due to planned new stores not opening on time. With the city breathing down its neck, acquisition is the quickest way to grow. If the deal goes through, Poundland gets 50% bigger overnight, rather than having to wait to expand incrementally, where suitable premises have to be found on a town-by-town basis.

Poundland have been very successful, despite that small share price blip. They generate more sales per store than the 99p Stores, and have more outlets, so are the stronger operator. They have invested in store development, so their stores look modern and well organised. They have expanded their range to encourage more affluent customers, like their bakeware tie-in with Jane Asher. Finally, they work with big, well-known brands to offer consumers the products they are used to.

After so much doom and gloom about town centres, it is good to see that some high street retailers are doing so well. This supports our High Street 2020 findings – our analysis of Springboard’s national footfall data shows that many towns are doing fine. Especially those that are well on their way to adjusting to structural changes in the sector, by becoming ‘convenience centres’ – where people pop in regularly for everyday items, food, personal and household products, rather than more expensive things like clothing.

The fixed-price retailers are well placed to take advantage of these changes in shopping habits – and strengthen the offer of a convenient town centre – as they are reliable, in terms of range, price and opening hours. The fixed-price retailers have taken trade from lots of different retailers – including the local market. In fact, in terms of offer, a traditional market is probably a closer rival to Poundland than the discount supermarkets. Many traditional markets offer very similar merchandise – sometimes even cheaper. The problem with markets is they are often not so well organised and well branded and do not have such a clear fixed-price message.

The Competition and Markets Authority (CMA) will be investigating the deal as they will want to be assured that both consumers and suppliers will not be disadvantaged by the loss of a fixed-price retailer (i.e 99p Stores).

On the supply side – even with the additional stores, Poundland will not be powerful enough to exert undue pressure on suppliers. For example, their sales of FMCG brands are a drop in the ocean compared to the ‘Big Four’.

Likewise, it’s pretty hard to see how the price the consumer pays would be adversely affected as both companies effectively offer the same products at the same price (give or take a penny). Normally the CMA are concerned that a buyout of this nature could force prices up for consumers, but unless Poundland change their brand to TwoPoundland or even OnePoundTenLand after the acquisition I can’t see how prices can rise.

What the CMA may do is force Poundland to give up some of their stores so that other rivals can compete more fairly, with a more similarly sized portfolio. But retail competition is a very local issue, and unless specific stores are named by the CMA for divestment, then it’s unlikely to impact on Poundland’s position.