When Poundworld crumbled into administration earlier this week, threatening 5,100 jobs and 350 stores, it did more than add to the ongoing narrative of high street carnage.
It raised questions over the health of a retail segment previously perceived to be bucking the blues – the resilient value sector.
This branch of Poundworld in Stockport is one of the 350 stores now at risk after the retailer slumped into administration
This year is proving tough for high street retailers for multiple reasons – a deadly cocktail of cash-strapped shoppers, rising business rates, ecommerce and the national living wage is wracking the industry.
Some, like Maplin and Toys R Us, have ground to a halt entirely. While others like New Look, Carpetright, Mothercare, M&S and House of Fraser are making urgent store disposals to stand a chance of survival.
But the value sector, which boasts the likes of B&M, ABF’s Primark, Poundland, Aldi, Lidl, The Range and ScS, has been viewed as one of retail’s bright spots.
So, what went wrong at Poundworld?
‘Being a value retailer alone is not a passport for success in this market,’ says independent retail analyst Richard Hyman.
Although bargain retailers typically thrive during a downturn – Poundworld sales grew 55 per cent in 2012 as it expanded apace and shoppers sought value for money – clearly no business is immune from today’s retail climes and the multitude of factors triggering radical change in the sector.
Value retailers now, Poundworld included, have felt the sting in particular of sterling’s post-Brexit slump.
The sunken value of the pound has knocked buying power and ramped up the cost of importing goods – something these retailers do a lot of.
Eager to remain competitive on price, they are reluctant to pass these costs on to shoppers, and margins have been seriously squeezed as a result.
This all but wiped out Wilko’s profits last year, which plummeted 80 per cent. The firm also make 1000 redundancies.
Halloween display at a Wilko store. The value chain put falling profits down to currency movements
Pound stores with a single price point model are particularly vulnerable to currency volatility as they have no room for manoeuvre on the ticket price.
And it is here that Poundworld came unstuck.
‘A fixed price point was always seen to be a very strong advantage, because the idea of buying things for a pound is attractive,’ Hyman says
‘These days having a fixed price in the title is a disadvantage because it’s fundamentally a limiting factor.
‘What they’ve had to do to get round the drop in the pound is to get suppliers to reduce the number of items in a pack. But that’s a bit like using a sledgehammer to crack a nut.’
Although Poundworld attempted to introduce a multi-price model at the eleventh hour last year, the switch was poorly executed and proved disastrous, prompting mockery on social media and causing many of its remaining loyal customers to turn their backs.
Poundworld struggled to manage currency fluctuations and falling footfall
Poundworld, like all bricks and mortar retailers, has also suffered from declining shopper numbers in some key locations. As most value players don’t operate online, they are reliant on this passing trade to make ends meet.
But Poundworld needs to look to itself too.
While some other value players have evolved to meet the requirements of 21st century shoppers, Poundworld – weighed down by a large, mature store estate – lagged behind.
Meanwhile, its stronger rival Poundland ramped up its own-brand label and diversified with a value fashion offer.
As Hyman says: ‘In retail, it’s not about what you do, it’s how you do it. And value is no exception.
‘Poundworld was not well managed and it hit the brick wall of the most unforgiving retail market we’ve seen. Even good players are having to run much, much faster.
‘Unfortunately, Poundworld is far from the last casualty we’ll see.’
But are all bargain businesses bust?
Although all retailers are under pressure, Poundworld’s fate is not reflective of the whole value sector – more of its inability to keep pace in what is a thriving and competitive environment.
While many firms are shutting up shop, value retailers B&M, The Range, Card Factory and The Works, are all opening swathes of stores, benefiting from the reams of empty space suddenly available.
The same goes for grocery disruptors Aldi and Lidl, which continue to attract shoppers in droves.
For Hyman, one stand out value firm is space hungry Home Bargains, which he predicts will be ‘much, much bigger going forwards’.
‘It ticks all the key boxes’, he says, ‘and understands the market is is serving.
‘Sourcing is brilliant, supply chain management is brilliant and so are operations.’
B&M has around 560 stores and ambitions to open a further 45 in its current financial year. Its boss Simon Arora can see the UK portfolio ultimately reaching 950 stores
Bargain big-box retailer B&M is another shining light on the otherwise dim retail landscape.
It reported a 25 per cent full-year profit jump last month, driven in part by its cunning acquisition of Heron Foods, which has enabled it to introduce new frozen food ranges to 72 of its stores so far.
Although it was hit by the ‘Beast from the East’ in its fourth quarter, B&M gloated that its business model is ‘highly relevant’ for today’s ‘difficult economic environment’.
Broker sentiment for B&M is at ‘strong buy’ overall. Its share price since the full-year results has shot up from 370p and settled at around the 415p mark.
Adam Tomlinson, a retail analyst at investment bank Liberum, says B&M’s strength lies in its direct sourcing methods and disruptive value proposition.
‘It plays across three categories – general merchandise, FMCG and speciality – so it’s addressing a c.£300 billion market, and can nibble away at all those areas.
‘But it also manages to still have a tight product offer. And because it cuts out the middle man, it can offer great value while keeping a good margin.’
Since its acquisition of Heron Foods last year, B&M has introduced frozen food ranges into some of its stores
‘The shares came down a bit probably as a result of concerns around increased competition if the Asda/Sainsbury’s merger goes through, which could be a longer-term threat,’ Tomlinson adds.
‘But for the time being B&M is in a really good position, evidenced by its strong trading and recent results. It has more space to move into, especially in the South East and a big opportunity in the convenience sector and in Germany.’
So, a true bellweather for the health of the value sector Poundworld is not. Its demise is indicative, however, of a retail industry with no room for error.