What do you get if you add up 99p and a pound? No reduction in competition, according to the UK’s Companies and Markets Authority (CMA), which this week waved through permission for Poundland, the listed discounter, to gobble up its smaller rival the 99p Stores.
The rise of retail discounters has been the story of our austerity times. The capture of market share by Lidl and Aldi, the woes of unfocused Tesco and the proliferation of stores such as Poundland, Poundworld and the 99p Stores, were driven by a fundamental shift in consumer behaviour.
Although they have been around for a while, it wasn't until recession hit in 2009 that discounters gained traction as cash-strapped Brits plundered Poundland for discount washing powder. By 2014, when Tatler magazine sent its reporter to the Notting Hill branch of Poundland – the same one frequented by David Cameron – what was a cost-cutting trend, had become an institutionalised change in attitudes. It is now all about the search for value.
Upbeat reaction
So consumer reaction was upbeat when the CMA decided that Poundland, with 600 stores, presented no threat to competition with a £55 million (€75.5 million) agreed offer for 99p Stores’s 250 outlets.
The CMA would have looked silly had it come down any other way. Poundland – which has more than 30 stores in Northern Ireland and a handful in the Republic where it operates as Dealz – has been been ticked off in the past for selling products for more than £1. But, given that the chain’s whole attraction is based on the possibility of buying products for £1, it stretches credulity that it would buy its rival and then reposition itself as the “£2 Stores” because of a reduction in competition.
Perhaps the regulator, whose predecessor did little to stop the UK’s biggest supermarkets from squeezing out competition by buying up land, was trying to be thorough.
What the deal has to say about the discounting market is interesting. The two companies have had a similar trajectory. Nadir Lalani, a Tanzanian immigrant to the UK, opened the first 99p Stores in 2001. Lalani built up petrol chain franchise Whistlestop too, which he offloaded in 2005 to concentrate on the 99p Stores. From then his chain expanded rapidly, generating £370.4 million in turnover in the year to February.
Poundland began with a store in Burton on Trent in 1990. By 2010, it had 300 stores and its founders had sold control to Warburg Pincus, an American private equity investor.
Express expansion
After flotation last year, Poundland’s store count was more than 600, which it is pushing to get to 1,000. Turnover is more than £1 billion a year and profit £44 million. In making an offer for 99p Stores, Poundland chose the express expansion option over organic growth, which was going more slowly than it wanted.
Some claim the merger – which comes as turnover growth slows at Poundland – is happening as the discounting fad is on its way out. Yet investors have reacted positively. Poundland’s shares rose more than 5 per cent when it announced the acquisition in February, suggesting the market thought it had bought a bargain. Shares in Poundland closed another 5 per cent up yesterday on regulatory approval.
By international standards the UK and Irish market for discounters remains ripe. It is nowhere near as developed as in the US where the the big three – Dollar Tree, Dollar General and Family Dollar – together own 24,500 stores, more than McDonald’s and Starbucks put together.
Austerity has not gone away in the UK and ripples from China’s slowdown can only exacerbate this. Yet we haven’t stopped spending: Office for National Statistics data for July shows retail sales grew year-on-year for 28 months, the longest period of sustained growth since 2008.
Helen Power is a freelance journalist
