September 20, 2011 4:51 pm

Pound shops squeezed by inflation

Inflation is the biggest enemy of the fixed price retailer . The pound shop business model relies on high volumes compensating for low margins, so when prices creep up, products often have to be re-engineered.

Poundland removed an egg from its egg boxes earlier this year, redesgining the packaging to sell 9 for a pound instead of 10. It has stopped selling bags of sugar, after prices rose, as management did not think the small size of the revamped bag represented good value for its customers.

Pound shops pride themselves on selling brands consumers recognise, and will often do deals with big manufacturers to produce appropriately “resized” bottles. Selling three of the same item for £2 is another marketing ruse designed to keep volumes high as margins wane.

Careful cost management is the other side of the coin. In the Channel 4 series Undercover Boss, Poundworld director Martyn Birks unwittingly revealed how harsh the retailer’s “swipe in, swipe out” policy is, when he had his wages docked for not clocking in on time. Unlike the supermarkets, very few pay to advertise and management time is concentrated on pushing supply chain efficiency.

New formats are another way around inflation – 99p Stores launched Family Bargains last year, which trades from out-of-town retail parks, and sells most products for under £10.

The pound shops face a particular challenge, but inflationary pressures have been mirrored in the wider consumer sector for some time. A Which? survey published this week claimed that Fairy washing up liquid has shrunk from 450ml to 433ml with no drop in price, and that Persil has taken eight wash tablets from its largest packet, but has not reduced the price by the same ratio.

Sainsburys has agreed to cut the price of its own-brand ketchup, after the survey revealed that new packaging reduced the bottle size from 485g to 460g, but the price remained at 95p. With consumers searching harder for value, if you look after the pennies, the pounds will look after themselves.

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