Analysts believe the likes of Poundland can grow further

Analysts believe the likes of Poundland can grow further

For those of you who thought the discount retail bubble had burst in the UK, think again.

The likes of Aldi and Lidl may have come down from their late 2008/early 2009 high but some in the discount sector continue to thrive in the weak consumer climate.

Poundland, a general merchandise retailer that sells around 3,000 items at GBP1 (US$1.51) each, has attracted new owners after a buoyant 12 months and a forecast of more to come.

Yesterday, US private-equity firm Warburg Pincus had announced that it had moved in for the business in a deal said to be worth around GBP200m.

Warburg Pincus, whose interests in the food sector include shares in Premier Foods plc, the UK's largest food maker, has snapped up a majority stake in Poundland after striking a deal with the retailer's former private-equity owners, Advent International.

The transaction, and the noises coming from Warburg Pincus as it announced the acquisition, suggest the private-equity firm shares Poundland's optimism for the future.

“Poundland is an exceptional business that enjoys a leading position in the high-growth, single-price discount retailing market in the UK," said Warburg Pincus MD Steve Coates. "The company is well placed to continue to take advantage of excellent growth opportunities."

In the short term, few would disagree. The UK may have technically moved out of recession but consumer confidence remains low. Any optimism consumers may have felt as the UK economy started to grow again will have been tempered by the tone of campaigning for this year's General Election, when much of the debates have focused on the level of cuts needed to improve the country's finances.

With few signs that the UK's frugality is lifting, Poundland's management clearly believes it can benefit. Under the stewardship of ex-Sainsbury's executive Jim McCarthy, Poundland plans to expand its 260-strong store estate this year with the opening of around 50 more outlets.

And the retailer argues that it can continue to grow if and when consumers start to feel more confident of the state of the UK economy and, more pertinently, their job prospects.

Bullish comments from Warburg Pincus yesterday, which told us that Poundland performs best when the economic cycle is better, dovetails with McCarthy's own thoughts on the post-recession consumer.

Talking to the British Retail Consortium's annual retail conference last June, McCarthy was not fazed by the prospect of economic recovery and brushed off the suggestion that the success of discounters like Poundland is a cyclical phenomenon.

"The consumer now is much more informed about value. Some of those habits and behaviours that have been acquired during this recession very necessarily will remain sticky. So, I can't wait for the recovery," McCarthy said.

And some industry watchers agree that consumer behaviour has changed for good. Neil Saunders, consulting director at Verdict Research, said Poundland will find it "tougher" to maintain its growth once the economy improves. However, changes in how consumers shop provide Poundland with opportunity to grow, Saunders explained.

"Growth has been more than about just economics: over recent years people have generally become more savvy with their money and have become much more willing to seek out a bargain; hand in hand with that, they have become a little less ‘snobbish’ about where they shop," Saunders said.

"Those trends will not go away post-recession and so there is a continued opportunity for stores like Poundland to grow. Woolworths plc has also left a gap on the high street that stores like Poundland can fill."

The demise of Woolworths has given the likes of Poundland - and single-price peers like 99p Stores - a chance to lure customers with their cut-price offerings.

Retailers like these may be general merchandise stores - selling everything from toilet roll and envelopes to groceries - but the UK's food makers would be wise to note the march of single-price outlets in the country.

Even for a general merchandise retailer like Poundland, food accounts for a significant proportion of sales. At Poundland, the figure is something like 30% and, while the retailer does not have the offer to provide consumers with a full basket, its food sales are largely driven by impulse purchases, which would appeal to snack makers and confectioners.

As Saunders says: "They certainly haven't reached a ceiling quite yet."