The unstoppable rise of the discounters

Discount stores are expanding much faster than their bigger rivals

During his nine years at the helm of Poundland, says chief executive Jim McCarthy, the discount chain has sold a product at a loss just three times.

And even one of those three times - when it bought 250 million chocolate selection boxes from Woolworths following its collapse - was a deliberate ploy to attract the retailer's customers to its stores.

It's a story that reflects just how Poundland, despite the cheap and cheerful image, is a tightly managed business.

Poundland might look a bit basic - the ultimate in pile-it-high, sell-it-cheap - but this is a sophisticated firm with big plans for expansion. And its growth is part of a wider UK success story: the unstoppable rise of the discount retailers.

Poundland plans to eventually open 1,000 stores

Overall, the discount sector - including Poundland and its smaller rivals such as Poundworld and Poundstretcher, as well as the fast-growing supermarket chains Aldi and Lidl - has grown 48% over the past five years, according to retail research firm The Local Data Company.

This compares to the slower 34% expansion of the big four supermarket chains - Tesco, Morrisons, Asda and Sainsbury - over the same period.

In fact, last year discount stores grew twice as fast as the big four supermarkets with each chain opening an average of 33 shops compared to the 16 opened by each of the bigger players.

This growth in a much improved economy seems surprising, but analysts believe the recession started a much more fundamental shift.

The honest retailer?

Maureen Hinton, global research director for retail research firm Conlumino, says the careful habits initially borne of necessity have now become entrenched, with people realising they don't have to pay a lot to get good quality products.

She also credits the straightforward everyday pricing strategy of the discounters, compared to the "opaque" costs of their bigger rivals for their continuing popularity.

"There's a genuine honesty with pound stores. People have discovered there's the opportunity to buy good stuff at low prices so why pay more?" she says.

Poundland's customer data backs this up. Far from a shop just for people struggling to make ends meet, it claims to have successfully converted the middle class with a quarter of its customers now from the "AB" demographic - the wealthier end of the population.

People overestimate their ability to understand pricing, say pscyhologists

Hunter gatherer instinct

The discounters are also benefitting from a backlash against their bigger rivals: they're are seen as a welcome outsider, says Dimitrios Tsivrikos, a consumer and business psychologist at University College London.

"The cheap environment, low staffing and basic shop fit outs all help. People think there's no danger here and let their guard down," he says.

And conversely, because customers believe that there's no hidden agenda they spend more.

"The no gimmicks, no frills, 'here we are saving money' message means people buy a lot more just because no one is trying to convince them to do it," he adds.

In reality, he says people overestimate their ability to understand pricing, with the low pricing creating "a level of euphoria and excitement" that interferes with rational decision making, with "bargain" signs helping to create a sense of urgency.

"We are hardwired to feel more euphoric, the hunter gatherer instinct pushes us to buy with our shopping driven by missing out rather than acquiring what we need."

To take advantage of this, most of the discount stores stock a smaller constantly changing range on top of standard staples.

Chris Edwards, the boss of Poundworld, says its bestselling products are "everyday grocery items", including baby wipes, crisps and chocolate.

But he says the chain, which has 280 shops nationwide, each week changes 500 of the 5,000 items it stocks to "keep up with trends", such as a range of Minions products to tie in with the forthcoming film release, and give customers "new and exciting offers".

The chain has also recently launched an online shop, aimed at expanding its reach.

Poundland's takeover of rival 99p Stores is currently being investigated by the competition regulator

Poundland's Mr McCarthy says it is "reasonably well advanced" with similar plans, but it is also aiming to rapidly expand its physical presence.

It is using the funds from last year's £750m flotation on the London Stock Exchange to open more stores with a bullish long term target of opening 1,000 UK stores up from its current network of over 500 stores across the UK and Ireland.

A £55m deal to buy smaller rival 99p Stores and convert their shops into Poundlands, which is currently being reviewed by The Competition and Markets Authority (CMA), would dramatically hasten its growth.

And in contrast to what you'd expect, Mr McCarthy says the "good times" are actually much better for sales.

"We've been going for 25 years and seen two recessions. In good times people feel more confident and go on more shopping trips which means we get more business".

He is equally upbeat about the firm's growth prospects, pointing to the success of US discount chain Dollar Tree, which has been going for half a century, for proof of Poundland's potential longevity.

But others are less certain, warning that the growth of the discounters has an obvious limit. "If there are five pound shops on the high street, people are not going to spend five times as much. They are in danger of reaching a peak," warns Ms Hinton.

Still, it remains hard to resist the lure of the bargain. Mr McCarthy admits that even he is not immune to the store's charms - describing it as a "Pandora's box treasure trove".

He buys phone charges, Toblerone chocolate bars and biographies. "It's very difficult not to be compelled to buy," he says.