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Products priced at £1 are not just for recessions

Since the big four supermarkets decided to boost the number of products they sell for £1 and Asda began referring to itself as ‘Britain’s biggest pound operator’ fixed-price retailing has been placed firmly under the spotlight. By Glynn Davis

GENERAL MERCHANDISE

Products priced at £1 are not just for recessions

Since the big four supermarkets decided to boost the number of products they sell for £1 and Asda began referring to itself as ‘Britain’s biggest pound operator’ fixed-price retailing has been placed firmly under the spotlight. By Glynn Davis

In the past few weeks Tesco has corralled together an extended range of 1 products at its larger outlets into 'Pound Shop' zones, Asda has boosted its number of 1 lines to 7,000, Morrisons now has around 1,400 lines on 1 promotion, and Sainsbury's has trebled its number of such offers to nearly 1,000.

But despite this high level of activity it is unlikely that the 1 price point (and other 'round' price points such as 50p, 75p and 2) will be a long-standing fixture in the major grocers because they are predominantly being used as a promotional tool and are therefore temporary.

This is in stark contrast to the true fixed-price retailers whose entire business models are based around selling goods at a single price-point and who do not simply change their pricing ar

chitectures on a whim.

The leader of the pack in the UK is Poundland that racks up annual sales of around 400 million from its nationwide chain of more than 200 stores and has been charging only 1 for its products since it was founded in 1990.

For such companies to continue to sell goods at a single price and most importantly still offer shoppers a strong value proposition while overcoming the effects of inflation requires a business model focused squarely on this objective.

With around 7,000 lines typically changed each year the Poundland buyers are adept at cutting deals and will often take advantage of situations such as manufacturers needing to sell-on goods that were part of cancelled orders originally headed for the big four, and end-of-line items.

However, for the 300 to 350 'essential' lines that the company stocks on a permanent basis the skill is to be able to make minor modifications to the products whereby they can be sold at 1 while still generating the required margin for Poundland.

This adjustment to the product is referred to as 'product re-engineering' and can take many forms, all of which are used by Poundland on an ongoing basis. The more effective the company is at the task ultimately determines the attractiveness, and value to the customer, of the products stocked on the shelves.

This product engineering has to not only offset inflation but also counter exchange rate fluctuations. On my recent visit to the head office of Poundland in Wolverhampton Jim McCarthy, chief executive of Poundland, highlighted how the business has to mitigate the currency fluctuations on goods sourced from the Far East.

And with the /US Dollar exchange rate having traded between the extremes of 1.26 and 2.06 the capabilities of Poundland and the other fixed price point retailers has been fully tested. “You have to have flexibility with production in the Far East so with annual orders that have 'call-off' stages we can at these points alter say, the number of pencils in a box,” he suggests.

David Coxon, trading director at Poundland, says there is also the issue of raw material costs that continuously fluctuate and often require some form of re-engineering to the products. He cites cling film that is typically in 100m rolls but with the cost of the raw materials (chiefly oil) increasing last year the length was decreased to 60m before it was then taken back to the original length when the input costs decreased again.

What Coxon says cannot be done is any reduction in the quality of the product so Poundland would not have retained the length at 100m while reducing the thickness of the film. This is why he dismisses the tactic of another supermarket in having a brewer create one of its well-beers but at a lower strength in order that less Duty would be paid and it could then be sold in-store for less than a pound.

McCarthy agrees: “You have to be careful. There is a big difference between an ABV of 5.2 and 2.1. You can't fool the customers.”

Changing recipes is therefore not part of the re-engineering game at Poundland, whereas being flexible with sizing is vitally important and the changing of pack sizes is used frequently, especially with the group's own-label products. Extra items are sometimes added into packs or are taken out, and a variety of multi-packs are continuously created.

Walking around the retailer's two central Birmingham stores with Tim McDonnell, retail and operations director at Poundland, he highlighted some of the many products (both branded and unbranded) that had been re-engineered to fit the 1 price point.

A packet of Sony AAA batteries had '+2' printed on the packaging thereby taking it from a typical pack of eight up to 10. It was a similar deal with Lee's Snowballs where four extra confections were included in the pack to take it up to 14 for 1. “It's a very simple concept but you have got to have your wits about you,” says McDonnell.

Although the company does not often work directly with major brand owners to re-engineer products there are some examples of such co-operation. It worked with Whitworths to create a non-standard bag of sugar weighing 1.5kg. A machine was brought over from Germany specifically to enable the manufacturer to create this unconventional UK pack size. It normally comes in 1kg bags and works out at 93p per kilo so by charging 1 for 1.5kg Poundland is able to sell it for the equivalent of 67p per kilo.

Poundland also purchases many of the rarely seen non-standard pack sizes from the major branded suppliers. They are unusual because “the big boys have got consumers used to certain pack sizes”, suggests McDonnell. This sort of activity all falls within the realms of product re-engineering and in the Birmingham stores examples included After Eight mints in 200g packets rather than the typical 300g pack size.

Mars Bars were also available, in the slightly smaller 51g size rather than the traditional 62.5g pack size, and were sold as multi-pack deal of four for 1. WD-40 lubricant was available in an 80ml can and had '+20ml' printed onto the can. This compares with the standard 200ml can.

If there is any doubt about the ability of Poundland to use its creativity and re-engineer products to retain the fixed price 1 for many more years to come then McCarthy points to the US where Dollar stores have been a popular fixture for a long time and are currently doing a roaring trade.

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