The competition in the British retail sector hit two of the most famous brands on the high street, with House of Fraser and Poundworld experiencing difficulties putting thousands of jobs at risk. House of Fraser is a loved British brand with more than 170 years of history and Poundworld was thought to have an appealing business model in the age of austerity. Where did it go wrong for these two companies? This article is dedicated to Poundworld, while House of Fraser will be discussed in a second part that will follow.
The world of high street retail has been under pressure in the past years. Economic uncertainty, austerity and the rise of online shopping have threatened the very existence of traditional high street chains. In this tough environment, budget retail chain Poundworld offered a proposition that was winning the hearts of customers. Poundworld's first shop opened in 1974, when founder Chris Edwards Sr. opened a market stall in his hometown of Wakefield. The store offered deals to customers and eventually switched to the single-price format in 1997, with the name of "Everything's £1". The global financial crisis and the recession that followed in 2007, allowed Poundworld to win customers who became price sensitive and expand. Eventually Poundworld reached revenues of £200M in 2012 and planned for further expansion with 40-50 store openings planned for each year. In 2015, when the private equity fund TPG bought the majority of the company for £ 150 million, with the intention to grow even further to 4,000 stores, the company reached its apogee.
How did it fall? Poundworld's business model was mainly built around economies of scale and a reliable and cheap oversea supply chain- which covered at least 30% of the company's supply chain. A key element in this architecture was the reliance on the pound as strong currency in the FX market, which allowed consistent savings when purchasing materials overseas. While the British economy has showed resilience in the face of the Brexit referendum, the same cannot be said for the pound which has been massively discounted, particularly against the US dollar. While some industries benefited from this movement (tourism and manufacturing for example), this proved to be fatal for Poundworld. Its business model was now too expensive and overstretched in too many shops to be profitable. After a brief battle to reach an agreement that could save the company, Poundworld entered into administration on the 11th of June threatening the loss of 5000 jobs.