Can pound shops make money online?

19 February 2014 Last updated at 00:00

Pound shops: Can they work online?

By Edwin Lane Business reporter, BBC News

Can online pound shops recreate the bargain-hunting experience of the High Street?

Selling triple packs of Mars Bars, kitchen sponge scourers, Elvis calendars and multipacks of marble-effect party balloons, pound shops have done well out of the UK's recession.

While retailers like Woolworths, Comet and Jessops went to the wall, names like Poundland, Pound World and 99p Stores took over the UK High Street, stacking cheap and cheerful goods high and flogging them to Britain's growing army of austerity-hit bargain hunters.

99p Stores started as a single shop in Holloway, north London, in 2001 and now has more than 200 outlets turning over £270m a year.

Poundland, the biggest chain, opened its 450th store last year and is planning a £750m flotation on the London Stock Exchange.

Now, at least two businesses are hoping to replicate that success, but this time on the internet.

'Real challenges'

Last week Pound World, the UK's third-biggest pound shop chain, joined forces with Poundland founder Steve Smith to launch Poundshop.com, a website offering the pound shop experience on the web.

Hereforapound.com tries to mimic the experience of browsing a pound shop

That came a week after the launch of a similar site - Hereforapound.com.

But can pound shops work online? Many retail analysts are sceptical.

"It could work, but it has some real challenges to overcome," says Neil Saunders, a retail analyst at the consultancy Conlumino.

The strengths of the pound shop business model, he argues, are exactly the things that are problematic in online retail.

"A lot of shopping in pound shops is impulse - you go in looking for something, you see other things in front of you and they end up in your basket. That's difficult to replicate online," he says.

Secondly, the profit margins on pound shop merchandise are notoriously low, meaning you need to sell a large volume of goods without spending too much on things like processing, packaging and shipping that are a costly part of online retailing.

Not profitable

"It doesn't work because, once you factor in the extra costs, you erode your profit margin," Mr Saunders says. "When you translate it to online the numbers don't stack up."

Retail analysts say it is a broad misconception that online retailing is a hugely profitable business.

While clothing retailers like Asos, or those selling high-end electronics, have turned a profit, those selling lower margin goods often do not.

The food delivery company Ocado has yet to deliver a profit, despite huge levels of investment. and budget clothing firm Primark has pulled out after a failed online trial. Even Amazon, Mr Saunders points out, while fast-growing, is not a particularly profitable company.

"Most online grocery stores don't make money," says David Gray, a retail analyst at Planet Retail. "With non-food you can make money but it depends on the product."

He argues retailers are rushing to establish an online presence because they believe in the importance of having an internet presence - a notion that has been "exaggerated".

"It's cyclical," he says. "At the moment the internet is a big thing, but it's not going to take over all of retail.

"You do need an online presence to promote your business, but it's not necessarily something you're going to make money out of."

Browsing experience

This has not dissuaded Donna Baker, the managing director of Hereforapound.com.

Poundland has seen huge expansion on the High Street, but has yet to move online

In the first week of trading she says the company brought in £28,000 worth of orders - ahead of its own expectations - and says feedback from customers has been positive.

"Shipping is a great convenience to our customers," she says. "Especially some who are housebound or disabled."

The company charges a flat fee of £3.50 for delivery, but offers free delivery for orders over £20.

Ms Baker says around a third of customers so far have bought enough items to get the free delivery.

Furthermore, she says they tend to buy a range of products from around the site, rather than buying one or two things in bulk volumes, suggesting they are mimicking the experience of browsing around a real pound shop.

The site is designed to encourage that. "It's crucial to get as many products on the page as possible at the same time," Ms Baker says.

"People are able to scroll through as many products as possible, and it's quick and easy to add items to the basket, like shopping in a High Street shop."

But Planet Retail's David Gray fears that the pound shop model is simply not suited to making money online.

"I'm not convinced," he says.

"It doesn't make business sense if you don't make money on the sales. The lifeblood of pound shops is passing trade - and you don't get passing trade online."