How to start a pound shop
Our step-by-step business guide to help you launch a discount store that will have you coining it in on the profits
Things to think about when starting a discount store are:
Launching a pound shop: Opportunities
The pound shop is now a common sight on high streets up and down the country flying in the face of modern thinking which suggests people nowadays have more sophisticated tastes and are only interested in branded products. The fact is, though they might not be the most fashionable of shops to be seen in – either in front of or behind the counter – that doesn't stop them being profitable, particularly when credit crunch tightens its grip on high streets and consumers turn to budget retailers to keep their costs down.
Although the recession did help pound shops thrive; the combination of consumer demand for value products and the cheap retail space available, as high street brands such as Woolworths fell by the wayside, has led to a boom in pound shops over the past two years. Data specialists Experian report that the number of shops with ‘pound' in their name has doubled in the past decade. However, the increase in popularity of the pound shop cannot be entirely attributed to the recession – the number of stores had already grown to 628 by 2004, several years before any whiff of the credit crunch.
The pound shop phenomenon began with the UK's original outlet, Poundland. The store opened in Burton-on-Trent at the end of 1990 in an shopping centre that was struggling to attract tenants and took an incredible £13,000 in its first day of opening alone. More stores were to follow and in March 2008, as the ‘Aldi effect' started to become apparent, the nationwide chain with a range of over 2000 products on its shelves saw its profits jump by 122% to £8m. That's a lot of pound coins.
“Pound shops have been around for a while and people know what to expect from them and feel comfortable shopping there,” says Len Griffin, company secretary of the Association of Independent Retailers.
“People love finding a bargain, and pound shops follow on from things like antique shops and flea markets, because you're never quite sure what kind of a great deal you're going to come across. And of course, if what you buy isn't that great, you've only spent a pound on it.”
Finding premises: How do I get started?
Though pound shops are fairly common, this fact still has not made it any easier to find the right premises in which to set up shop. As is true of many retail businesses discovering suitable and affordable property to rent or buy still remains one of the most difficult tasks any new retailer will face.
For example, if the shop is in a top location, it tends to be owned by a corporate fund which is really only interested in national chains because they can get them to commit to long leases and know they are going to be able to afford high rents. And finding suitable premises is made even harder for potential pound shop owners, as selling low-ticket items means, to maximise revenue, as much stock as possible needs to be displayed – so a good-sized outlet is a must.
David Wilson runs a pound shop in West Cornwall with its own website, poundshop.co.uk, along with another venture, smellybits.com, and he believes size is important. “Selling low ticket-times is a gamble, because you are literally going to be making pennies on each item so volume is the key. You need to have the right sized outlet which will enable you to handle large volumes of stock.”
But just because you might not be able to afford your first, second, or even third choice, don't despair. One of the benefits of pound shops is that they often fare better in the less obvious locations, rather than trendier and more expensive districts. And customers who are looking for a bargain will be prepared going that little bit further to find you, if they know the savings are going to make it worth their while. Furthermore you can consider getting initial finance to help get you off the ground.
What to stock in your pound shop
Choosing the right products to sell in your shop is one of the trickiest skills any shopowner has to master but for a pound shop owner it's made somewhat simpler by the fact you only have to focus on goods which you can afford to sell for a £1.
It all comes down to experience, and you can only learn by your mistakes, but after a while you should start to get a feel for what will sell by keeping a close eye on what's flying off the shelves and what is collecting dust.
One of the best things about running your pound shop will be when you've got the process perfected, and items you ordered start falling into the hands of customers who are grateful to you for providing them at such knock down prices.
“If you think it's a good line you might order, say, four dozen a piece, and if it sells out in a day you go back and order 40 dozen!” says David Wilson, poundshop owner. “But knowing when to stop ordering a good line is as much a skill as knowing when to start so that you aren't left reducing stock in a saturated market”
One decision you will have to make is whether to stock ‘branded' products, those produced by companies known to the customer, or not. By choosing not to, you are likely to get a better mark-up on the goods, but you're going to be taking more of a gamble as to whether you can shift them. It may be that customers are willing to try a new product once, but if it's low quality they will be unlikely to return to your store.
“These days I'm afraid the public want more and more for their money and they generally get it,” says Wilson. “The lines we sell now are much better value than when we started five years ago, but the price has obviously stayed the same.”
For example, toiletries such as soap products, deodorants and lotions tend to sell well if branded, largely because customers feel more comfortable about slapping something on that's not going to bring them out in a rash. On the other hand, household cleaning products, such as floor wipes and bleach, don't necessarily need to be recognised names to sell. The key with this particular sector of goods is the larger the amount for a pound, the better.
Choosing your stock is an ongoing process and another major factor to bear in mind when picking products for your store is seasonal variations, the most obvious being Christmas. As any retailer will tell you, the festive period provides much of a store's profit for the rest of the year, and pound shops are no different. This means you will need to start thinking about bringing in discount products such as decorations, Christmas card packs and other stocking fillers well in advance to maximise the rise in spending over the period. But it also means you will need to decrease other stock levels to accommodate this, again planning ahead in plenty of time. The same process will be repeated across the year from Valentine's Day to Bonfire Night via Easter and the summer holidays.
“The big retailers will always be carrying out massive advertising campaigns on the latest products or seasonal gifts, like Easter eggs, and small outlets can take advantage of that,” says Len Griffin of the Association of Independent Retailers. “When shoppers come into town looking for a particular product, they usually won't just go to the place that's been on TV as they'll want to shop around for the best price, which is where discount stores can really excel.”
And it's not just seasonal variations a pound shop owner needs to forecast. A good discount retailer will be one who notices trends on the high street that he or she can take advantage of. This is particularly true of the toy market, as items like yo-yos, water-pistols and so on fall in and out of fashion – so if a retailer can offer a discount version of the latest must-have, they're likely to have a lot of happy parents on their hands.
Finding a supplier
While choosing which items to stock is a skill which will take some mastering, finding companies to supply them is also not as easy as you might think. There are specific discount wholesalers and while flicking through the phone book is a good way to start, the problem is many suppliers often rely on word of mouth and local knowledge to attract new clients.
Some have found their way online, and there are also a number of subscription based sites which, for a price, will help point you in the right direction.
In addition to these sources, for anyone starting out in the discount retail market, there are two main trade shows each year: Spring Fair International at the N.E.C and the autumn trade show in September. Both are worth attending as all the main suppliers are be there. On top of this there are also a number of specific magazines, such as The Trader, which contain good helpful lists.
Tracking down a supplier is the hard bit but getting them to sell you their products is a lot easier. They are as happy to sell to sole traders as they are to large corporations and it's pretty straightforward to get your hands on a millions pounds' worth of goods.
The difficult part comes when you've got to pay for it and stock it. You do need to bear in mind if you are starting with a new supplier they will more than likely want the money before the goods leave their warehouse, even if you do already have a good credit rating.
After your initial order, much of your future success will depend on forging a relationship with your supplier. Good communication with them is vital, because they will help you track down the items which are good and bad sellers, and it makes sense for them to provide you with the best lines, because if they try and force you into buying an item which just won't shift, you're unlikely to have the cash available when they return for a repeat order.
They also need to be reliable and able to provide a weekly or fortnightly delivery. This is important because unless you can plan ahead on delivery dates then you are never going to be able stay on top of your stock control. You will soon lose those repeat customers if you can't make sure their favourite items are on sale week in week out.
The reality of running a pound shop
So you've found your premises, stock and supplier – now you need to start considering general business issues. Just because your goods may be cheap does not mean you're going to be able to pay any less attention to all the official legislation and red tape which goes with being your own boss. Tax, National Insurance, VAT, Health and Safety all still have to be thought about.
In terms of recruitment, finding suitable retail staff is rarely going to require more than a notice in your window or a cheap ad in the local paper. You should have access to a pool of either mature workers or teenagers, who'll mainly be working part-time, depending on the size and scale of your operation. Once you have your workforce in place, chances are any additional members you decide to take on board will probably come your way via word or mouth or through speaking to other businesses.
When all this is in hand, you can start to think about making some profit. With a pound shop you've got every chance of developing a good customer base who will probably spend more than they an anticipated.
If you can keep new lines coming in every week, this customer satisfaction will be further enhanced. When customers start to see the items in your pound shop are much cheaper than in their local supermarket, and just as importantly they will always be the same price, you're onto to a winner.
And of course there's something nice about being able to work out how much your goods are worth before you get to the till! “I don't know how many times a day I hear ‘I only came in for a shampoos and now I've picked up a basketful,” says pound shop owner David Wilson.
Managing a pound shop
Though you'll be popular with customers, don't expect the same treatment from your fellow shopkeepers because you'll probably be busier than them most of the time and you'll probably undercut some of their range on price. Never forget you are doing the same job as any other store. Buying and selling goods, managing staff, paying taxes and so on. The secret to success is the ability to keep an eye on all this, but also on your profit margins.
“The reason a lot of new retailers and shopkeepers fail is that they don't think like business people,” says Len Griffin. “They don't think in terms of money and instead just become far too engrossed in the day to day running of the store and end up employees of the proposition, so rather than owners they're acting like managers.”
On top of this, it will be a help if you're physically fit – because there will be plenty of stock shifting to be done – and make sure you don't get flustered when the shop's teeming with customers. Though each shop is different, you should be aiming to be able to take away 25% of what ends up in the till, after the VAT-man has had his 17.5 per cent cut.
Out of that you're going to have pay all your overheads such as wages, rent, insurance, and so on. What's left you get to keep but only after you have sorted out your own personal tax. We're not talking millions here, but you certainly should be quids in.
Tips for pound store success
Just because every item is the same price does not mean running a pound shop is any less fraught or complicated than any other type of retail business. To help make sure your venture is a sound as a pound, David Wilson recommends keeping the following in mind:
- Premises: “It's best not to consider taking a long lease, but instead take a short one or at least one with a break clause because you are not necessarily going to get it right first time. Economic and retail circumstances do change in town centres and you could find yourself in a backwater with a high rent to pay – if you can't get out of the lease you could lose everything. “For example I had a unit in a shopping mall in Oxford Street, London where you would think it would be easy to take money. It did well at first but after a few setbacks, I was taking less than half of what the shop in rural Cornwall was taking but with four times the rent! Fortunately I had built a break clause into the contract which we exercised before it swallowed all our capital.”
- Suppliers: “Cultivate your own suppliers that you can work with which preferably have a good supply of new lines. It's also worth making a personal contact at the head office who you can go to if there is a problem. And don't buy too much from clearance houses because some lines will sell fine but others, for some unknown reason, won't sell anywhere at any price.”
- Stock: “As a general rule, unless you are a spectacularly confident buyer, you will need to hold five to six weeks' stock overall. This is because, ignoring V.A.T., if you work out you need to take £5,000 per week to cover all your expenses and to pay yourself a wage, you will need to have in stock worth six times this amount, £30,000 at retail price, so if you are working on an average 25% profit margin this means you will need to spend £22,500 (£30,000 less 25%) on stock alone before you have even opened the door. Obviously, this figure does not take into account the three months' rent you will have to pay in advance and money for fixtures and fittings.”
- Staff: “I was once told by a marketing expert that your staff are your best friends. You have to encourage them and reward them as best as you can so they are happy, which will in turn make your customers happy. You also need staff you can trust. It's so easy for them to spirit away the odd £1 coin but remember – for every pound coin which finds its way into someone's pocket, you have lost the profit from the next four or five sales.”