Strength, Opportunities and Threats of Pound Shops - Essay Example

?Pound Shops SWOT Analysis Strengths: Pound shops are low price point retail shops that thrive on low price of products across the entire product line. All their products would be priced for a pound (or two). The fixed low price point factor becomes their largest strength, one that truly differentiates them from all other consumer retail chains. It makes their products affordable for their target market, due to which customers in recent years have been very much attracted to these pound shops. The price factor drives volumes, which makes up for the low margins, in total profits. The prominent pound shops in UK have registered large profits and growth in recent years. According to the figures released earlier this year, Poundland reported an 81.5% increase in profits from the previous year. Poundworld posted record profits of ?5.4m in on sales of ?133m. Buying from these pound points provides incredible value for money to the consumers, and with budgets stretched, it makes pound shops very preferable for them. The low prices are made possible due to low costs incurred in their model, by these shops. A conscious effort to keep a check on costs is made, in terms of overhead expenses and direct costs. Pound shops are able to save large chunk of money by buying in bulk quantities. They don’t shelve varieties for their products, but usually stack on products from one or two manufacturers for each category. This allows them a lot of bargaining power with the suppliers. Since they only have to stock few varieties for each product category, they can always switch to those suppliers that offer the lowest rates. Even renowned brands have supplied their products to pound shops, recently. Pound shops’ model is based on keeping prices at the low price points, ensuring there’s price consistency across the shop, and which continues overtime. This creates greater certainty for the customers, who confidently return to the shop, knowing they would be able to shop without draining on their low budgets. For the administration too, it’s a relief, since they don’t have to spend time and hire resources, to calculate prices for each product item. All product items can be arranged anywhere in the shop, and rearranged to change the display, without worrying about changing tags, or shelves. Pound shops also don’t undergo price inflation. This certainty gives them a rare advantage over other consumer retail and other avenues of consumers’ pounds, where inflation can be a huge drain on consumers’ already limited incomes. Pound shops try to absorb inflation by negotiating harder with suppliers so they continue getting products at same level of prices. Alternatively, they might switch to another supplier, which, however, could be offering products which are inferior to those previously offered. However, at times, pound shops have been known to counter inflation by other means too. Instead of increasing prices, they have reduced the quantity of product offered. 99p Stores, for instance, were selling 200g Toblerones but later the chocolate bars were only 170g in weight. In general, however, the zero-price inflation, price consistency, and of course low prices, ensure a large customer base for pound shops. In times of recession and low economic growth, when wages don’t increase by much, if at all, low wage earners find pound shops extremely valuable. When unemployment is relatively high, more people are living off benefits. Middle and upper classes too feel compelled to look for value in their shopping, and then there are students and other such groups of consumers who are very conscious about their spending. With their unique business model, pound shops are able to reach out to, and cater to, a larger customer base than other retailers. Pound shops also employ an effective tool in their marketing mixes- that of psychological pricing, in pricing. 99c is a successful price point chain in UK, and others also use the psychological pricing effectively, to give the consumer the perception of greater value for money. In terms of placement, the pound shops are located in numerous places across major cities, after their recent expansion. The accessibility factor can be crucial, as consumers could be diverted to other retail outlets if the shops are not easily accessible. Most low-wage earners would find it expensive to commute across the city for grocery items, for example. In terms of promotion, most pound shops rely on low budget, cost-effective means to promote their outlets. Many of them use cheap mediums such as social media to effectively reach out to target market. ‘Poundland’, one such pound shops chain, has a strong social media presence, on Facebook at least, which it uses to attract consumers, for new and repeat purchases. Word-of-mouth is also very effective and thus they try to create strong brand loyalty so that their customers become their voice and help increase sales. Weaknesses Low prices across the product line also mean less, mostly minimal margins on most products. Pound shops are looking to create value for customers be negotiating better prices from suppliers and cutting on their own profits as well. They seek to offset the minimal margins by boosting sales, and generating higher revenues. In case they are not able to sell well in a particular season, because of external reasons, unpopular products, or competition, they could end up with cash flow and profitability problems. Pound shops also look to keep prices low by making hard bargains with suppliers. To do that they seek to keep less varieties of each product item, and negotiate lower unit rates for larger total units. For the consumer this means there would be very little or no choice in most categories. On the other hand, Supermarkets could be offering fifty or more brands/varieties for consumer to choose from. If less pressed for value, some consumers might prefer to have more choice and go elsewhere. For instance, supermarkets were selling more than 300 types of cheese and 200 kinds of bread. At certain pound shops, only one is one the offer. Sugar and tea bags come in one variety though branded. At the supermarket, there are 44 varieties sugar and over than 70 different teabags. Sometimes, low price point shops would be selling products with short expiries (to use by dates), because they are acquired far more cheaply. This could be a cause of concern for many customers, and some might consider buying from elsewhere where products still have a longer shelf life. Demand for the products they sell is also elastic in another way. Since they try to get the cheaper product varieties, most of these are likely to be the lesser known brands which have not spent much on marketing them. Thus unbranded products tend to have elastic demand, and consumers too might have little awareness of these products. They are even less likely to be loyal to these brands. Given their incomes rise, or their consumer retail spending increases somehow, they might easily to switch to brands which have created a deeper connection with consumers. (However, some renowned brands too are now available at low price point stores.) Pound shops are looking to keep overheads as low as possible, because of which their marketing budgets too are very minimal. They are usually not able to promote their outlets, particularly in mass media (using ATL activities). Their competitors, like supermarkets, could use promotion to attract consumers to their outlets by offering discounts on a particular range, additional services, more varieties or anything to win away customers from one pound shops. Opportunities: The macroeconomic environment of the country can continue to provide an opportunity to capitalize on, for pound shops. The wages of the lower income groups might continue to grow slowly, in which circumstances; pound shops offer great value for money. The Middle and Upper classes have also been turning to pound shops for value shopping. Earlier this year, certain pound shops chains started accepting American Express cards, something only associated with high earners. Even if the macroeconomic environment improves steadily, the consumer habits take time to change, and given they become used to the pound shops, get good value and pound shops provide good service, consumers might be unwilling to switch to other options, even if they can. The favorable circumstances will allow them to grow and expand. This was also evident by how all the pound shops replaced with their outlets, the outgoing Woodsworth. The three major pound shop chains are expanding, earlier this year, Poundland had 389 outlets, 99p Stores had 173 and Poundworld had 125 stores. Poundland, moreover, planned to open a further 50 in the ongoing financial year. Threats: Pound shops are sensitive to threats from external environment, including the government and competition. Single-price model has risks of its own. When the VAT increased to 20% last year, most shops could raise their prices to reflect the change. Pound shops on the other hand, couldn’t, as that would have jeopardized their model. A larger threat for existing pound shops is that supermarkets, along with chemist chains, have started adopting pound-point rates in an attempt to attract shoppers on a budget. This also makes their previously confusing deals, simpler to understand. Twenty-five percent of Asda’s products are sold at price points. Competitors in the pounds shops competition, and others in the consumer retail segment, are also threatening by using psychological pricing, more effectively to thwart competitor sales. It was noted above that this was also one of the strengths for pound companies, and when others adopt it, pound shops lose out on their advantage, and thus they are pressed to keep more competitive pricing in such cases. PEST Analysis Political Analysis The $1 shops usually thrive by earning large volume of sales but the profit margin on each sale is small. This means that the store has to depend on a large volume of sales if it needs to ensure good profit figures at the end of the financial year. The government polices in the current economic scenario do not favor the $1 shops. This is due to the fact that the government has revised polices regarding the minimum wage rate which currently stands at $6.19 per hour. The rise in the wage minimum wage rates means a relatively lower profitability for business specially the businesses which have a low profit margin and high volume of sales. $1 shops need to hire the sales staff to increase the sales volume and a large number of sales staff on a higher wage rate will only affect the business negatively. The $1 shops cannot afford to layoff the sales staff to a great extent due to the value added by the efforts of the staff. Along with the minimum wage rate revised by the UK government, the regulators have also introduced new measures that need to be fulfilled to be granted the licenses to operate their stores. These policies include the environmental policies as well as the need to introduce new measures to facilitate the customers more. The government introduced the law which makes it compulsory for the stores, which includes $1 shops, to entertain the disabled people by installing ramps and wide enough walkways so that the disabled persons can themselves manage to go through the store. These policies create a challenge for the store managers and owners who have to design the store outlay accordingly to meet the government policies and they eventually have to add up to expenses or rather the investments to setup the stores. Economic factors The British economy has been on the road to recovery since the past third quarter. The unemployment levels have gone down relatively and along with it, the inflation rates have also decreased. The month of October 2012 experienced a rise in the retail consumption and the economists have shown optimism that the consumption will be on a rise in the next few months and will eventually fully recover in the year 2013. (O’Connor, 2012) With the British economy on its road to recovery and the people having more money to spend only means that it is a good thing for the retailers and this will also apply to $1 shops throughout the country. People will visit the stores more and will be more willing to spend money now that they have jobs and the inflation rates are on a decline. However, the $1 stores will not be able to enjoy the same success as other stores will be enjoying. People certainly do not buy luxury items from the $1 stores and therefore the rise in the disposable income will affect the $1 stores more. With people having more money to spend, they will consume more products in the near future and they will do this by spending this money on the $1 shops. The people in general are still pessimistic about their consumption patterns and they prefer that they do not spend astronomical amounts of money on luxury items as yet. Therefore, the people will turn to these $1 shops in the near future to spend their increased money until the economy has fully recovered and reaches its optimum level. However, the things do not look too good for these $1 shops in the year 2013 since the economists predict that next year will witness full recovery of the British economy. When this happens, people will not be pessimistic anymore and will start to spend their increased wages and disposable income on luxury items which are usually highly priced and definitely higher than $1. This means that as the disposable income increases, the sales of the $1 stores will decrease. Therefore, the $1 shops are very much dependant on the economic factors and anything that is too high or too low performance of the economic indicators will damage the sales potential of these stores. Social factors As mentioned above, the British economy is on the road to recovery and the $1 shops will only benefit from this recovery to a limited extent since with time, people will start shifting their consumption patterns and will spend more on the luxury items. However, the social factors will have separate implications on the performance of these shops. During the Olympics in London 2012, it was expected that the retail businesses will have a great time and the tourists will turn to the shops, ranging from the $1 shops to the huge departmental stores, and the turnover of the retail business will rise to an all-time high. However, this did not turn out to be the case and the revenue of these retail stores actually declined by a considerable amount. (Knight, 2012) During the course of the Olympic Games in August, the shoppers preferred to stay indoors rather than leave their houses at a time when the streets were filled with tourists. This affected the consumption patterns of the shoppers when it comes to $1 shops since tourists usually do not visit these shops and the local shoppers were not leaving their houses specially for shopping. Another factor which played a major role during the Olympics was that the impulse shoppers who use to visit the websites of retailers and instantly book their orders at that moment were not doing so at that time. Instead of the people surfing the internet by viewing the retailers’ websites, people were viewing the Olympics online and therefore the marketers and managers of the stores faced a huge challenge in trying to capture the attention of the shoppers. Similarly, the demographics also play a huge role in influencing the marketing patterns of the $1 shops. These shops are successful in the London area to be specific because this is a city which hosts people from a wide range of races and countries. These people may be tight on the budget and as a result they opt for the $1 shops for shopping. Technological factors The marketing of all the businesses throughout the world have revolutionized in the 21st century since the introduction of social media websites such as Facebook and the development in the concept of online marketing. The technological advancement has facilitated the emergence of huge online corporations such as Google and Facebook who use the funds provided by the advertisers. The fact that the people have become so reliant on these sites that they turn to Facebook for social purposes and have started to using the word “Google it” instead of search it. This alone speaks for the success of these corporations and this provides the opportunity to the marketers of the retailers to advertise and market their products to the consumers. This opportunity has indeed been capitalized upon by the marketers and the stores have used the tools of search engine optimization and advertisements to make more and more consumers aware of their products. The marketers will not get a better forum on which to market their products where virtually the whole world views and uses it to communicate with others. These technological advancements have thus opened a wide range of opportunities to build upon their brand, and this also applies for the $1 stores. As mentioned above, these $1 stores depend on high sales volume and they have to do this by making their existence known to more and more people. Bibliography Knight, J. (2012, September 21). Olympics casts cloud over shops and UK economy. Retrieved from The Independent: http://www.independent.co.uk/news/business/news/olympics-casts-cloud-over-shops-and-uk-economy-8160776.html O’Connor, S. (2012, October 30). Retailers upbeat after spending rises. Retrieved from FT.com: http://www.ft.com/cms/s/0/88d46538-228b-11e2-8edf-00144feabdc0.html#axzz2Az87sv9K Read More