Pound Shops to take VAT hit

Two popular retailers in Eastleigh are facing tougher trading conditions thanks to today’s rise in VAT which saw the rate climb from 17.5% to 20%.

Fixed price discount stores Poundland,which took over the Woollies site last year, and the ‘99p store’ at the Swan Centre will have to find ways to absorb the 2½ percent rise themselves .

After all, “One-pound-two-and-a-half-pence-land” doesn’t quite have the same ring to it.

Not passing on the full VAT hike could see up to half a million pounds shaved off Poundland’s profits so the cheapie retailers need to find ways to peg their prices and maintain their margins.

Although many lines have narrow profit margins others are quite generous and the rival discounters could concentrate on these and discontinue less profitable items.

Poundland has been in negotiations with suppliers to reduce costs by shrinking pack sizes.

Poundland shoppers: One triangle short of a Toblerone?

They say they have persuaded Kraft to supply Toblerones with one less triangle of choccy – bags of sweets like Maltesers will go down from 146 gms to 120 gms while tea bags which were once sold in boxes of 100 will now be supplied in boxes of 88.

Jim McCarthy CEO of Poundland said:

“Despite the significant and inflationary increase in VAT Poundland will continue to sell its products at the single price of £1.

…where we are unable to offer amazing value on a continuing basis we will de-list the product and supplement with other products that meet our customer needs”

Meanwhile Faisal Lalani, a director of 99p stores said:

“In fmcg and food virtually every supplier is offering us better pricing to compensate for the increase in VAT,”

“Generally the rule we’ve taken is, if they can’t reduce the price on one product then they’ve reduced the price of another to compensate. Suppliers were given a choice of better prices or alternative products. More than 90% have agreed to better pricing.”

How long suppliers can keep from passing on rising transportation costs remains to be seen while price inflation in china – the origin of many discount consumer goods – is also rising fast.

Meanwhile the sinking value of the pound – which has boosted our exports – means that we are now importing inflation.

Last year in Eastleigh the ‘89p extra’ discount store in High Street was squeezed out by the competition and forced to rebrand itself as an Asian food market.

Both Poundland and 99p stores are bullish about their prospects saying the recession will see an upsurge in their popularity as part of a ‘flight to value’ – but although shoppers may think they are getting value for money they could find the VAT rise will result in fewer ‘2 for 1’ offers, smaller pack sizes, lower quality and a narrower range of goods.

Is the era of cheap goods from China nearly over? Which of Eastleigh’s discount stores will fold next?

  2 comments for “Pound Shops to take VAT hit

  1. peter stewart
    January 6, 2011 at 9:29 am

    Kraft: The very same company that took over Cadburys and then began to destroy the British workforce?

    Seems fitting they would begin shrinking Toblerone to suit the Poundland mentality.

    In this “race to the bottom” the logical outcome (shortchanging the customers) is that Toblerone will eventually end up with only ONE segment!

  2. easy peasy
    January 6, 2011 at 10:41 am

    I don’t remember Poundland INCREASING the pack size of their goods when VAT dropped 2.5% to 15% last year.

    Nor did they reduce the price goods to stimulate trade as they were supposed to.

    They pocketted the difference.

    Now VAT has gone up they want to short sell their customers.

    It’s ‘Heads we win, tails you lose’ with this lot.

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