This morning;s announcement that Poundland has agreed terms to acquire 99p makes perfect sense. It was inevitable that there would be some consolidation in the value sector. This is just that, within the single price segment of the wider value sector. These two businesses are very similar but Poundland has pulled away from its rival in several ways during recent years. The two key elements of this are size (Poundland sales are now virtually 3x those of 99p) and performance (Poundland’s has been strengthening while 99p’s has been showing signs of strain over the past couple of years).
The rationale is very simple. Poundland takes out its largest rival and establishes undisputed dominance of the single price sector. It immediately inherits a sales boost of around 33%, with the prospect of driving this up to 50% if it is able to get the additional footage to be as productive as existing Poundland space. If 99p’s sales can indeed be traded in-line with Poundland’s and similarly profits, the potential prize is an incremental £25m. Clearly, there are a number of “ifs” here but in the context of a purchase price of £55m, this is an extremely attractive prize which ticks all the boxes. And given the structural similarities of the two, there is a very good chance these numbers will be achieved. Of course there will be other economies too.
There will certainly be more consolidation in the value sector, just as there will be throughout retailing. Growing overcapacity means everyone has to run that much harder to stand still. And standing still will increasingly be not good enough.