by Real Business - Thursday, 30th August 2007

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Steve Smith might have been taking it easy in Majorca doing up farmhouses for tourists. Instead he set up what turned into one of the fastest-growing retailers in the UK. Poundland, with starting capital of £50,000, opened its first shop in December 1990. Last year, its 42 shops hit a turnover of £73m and made profits of £2m. Half a dozen Dix Francs shops in France have made a good start. And in Israel, a proposal is on the table to repackage the concept as Shekel Express.

Steve Smith's £50,000 could now be worth £40m.

The Poundland concept - every item in the shop costs £1 - or variants of it, has been tried before. But Smith gave it a new look and a new professionalism. This kind of discount retailing usually takes place in discount locations: secondary property, with rundown fittings if any at all. Instead, Smith has put it into mainstream shopping centres and fitted out his stores in a manner which would keep even Hyacinth Bucket happy.

It's the same story in Poundland's head office - or retail support centre, as Smith refers to it - with a tailor-made IT system into which Smith has sunk £750,000 so far and will pour another £250,000 this year. To make sure he gets the most out of his software, last year Smith bought the consultancy that had written it for him.

Steve Smith started his retail career when he was two years old. That's when his father, Keith, moved his wholesaling business out of his garage and onto a market stall at Bilston, halfway between Birmingham and Wolverhampton. Ten years after that came the migration to a small warehouse. Keith ran the warehouse and young Steve looked after the stall. The warehouse grew and grew. Then in 1988 the Smith family enterprise, trading as Hootys Supplies and dealing in a wide range of what used to be known as "fancy goods", attracted an offer of £3.7m. It was too good to turn down.

Dad emigrated to Majorca and Steve got ready to follow him, after a one-year handover period working for the buyers of the business. But, having sold his house and with the family possessions in a trailer, Steve's wife decided that the Balearics lacked Birmingham's charms.

"We did go to Majorca," says Smith, "but I had to tell my parents we were just there for a holiday, not for good. So we spent a few evenings in the bar discussing what I could do instead. That's when this idea came up. I didn't want to go back into wholesaling because we thought it was slowly dying: the manufacturers and the importers were beginning to go direct to the market traders and small retailers."

The Poundland concept was always more than a marketing gimmick. "There are big cost savings associated with it," says Smith. "With a chain as opposed to a single large warehouse, I couldn't be everywhere at once. If everything's the same price, you don't need to tell staff what an item is to be sold for and they don't need to put a price sticker on it. Stock moves straight from the boxes onto the shelves. That adds up to a big and valuable efficiency."

Inevitably, Poundland has plenty of manufacturers' end-of-stock lines. These sell well at a discount but, when they're finished, they're finished. But its range also includes many staples, including a smattering of big brands such as Panasonic, Kellogg's and Cadbury's. Poundland takes four lorry-loads of market-leading Walkers Crisps a week. Other manufacturers, fussier about the retail positioning of their products, provide regular lines under Poundland's in-house brands.

Smith was determined to take Poundland out of back-street discounting and into mainstream shopping centres. But along came a problem familiar to many small businesses. Big landlords didn't want to know him. It wasn't so much the tone of Poundland, although the idea that Smith would undercut every retailer in sight clearly gave rise to some reservations. The killer was that Smith had no covenant. Hootys might have been an impressive success, but it was too obscure to have registered with this audience: Smith lacked the copper bottom sought by landlords doling out 25-year leases.

After many turndowns, the brave - or desperate - owner of Burton-on-Trent's Octagon Centre handed over a unit in November, 1990. Intent on opening his pilot store in time for Christmas, Smith and fellow director Dave Dodd, who had been a manager at Hootys, worked overtime. "In the last week, we did one stretch of 53 hours without going to bed," recalls Smith.

The obstacles mounted. Suppliers looked askance at Smith when he sought small quantities of stock; at this stage, Smith was dealing with 650 of them. As he conceived it, Poundland was to have 25 categories of product and a stretching 8,000 lines in all. To make the pilot a good test, he needed to have most of those present on its shelves. "These people sell by the pallet. I wanted one or two cases, even half a case. Some were obliging but even most of those said we'd have to collect," says Smith, a thoughtful man not given to hyperbole.

He did and it was worth it. The new store opened two weeks before Christmas. Smith is coy about how much money it took. "It was wildly more than we planned, though," he says with a big, involuntary, smile on his face.

And it made an impression on the landlords. Pop down to his store in Birmingham's city centre Pallasades development, alongside Mothercare, Austin Reed, Boots and many other big retail names, and see how Poundland's footfall leaves the rest standing. "We attract the same traffic of customers as a full-size anchor tenant. Landlords want us because we get shoppers into their centres," he says.

Smith wasn't always so upbeat. Having secured a prime location in Sheffield's Meadowhall Centre for his second store, at two and a half times the rental of Burton-on-Trent, Smith put out the local advertising and hoped to stimulate a day-one surge by opening the store late at 9.45am. "My father was back in the country and he, Dave and I stood at the door from 9.15. Absolutely no-one appeared. My dad asked, 'How much are we paying for this?' Dave and I went to console ourselves over breakfast, round the corner. When we got back the customers were climbing over each other. Meadowhall doesn't open until 10am!"

Since then, it's been comparatively plain, if frantic, sailing. But there has been one big hiccup. There were six Poundland stores by December 1991 and 13 a year later. Now stretching between Newcastle, Canterbury and Bristol, the chain numbers 45; another 30 target locations are in the pipeline. The hiccup occurred in 1995. And it taught Smith not wait until the last minute.

The chain's growth was pushing the capacity of its warehouse past the limits. "There was stock in the aisles and outside and more about to arrive. We could not process deliveries and despatches," says Smith. "We didn't even know what we had. Shrinkage [theft of stock] had reached impossible levels." A lease on a second warehouse across the road was all but signed up and due to be filled to the ceiling from week one. But when Smith went to collect the keys, the agent said his client had received an offer for the freehold and was holding off for a month.

The whole episode - including the solution of an over-large 130,000sq ft warehouse 15 miles away - carried a monumental cost. Poundland's profits fell from £850,000 in 1994 to £400,000 in 1995. It was well into 1996 before the new site became fully operational. "Consolidation of our business during 1996 saw the operational difficulties resolved... a satisfying achievement was that our loss prevention strategies were successful," was the sober conclusion in Poundland's annual report.

That year also saw a new retail concept. "Eureka" was the name Poundland gave to a "multi-price" store. Two Eurekas have been doing good business but have now transmuted into a yet bigger idea. Poundland can readily fill a 10,000sq ft unit and the power of the proposition is plain to see. But it is constricting in terms of range and ultimately gives away more margin than necessary. "We had telephones for a pound," explains Smith. "But at this level, value challenges credulity." The new idea is to offer the same value on something that ordinarily sells for £100-£200 as Poundland does in lower price bands. The outcome will be a 20-30,000sq ft store, with prices of up to £100. Smith says there is an abundance of merchandise available internationally "which is every bit as exciting as our £1 product but not currently represented in any credible manner in mainstream UK retailing." Look out Debenhams, John Lewis and House of Fraser. The first "hundred pound land" store - its real name and location are under lock and key - will open this summer.

Meanwhile, Poundland has got within striking distance of £100m sales on the Smiths' original £50,000 plus modest borrowings. But if the new concept takes off in its first location, its roll-out will require an expanded equity base. Smith says he doesn't see himself going public (and is sceptical about the value for the whole group suggested in the opening paragraph). Instead, he intends to take a variety of venture capital firms and private business angels around the new store as soon as it opens and invite them to buy into the firm privately.

The overseas prospects seem set to fair without drawing financial resources from the UK. In both France and Israel - and in other less advanced international proposals - Poundland's valuable IT systems, together with its buying and managerial expertise are being twinned with other people's capital. The French business, Pays a Dix Francs, was taken over from customers of Hootys and is backed by a French investor. The Israeli proposal arose from an approach made to Smith by a financial source seeking a retail investment.

Poundland may have humble origins and down-to-earth customer proposition, but it takes itself very seriously, occasionally verging on the pompous. "We must understand what makes us competitively unique," thundered a recent missive to suppliers. "We refer to this as our DNA coding and most importantly, we have to be prepared to 'genetically engineer' our code. Our customers suffer from 'time poverty'. We recognise therefore that our future retail activities must entertain and fully satisfy their expectations." It sounds as though the highly capable Steve Smith is not short of even more capable marketing consultants. But it's difficult to argue with the missive's conclusion: "our remarkable success story ... is destined for dynamic growth."

Jeffrey Curtiss certainly agrees. He is chief executive of United Overseas Group, a global mopper-upper and distributor of excess stocks of branded consumer goods. United Overseas floated on the Stock Exchange last year. "I think Poundland is one of the best-run retail businesses in the UK," Curtiss says. "They not only know how to sell, but they have fantastic IT systems which give them a total picture of every product line. Poundland is going places."

Prime positions
Steve Smith momentarily thought he had goofed by taking a prominent high rent unit in Sheffield's Meadowhall Centre. But the commitment to prime positions has served him and his father well throughout their careers. "When we traded in the market, we always moved our stall if a better one fell vacant. Eventually we got a corner position opposite a pub. In the summer, drinkers would spill out of the pub and sit on a wall right opposite our stall. They could study our offer while they drank. Then they came and bought it."Hootys, the former business, was offered a warehouse half the size of their then site. Despite the enforced shrinkage, the Smiths took it. "It was simply a better site. It was more prominent and had much better car-parking. We ended up doing more turnover from half the space."

Speakeasy
Poundland's Speakeasy is a freephone number on which "colleagues", as all staff are known, are invited to leave a message - anonymous or otherwise - on any issue they choose. Examples, "welfare, morale, job satisfaction, fair treatment, suggestions, comments, security..." invites the advert in the house newsletter, The Grapevine. All messages arrive on Smith's desk. "It's frustrating when you grow past the point of being able to know everybody's name," says Smith. "They can't speak to me directly. This is one way in which we address that." Suppliers have already been plugged into Speakeasy and now the number is to be printed on every till receipt.

Make it to measure
Some Poundland stores take eight deliveries a week. What's ordered by noon is delivered the same day. This is only possible thanks to an impressive IT infrastructure. Rather than use inexpensive off-the-shelf solutions, the firm has invested big bucks in a bespoke system. "What you need changes every month.

At first, deliveries came direct to stores. Then we set up a warehouse. For a time, we had two warehouses. Then we set up the Hong Kong buying office. Then we gave the buyers notebook computers. They needed to dial into our system from the middle of China. I don't believe there's an off-the-shelf solution that would meet all these requirements, let alone next year's. By going our own route we got what we wanted: a single integrated system, not one knitted together from dozens of components that were never designed to be knitted together." Last September, Poundland paid £100,000 for a 65 per cent interest in M&O Business Systems, the consultancy behind its IT success and installed M&O partner, George Oldridge on the board. A future step will be to sell the system to other businesses.

Value, value, value
In Sainsbury's, Tesco or Safeway, it's not difficult to spend £1 on a toothbrush, never mind the toothpaste. Poundland shrink-wraps the two together for £1. And they're not unheard of brands. They are often big brands, if sometimes printed in exotic languages. You want sticky tape? One roll might cost you 80p elsewhere. Steve Smith's pack for £1 contains eight rolls. The length per roll is undoubtedly less, but the value is still striking.

The total commitment to value was founded on an experience 20 years ago. "When we traded on the market, other traders said our prices were too keen. 'There has to be a limit', they said. We tried putting the prices up. In the first week we did the same volume and made three times the profit. The next week sales fell. By the fifth week, we were taking nothing. When you've got a regular trade, people come back because they trust you. But they don't when they realise you've moved the goalposts. We put the prices back down. It took us months to recover. Ever since, we've never compromised."But delivering value means finding it in the first place. Smith points out a rosebush in a plastic bag: price £1. "A friend of mine runs a garden centre. He pays £1.34 for these, but he's thinking of coming to us (many do just that: it's not unusual for customers to take 100 of one item, to mark up and resell in their own shops). You've got to get on your bike and find people who want to do the business."

Contacts
Alistair Blair started his career on the Grimsby fish docks in the seventies. he then took an MBA and moved south to the city where he spent ten years in corporate finance. He is now a business journalist and runs a small investment fund.

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