Five years on from the demise of Woolworths, fund managers will soon have a new discount retailer to invest in.

Five years on from the demise of Woolworths, fund managers will soon have a new discount retailer to invest in.

The aftermath of the credit crunch turned into a nightmare for Woolworths and its entertainment suppliers five years ago, but times change and we now have dream conditions for IPOs (initial public offerings) in retail, reflecting the big rerating of the quoted non-food Retail sector over the last 18 months or so and increasing optimism about economic recovery.

By and large, the retailers in the burgeoning IPO pipeline fit into three groupings: online pure-plays, speciality growth retailers and discount retailers, because these are the three growth sectors most under-represented on the stockmarket.

Of course, if Aldi UK was to float on the stockmarket it would get a very warm reception in the City, given the tremendous trading success it is enjoying, but that isn’t going to happen as Aldi is very firmly a private business.

So, all the focus is on non-food retailers at present, in terms of companies looking to go public.

Everybody loves a bargain (including City fund managers) and just as over 20% of Aldi’s customers come from the AB socio-economic categories, a similar percentage of Poundland’s customers have the same sort of profile. That implies that the current success of discount stores is not just a cyclical phenomenon.

In the US there is a big discount sector on the stock market. Dollar Tree, Family Dollar and Dollar General are all huge and growing chains, nibbling away at the market share of Wal-Mart and the drugstores. Dollar General has about 11,000 stores (with an opening programme of 650 this year) and it has a market cap of over $19bn. Family Dollar has about 8,000 stores, is opening 525 stores in the new year and has a market cap of over $8bn.

Dollar Tree has a market cap of nearly $12bn. With about 5,000 stores, it is growing its footage by about 7% a year.

In the UK, the three ‘pound stores’ are all growing but they have a long way to go to match the scale of their US counterparts.

Poundland is the ‘king’ of the sector with about 500 stores (including Dealz in Ireland), whereas Poundworld has over 200 stores (including its multi-price brand, DiscountUK). 99p Stores has well over 200 stores (including its Family Bargains fascia and Euro 50 stores in Ireland). All three chains have been able to expand by taking former Woolworths sites: 99p Stores claim to have more than 70 of Woolworth’s former sites and the highly successful Poundland in the relatively prosperous London suburb of Twickenham used to be a Woolworths.

In the UK stock market investors lack a direct way of playing the growth of the sector, but that will change next year and a solid, proven performer like Poundland should be well received.

Led by the ebullient chief executive Jim McCarthy, Poundland is professionally run, with disciplined stores and good operating systems, which is more perhaps than can be said of its family-owned competitors like 99p Stores and Poundworld.

Former private equity backed retailers have a mixed record in the City, but Poundland is now on its second private equity owner, in the form of Warburg Pincus, and the disciplines that private equity ownership has brought don’t seem to have been bad for the business.

Viewers of the BBC documentary Pound Shop Wars this time last year will have been left in doubt about the fanatical devotion to duty of Hussein Lalani at 99p Stores and Chris Edwards at Poundworld, but the weak profit performance of the two businesses since then seems to leave a bit to be desired.

As and when Poundland comes to float next year, with a £800m valuation mooted, the business should have no problem differentiating itself from its rivals, 99p Stores and Poundworld. Poundland’s problem is that it is not as big as other discount chains such asHome Bargains and B&M Bargains and that they may have more growth potential.

Tom Morris’s fast-growing Home Bargains business has certainly got Ian Cheshire’s attention at Kingfisher because it has made incursions into B&Q’s market, although it appears to have no plans to go public. But if B&M Bargains ends up floating next year, three of the key Tesco executives of the last decade will be heading publicly quoted non-food retailers.

First up was the former Tesco Marketing guru Tim Mason, as chairman of the fashion chain Bonmarche, which floated this month. Next will be the former Tesco finance director Andy Higginson, who is chairman of Poundland. But B&M Bargains, which sold a 60% stake to the US private equity firm Clayton Dubilier & Rice last December in a deal valuing the business at nearly £1bn, is chaired by former Tesco chief executive Terry Leahy and it appears that they too are thinking of jumping on the IPO bandwagon.

Which of these three retailers turns out to be the best stock market investment remains to be seen but, if some investors aren’t quids in, no doubt Tim Mason, Andy Higginson and Terry Leahy will be joshing each other about it.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.