Home Bargains grasps UK high street shift

Home Bargains' strap line is "Top Brands, Bottom Prices". But operations director Joe Morris has unwittingly coined another one. "We do the impossible," he says, when asked to explain the fast-growing discount chain's business model. "We buy goods at the same price as the supermarkets and sell them cheaper."

Customers have noticed - 3m passed through its stores last year - and the group's red and light-blue fascias have been heading southwards from their base in the northwest of England as part of the wider march of discount chains.

Since 2008, when the financial crisis began, the business has more than doubled its turnover to £915m, and doubled its number of stores to 300, spreading from Inverness to Bristol.

Mr Morris runs the company behind the brand, known as TJ Morris, with his elder brother Tommy, who founded it with one shop in Liverpool in 1976 and still owns 89 per cent.

But the younger Mr Morris says there is no guarantee of success for discounters. He describes the downturn as "a double-edged sword". While the "squeezed middle" - as the cash-strapped British middle class has become known - is overcoming its embarrassment about being seen in a discount store, competition has increased. "Anyone can sell cheap goods," he says. "It's harder to make a profit doing it."

Profit margins are already eroding in the discount sector, which is also home to Aldi and Lidl, the German operators, as well as Iceland, Wilkinson, B&M Bargains and pound stores. Mr Morris says not all will survive.

"Netto could not make it work in the UK," he points out, referring to the Danish chain's lossmaking UK operations that were bought by Asda in 2010. He expects TJ Morris's own margin to fall from 10 per cent to about 7 per cent over the next couple of years because of pricing pressure.

The company's answer is to keep expanding. It is building a £70m distribution centre in Wiltshire, a copy of the 700,000 sq ft facility opened a decade ago at its headquarters on the edge of Liverpool.

In a sign of the shifting make-up of the UK high street, TJ Morris bought 14 Woolworth stores after the chain's collapse in 2008.

Today, the group has a 20 per cent average annual growth rate, 10,000 staff and is opening 50 stores a year - making it one of the top 100 private companies in the UK.

Turnover in the year to June 2012 was £915m, up from £721m the year before, with pre-tax profit rising from £59.5m to £84.2m. Profit was reinvested in the business, with net capital expenditure of £37.8m. TJ Morris aims to expand to 700 stores - more high street outlets than WH Smith - and £2bn turnover by 2020.

It has been able to keep administration costs and complexity down by stocking 5,000 product lines rather than the 50,000 in a typical superstore, and having only 60 head office staff outside the warehouse.

It also does as much as it can in-house. TJ Morris runs its own software, written by Ed, another brother who has a computing doctorate. It owns its logistics operation and has an office in China to source products directly from manufacturers, cutting out the middle men. It set up an online operation 18 months ago but Mr Morris says this accounts for a fraction of sales and is more of a promotional tool. Joe Morris, an expert on robotics, masterminded the warehouse design.

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Its stores are between 10,000 and 25,000 sq ft in size, selling 70 per cent regular lines and the rest one-off bargains.

"We like to give customers a surprise," Mr Morris says. On the day of the interview with the Financial Times, it was two Royal Doulton cereal bowls for 99p.

Its head office reception is usually crammed with traders striking deals more quickly than larger competitors could. Chris Reggio, of Heley International, a wholesaler that supplies several discounters and is a regular visitor, says: "They are a dream to deal with. They are the best paymasters in the business."

At a store next to the head office, customers are clear that price is their main reason for shopping there. Suzanne, a single mother from Bootle, says: "You have to budget. I don't know what I would do without it."

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