Pile 'em high, sell 'em low: the chain's winning formula stems from knowing exactly what we need. Photo: Amit Lennon

At the very back of the shop, far behind the stacks of Fairy Liquid and Dettol in the window, and the rows of pet food, confectionery and Tupperware, is Poundland’s book section: a couple of narrow shelves on which a few copies of a Kingsley Amis biography are strategically wedged between The Official Ollie Murs 2014 Annual and a self-help book on coping with childlessness.

In its early years, the whole of Poundland was as weird and wonderful as its bookshelves. But now, although it can still be relied on to stock some odd products (my recent finds include a lime-green bottle of aftershave called “The Edge” and a bag of “man flu” lozenges – the perfect passive-aggressive gift) it increasingly resembles a more conventional grocery or supermarket. The aisles are arranged logically, there’s a small fridge filled with drinks and snacks near the tills, most of the brands are recognisable and twice a shop assistant comes over to ask if he can help me with anything.

Poundland has smartened up its act. Its founder, Steve Smith, who opened the first shop in Burton-on-Trent in 1990 with a £50,000 loan from his father, likes to refer to the chain’s ISE, its “irresistible shopping experience”. You might snigger at the jargon but Poundland’s growth has been impressive. The firm trades through 517 shops across the country, and it plans to expand the number to 1,000. It sold £997.8m of goods in the year to April 2014 and on 12 March began trading on the London Stock Exchange, floating at £750m. How did a budget store in Burton-on-Trent selling (let’s face it) a lot of cheap junk grow so big?

Fixed-price shops and discount retailers have been the winners of the downturn. While sales at the big supermarkets are falling, the German budget stores Aldi and Lidl increased their sales by one-third and 14 per cent, respectively, in the third quarter of last year. Their success is triggering a price war on the high street: in March, Morrisons announced that it would invest £1bn in price cuts over the next three years, and Tesco and Asda quickly followed suit.

In 2008 the likes of Poundworld, 99p Stores and Poundland filled the gap in the market after Woolworths collapsed – and did so often literally, by taking over old Woolworths shops. My local Poundland, on Seven Sisters Road in Holloway, north London, occupies a familiar if depressing landscape, surrounded by empty lots, pawnbrokers and betting shops and standing opposite the distinctly scruffier MightyPound. (I went into MightyPound with the intention of interviewing a few customers for this article, but when I tried to snap a picture of a plastic handbag emblazoned with the friendly slogan “Keep calm and f*** off”, lying next to some furry toilet seat covers, a shop assistant barked, “No photos!” and ejected me.)

I can’t imagine this kind of customer service at Poundland. One intriguing aspect of the chain’s growth has been its success in attracting more affluent, middle-class shoppers. A friend of mine, a secondary school teacher, is obsessed with the place. “Guess where I got this?” she’ll say gleefully, waving a spiky plastic ball designed to stop clothes sticking together in the tumble dryer. The company boasts that a quarter of its shoppers are from the AB social group, broadly defined as those working in administrative and professional roles, or in mid-level management and above. Its most profitable stores are located in wealthier towns, such as Cambridge, Stratford-upon-Avon, Guildford and Bath.

We’re all becoming much less snobby about discount retailers. According to the research group Kantar, half of Britain now shops at Aldi and Lidl. They’re deliberately catering to middle-class tastes: at Christmas, Aldi sold lobsters for £5.99, award-winning champagne for £10 and cheap Serrano ham. With standards of living still below 2008 levels, middle-class shoppers are being more open-minded about where they buy.

Poundland doesn’t sell any £1 lobster or champagne – which is probably a good thing (I was not convinced by its faux-European champagne truffles) – but it has fought doggedly to gain social acceptance, among shoppers and mainstream brands alike, as Steve Smith tells me when we speak on the phone. His original business idea was inspired by his memories of helping out on his father’s market stall. His father kept a box on the stall for products with damaged packaging, all priced at 10p, and often that box made more money than anything else. This insight into the psychological power of fixed-price retail, married with the launch of the new £1 coin and his father’s decision to sell his cash-and-carry business and move to Majorca, lies behind his move in April 1990 to set up Poundland. When the first shop opened eight months later, it made £13,000 on the first day of trading. But Smith understood that these sales could be maintained only if he could encourage big brands to supply him with the goods to stock his shelves.

Smith says he faithfully attended buying shows for three years, but the sales representatives for major brands refused to meet him: they weren’t interested in filling the shelves of somewhere as low-market as Poundland. Eventually, he recalls, he “got a bit mad” at the stand for WD-40, the lubricant oil, and found himself agreeing to a price so high that Poundland would lose 3p on every can of the product sold. It flew off the shelves, and when WD-40 realised that Poundland had grown into one of its largest global retailers Smith was able to bargain down the price. He went on to strike a deal with Cadbury, and soon other big brands followed.

Poundland’s stock buyers are shrewd negotiators: not only are they able to bargain down prices, but they frequently talk companies into selling their product in odd-sized packages to keep the retail price under £1. While loaves of Warburtons bread sell at Tesco and Sainsbury’s in either 400 gram or 800 gram packages, Poundland stocks 600 gram loaves. Mainstream supermarkets sell Walkers crisps in multipacks of six or 12 but Poundland sells five-packs.

It also helps that these deals are seen as a useful way for companies to shift excess stock, which explains some of Poundland’s more unusual products: Smith cites among his victories the time he sold £1 golf clubs and a £1 six-foot desk. You might not think there’s much room for profit if you’re pricing everything for a pound, but Poundland makes bigger margins on its goods than higher-cost supermarkets. According to Kantar’s figures, Poundland averages a 36.9 per cent margin on its goods, compared to 25.7 per cent at Tesco and 24.5 per cent at both Sainsbury’s and Morrisons. “They negotiate really hard . . . they are ruthless,” says Simon Johnstone, an analyst at Kantar. No matter how great a bargain you think you’ve found on its shelves, the chances are that Poundland struck a bigger one.

Smith has benefited from the firm’s tough negotiating. He sold his business to the private equity firm Advent for £50m in 2002 (another private equity firm, Warburg Pincus, bought a majority share eight years later for £200m). Today, the 52-year-old, who has the broad physique and close-cut crop of a club bouncer, owns a 50-acre estate in Shropshire, complete with helipad and pet llamas. Does he still shop at Poundland? There’s a pause. “Yes, of course.” What does he buy there? Another pause. “Batteries . . . my wife bought some batteries there the other day.” Even Britney Spears shops at Poundland, he reminds me: she apparently visited the shop in October to stock up on matches. “They’re, like, the tiniest matches you’ve ever seen . . . they’re so cute,” the pop star told the chat-show host Alan Carr.

Discount retail in the UK is a profitable business: of the 1,000 people on the 2014 Sunday Times Rich List, those who made a fortune in this sector include Galen and Hilary Weston (who ran discount stores before buying up Selfridges in the UK, and are now worth £5.75bn); the Sports Direct founder, Mike Ashley (£3.75bn); and the Home Bargains founder, Tom Morris (£2bn). Many of them, like Smith, built their business from nothing and so have first-hand understanding of their cash-conscious customer base. Chris Edwards, who founded Poundworld, started out working on his parents’ market stall. The Lalanis, who launched 99p Stores, are first-generation Asian immigrants from Tanzania who moved to London in the 1970s after running a cash-and-carry near Lake Victoria. Even the current chief executive of Poundland is a self-made man. Jim McCarthy is the son of a window cleaner. He grew up in a council house in a Warwickshire mining village and rose through the ranks after joining Dillons Newsagents as a retail trainee aged 17.

McCarthy and the rest of the senior management at Poundland own 25 per cent of the firm, so they will have profited considerably from the flotation. What the sale of shares will mean for its shareholders and customers is a little harder to pin down. Was the decision by Warburg Pincus (which owned 75 per cent of the company) to take it public motivated by a desire to cash out while Poundland profits are at their peak? When the economy recovers, will middle-class shoppers retreat to the genteel, clutter-free aisles of Waitrose?

Weathering an economic recovery is, perversely, the first of Poundland’s three big challenges. The second is how to keep its products under £1, as each year of inflation puts more pressure on pricing. Finally it needs to compete in an increasingly crowded discount market: how much should Poundland fear Aldi, Lidl and even the 99p and 98p shops?

Unsurprisingly, the press team at Poundland brushed off my suggestion that shoppers might turn away as the economy improves. Perhaps they are right: all those Guardian articles promoting thrift, with their generous use of irritating terms such as “recessionista” and “credit crunch chic”, might have helped make it cool to be cheap. Hipsters now wear their charity shop purchases with pride, and self-consciously trendy restaurants serve foraged food and promote “head-to-tail” dining. Even the UK’s historic luxury stores want in on the trend. Fortnum & Mason, the London department store known for its overpriced preserves, fine wines and teas in Victoriana packaging, holds an annual Food and Drink Awards; last year it offered a special judges’ prize to Jack Monroe, who launched a popular food blog by posting low-cost, healthy recipes while struggling to feed her family on benefits.

Poundland declined an interview but agreed to answer questions by email, saying that consumer habits are “sticky and once customers experience the value on offer they are likely to keep coming back, even as the economy improves”. Perhaps, however, thriftiness will prove a fad. Simon Johnstone at Kantar said that, to hedge against a rise in disposable incomes, Poundland was investing in better-looking outlets and a wider range of groceries.

Alongside new lines of Poundland sandwiches and milk, you can expect more unusual packaging as the company struggles with changes in the economic climate. “Looking at the market in the United States, where the single-price dollar stores have been growing profitably for the past 60 years, we are confident that we can continue to manage inflationary pressures effectively for decades to come,” the company said in its statement. And yet, if you do cast your gaze on America, this year both McDonald’s and the fast-food chain Wendy’s have dropped their dollar menu, and a number of dollar stores have scrapped their fixed-price policy. At some point Poundland, too, will have to reconsider its “Yes! Everything’s £1!” slogan – or else sell single digestive biscuits and thimbles of Fairy Liquid.

But undoubtedly the biggest challenge will be to keep up with the competition. Determined bargain-hunters have never had more choice. A 2012 Channel 4 Dispatches documentary, Secrets of Poundland, exposed how the size of the firm’s packaging has shrunk over the years, how packets are labelled with offers such as “50% extra free” to convince shoppers they are getting value for money, and how some of its own-brand goods are of poor quality – yet the creative labelling appears to have had little effect on sales.

Many Poundland shoppers are too canny to be hoodwinked by the £1 label. The shoppers I chatted to at Poundland in Holloway weren’t mindlessly filling up their baskets with junk. Some, like Paul, who has been out of work for several years with a “gammy leg”, meticulously research the offers at their local discount shops. He recited the prices for two litres of milk from five local supermarkets (perhaps it’s not enough now to ask politicians to state the price of a pint of milk; a surer sign of the common touch would be an MP being able to recite the price of milk from several stores) and told me that today he’d buy his dog food at Poundland but milk at Morrisons. Robin, a retired former Tube driver, had visited all of his local pound shops in the past few days. “That’s what the government is telling us to do, to shop around,” he said. Poundland doesn’t only have to contend with price-cutting competitors, it needs to retain customers with little sense of brand loyalty who are willing to hunt around for a bargain.

As well as colonising the high street, pound shops are moving online. In February, Steve Smith launched his latest venture, in partnership with his former rival Poundworld, called poundshop.com – a garish orange website selling anything from £1 bras to baby rattles. He says the website is so popular that when it launched it crashed because of the high volume of web traffic. Within hours, 30,000 people had registered to use the site and Smith had made sales of £12,000. Once he begins reading out emails he has received from grateful online shoppers (“Thank God, we can’t carry all that stuff back on the bus, now we can!”) he is temporarily unstoppable. A week earlier, hereforapound.com also launched. It remains to be seen how well they do on the web in the long term – you’re less likely to impulse-buy an armful of cheap things when you’re sitting at your laptop – but the move suggests that they are increasingly catering to everyday shoppers rather than the bottom of the market.

Pound shops might be an eyesore on Britain’s high streets, yet unlike betting shops or pawnbrokers, their expansion could be a good thing for consumers: never before has the discount market been quite so intensely competitive. And although that bizarre bookshelf in Holloway seems a relic of the old Poundland, before private equity funding helped turn its quirky, cluttered stores into a relatively sleek operation, it also reflects the range of customers the shop now attracts.

Which means that even though Poundland is becoming increasingly common on high streets, it remains an unusual place. Where else will you find the long-term unemployed and overworked management consultants, fashion students and science teachers, diehard bargain-hunters and curious yummy mummies rubbing shoulders as they jostle for that final out-of-season chocolate Santa, ten-pack of Space Raiders or giant pot of penny sweets?