Faith, hope and charity shops

From Barnardo's to Age UK to the countless one-off outlets, charity shops have been totting up double-digit profits growth. It was 14% last year and 12% in 2011. Each of the three preceding years saw growth of between 4% and 7%, comfortably in excess of inflation. The stereotype may suggest their 160,000 volunteers are all of pensionable age, but there is nothing frail about their organisations.

Nearly 600 stores have opened in the UK during this five-year downturn. This has pushed the total count above 10,000 (900 in Scotland), creating a lot of extra outlets for unloved old suits and vinyl treasures.

This is getting up some retail noses as much as it pleases others. And it prompts an important question: is this boom a sign of the times, or is it here to stay?

The recent rise of charity shops has partly been on the back of their high-street neighbours' misfortune.

Katy Faulkner, head of retail business development at Sue Ryder, says: "When we looked at the return on investment when we prepared our business plan, we saw that we could deliver a good return. We recognised that the property market was in a position that there were opportunities for taking on premises where we could negotiate well on the leases."

In short, it became a tenants' market after 2007. The big charities could deploy their coffers – in many cases swollen by Government funding – to take advantage.

Sue Ryder, which cares for people with life-changing illnesses, has added about 60 stores in a couple of years and has at least another 20 in its sights.

But the overall growth in charity shops is not evenly spread: The Salvation Army opened 18 outlets last year against children's charity Barnardo's, which roared up to fifth in the league table with 57 openings last year; and the British Heart Foundation (BHF), which overtook Oxfam to become the Manchester United of charity shops on the back of 35 openings.

The BHF's story is particularly remarkable, since it only went into retail in the late 1980s. Only a few of the best-known high-street retailers can claim to have opened more than the BHF's 709 stores in that space of time.

Mike Taylor, retail director of the BHF, whose own background is in running commercial chains including Londis and Whittard, agrees that charity shops have benefited from recession-hit consumers looking for bargains, but says this over-simplifies what has happened.

"You shouldn't underestimate the whole recycling/reuse thing. There are a lot of people who feel it's wrong to throw things out that could give use to somebody else. A lot of people will buy a book from us and bring it back afterwards, for example."

Another boon for charity shops has been gift aid. Charitable donations are deductible from people's income tax liabilities and can be reclaimed from HMRC – gift aid enables donors to waive this right and let the charity get the money instead. This adds 25% to the value of the donation.

It has existed for cash donations since the early 1990s, but was extended to donations of goods in 2006. From April, charities will further benefit from another change which will dispense with the need to write to the donor telling them how much the stock sold for and asking retrospective permission to receive the tax rebate.

Faulkner of Sue Ryder, which was the first major charity to introduce gift aid for stock donations, says: "It will make a huge difference for the ability of charities to gain better value out of gift aid."

At the same time, charity shops have evolved over the years. Oxfam, of course, wrote the book on diversification, having been operating separate stores including music shops and bookshops for years that are much closer to commercial outlets than the clichéd image of mothballs and flying ducks charity shops.

BHF does a few of these, but its main brand extension (157 stores, including 13 in Scotland) is furniture/electrical stores. Age UK has been piloting "concept" stores that combine retail with other services.

Sue Ryder has opened six pilot "superstores" in retail parks of around 5000sqft each, albeit none yet in Scotland. These shops aim to attract different types of donations and buyers among car-borne customers.

Along with the likes of Age UK, Sue Ryder has also been dabbling in setting up stores next to city dump sites to take unwanted goods that otherwise end up in skips.

Online is another big opportunity, as well as being a necessary defensive move. Oxfam is the trailblazer here, already relying on its own site as well as the likes of eBay for between 3% and 4% of sales.

Andrew Horton, its trading director, says there is a long way to go yet. So far only 150 outlets of the near-700 chain are listing products online.

He says: "We have about 60,000 listings. We want to get that up to over 100,000 and then see where we go from there. We hope to be getting 10% of sales from online within three years, which would bring us into line with many of the high-street chains."

Given the plight of many of high-street players, charity shops have also made a few enemies. Celebrity retail expert Mary Portas has played standard-bearer, having planned to recommend that charity shop expansion be curbed in her 2011 review of the high street for the UK Government.

The Charity Retail Association persuaded the government to prevent this recommendation from making the final draft, but Portas's report did not expunge the unkind words altogether.

She wrote: "When a high street has too much of one thing it- puts off potential retailers and investors. Too many charities- are an obvious example of this."

And she said: "The [80%] business rate discounts that charity shops enjoy build a disadvantage into the system that's causing a problem. Landlords are choosing the safe option of charity shops and small new retailers are not getting a look in. There will be no growth or innovation- if we don't address this."

The BHF's Taylor says: "There's a bit of a myth that charities get a free ride. We are paying the same for our rents, electricity and waste collection as everybody else. Quite often the stores that we take on have been empty for a long time. If the local community didn't give us the stock and the people, the stores would not exist. That's about as pure a measure as you can get."

Opponents might point out that Taylor's last couple of sentences are not so different to what a big supermarket chain might say. Either way, he sees the end of his expansion in sight. The BHF sees a total of 800 stores as its rough limit, with most of the expansion coming from furniture/electrical rather than general outlets.

Andrew Horton of Oxfam says his organisation has reached saturation. It will open about 10 stores this year but close about the same number of stragglers to stay around the 700 mark.

He adds that Oxfam is also finding trading harder this year than for some time, which is echoed by one or two rivals. Stock donations are also suffering from people buying less new stuff than before.

Whether these are indications that the recession is finally hurting these businesses or a sign that they are cannibalising one another, Horton is not sure. If either is being commonly felt across the sector, expansion might be reaching its limits.

Trading figures in the coming months should clarify this picture. For now at least, fusty old suits have never had it so good.

Much of the statistics in this piece come from the Civil Society Charity Finance report 2012. It can be accessed in full at http://tinyurl.com/7zr3mps