Single-price retailers are heading for a "perfect storm" of rising VAT and inflation, warn discounter rivals and their growth could slow significantly as a result.

Retailers such as Poundland and 99p Stores have thrived in the recession, but the next year is expected to be more challenging. "I wouldn't like to be a fixed-price retailer over the next year," said one discounter boss. "I think we're about to see their growth dramatically slow."

Over the past year fixed price discounters have benefited from the reduction in the VAT rate, which has added more than 2% to their gross margin on non-food lines, boosting profits and providing them with extra capital to open new stores. When VAT returns to 17.5% at the start of the 2010, their margins will be reduced unless they alter their ranges.

"The VAT drop has allowed the discounters to keep products in their range that they would have had to have got rid of otherwise as they could use the extra profits they gained from the VAT cut to absorb price increases," added another retailer. "The VAT increase will make it harder for them to keep the ranges they want to and the effects of inflation will come through."

However, Poundland and 99p Stores both played down the challenges. "We have known the VAT rise was coming and we are well prepared for it," said 99p Stores commercial director Hussein Lalani.