25th October 2018
Amazon Q3 retail sales “surprisingly weak”
Has Primark identified the direction apparel retailers should be looking – or are US commentators right to claim the business is fundamentally flawed?
Earlier this month, I stressed the importance of finding new sources of retail efficiency rather than worrying about rising prices. Has Primark done just that?
There’s little debate that Primark has identified a key way of combining happier customers with better profits. But almost every American commentator, looking at Primark’s recent US openings, seems to think its unique business model just won’t work there. Even those praising the company most loudly.
What is Primark’s model though? Its owners – ultimately the Canadian Weston family, whose family trusts own about 60% of Primark’s holding company – rarely publish much detail about their retail operations. But Primark’s basic profit model is fundamentally different from the three major international apparel specialists – Gap, Inditex and H&M.
Those three all make a gross margin of around 60% – so the garments they buy account for about 40% of their sales, excluding sales tax or VAT. Running their stores, warehouses and central operations costs around 45% of their sales, leaving pre-tax profit around 15%. While they each define “profit” slightly differently, this translates to 17.9% for Inditex, 14.9% for H&M and 12.7% for Gap.
Primark undercuts them on price, it can’t be buying more cheaply (its sales are lower than all three, and it buys from mostly the same places), has much higher sales densities, and its profit is about 12.9% of sales.
A share trader at Nomura estimates Primark’s cash sales per square metre are 62% higher than H&M’s, for example, while broker Bernstein believes Primark’s prices undercut the opposition even more dramatically. Like-for-like price comparisons in apparel are fiendishly difficult, and I’d estimate Primark undercuts H&M by around 25%-30%. But that would still mean Primark is selling twice as many clothes per square foot as its immediate rivals.
Primark makes money by buying as cheaply – but working harder at greater efficiency where the real costs lie: in retail operations. Which means ruthless retail cost control, and skilled in-store merchandising.
Will it work in the US? There are three types of objection.
Abercromie and Fitch (A&F) chairman Arthur Martinez attacked Primark for being engaged in a “race to the bottom in terms of quality and price, not sustainable for A&F.” But A&F stores don’t attract the crowds of customers that Primark’s do; so when Martinez calls Primark “not sustainable” he simply means A&F can’t compete.
Most of Primark’s high sales per square foot come from the UK – which has one-fifth of the US’s population, but just one-thirtieth of the US’s space. Are they really feasible in America’s very different geography? Especially since Primark’s low operating costs stem partly from almost no media advertising. Sensible in Britain, where Primark’s target walks past one of its stores every week. But questionable in the US, where falling mall traffic means customers need persuading to visit shopping centres.
Can Primark really design product for the US from Dublin (Ireland), and can it identify the right location mix for the US? To all of these questions the simple answer is “we don’t know yet”. Primark is probably going to have to tweak some of its European policies and is probably devoting far more effort to these issues than us commentators. For what it’s worth, tweaking sourcing is likely to be one of its lowest priorities in the US, whereas ensuring its cost control and in-store merchandising are right for the US are likely to top the list.
As one commentator put it: “US consumers increasingly demand the ability to shop when, where and how they want – whether it’s at home at 3am, in a store, or on the run on their mobile phone.”
But Primark doesn’t do e-commerce. Its website has almost a million followers on social media (levels that no other apparel brand achieves), but it sees home delivery, or click & collect, as obstacles to its major commercial asset: its industry-leading ability to persuade shoppers to spend more than they’d planned, visit after visit after visit. As well as adding cost.
One day, e-commerce will become less of a profit destroyer – and Primark or a rival may well develop skills to create in internet-marketed apparel the endless instant purchases that Amazon induces in books and films.
Those advances haven’t been made yet. But even now, many American commentators insist, customer demand for e-commerce isn’t negotiable. I think that’s plain wrong.
The view would be understandable if Primark had developed its business model in a country with undeveloped e-commerce. But Primark’s success has come in the UK – where e-commerce is more developed than in the US. Indeed, some estimates give the internet in the UK as much as twice the share of retail it has in the US.
To me, those unquestioning assertions that Americans “insist” on e-commerce sound like people telling us over the past 50 years that shoppers would never accept self-service – or buy Chinese-made clothes.
Personally, I’ve never heard a real shopper “insist” on e-commerce or “an omnichannel experience”. I’ve heard dozens of speakers at presentations tell me they do – but none of them have explained why Primark, Ross Stores, Aldi, Lidl and Trader Joes manage without them.
And while I’ve heard dozens of complaints in Primark stores (mostly about the crowds of other shoppers), I’ve yet to hear a single customer complain they’d rather wait a couple of days for delivery.
Not even Primark insists every detail of its operating model will work in the US exactly as in Europe, and change is inevitable. How shoppers react, though, is going to determine Primark’s modifications – not second-hand management consultancy fads.
But those fads leave Primark almost alone in its preoccupation with constantly increasing its sales per square foot. Since that’s where retailers’ biggest costs lie, Primark must be delighted its philosophy is unfashionable with its competitors.