When the largest Primark store opened in Birmingham last year, nobody in the industry could predict that only a few months later, the company and its peers in the fashion industry would be forced to close all of their stores. The Birmingham store has 161,000 sq ft (14,957 sq meters), and its opening attracted long lines of excited visitors who wanted to experience the new shop. The store had a new concept: selling not only products but also offering an experience. Primark entered into the restaurant business with “The Mezz restaurant” which included takeaway or the “Primark Café with Disney.” Primark also offered a beauty studio and a barbershop. Primark’s openings in the past have attracted large groups of fans, sometimes waiting for hours to be part of a unique experience. An excitement that reminds us of the now-forgotten scene of the 1963 movie “Who’s minding the store,” when Jerry Lewis had to face a battalion of customers fighting for the best products on sale.
But yesterday, the parent company Associated British Foods (ABF) announced a 75% sales decrease for Primark in their third fiscal quarter (March 1 to June 20). It isn’t easy to compare this figure with its main competitors, as sales drops have been reported for different periods. Inditex (Zara’s owner) has faced a 44% sales decrease during their first quarter (February 1 to April 30). H&M, on the other hand, reported a 50% sales decline in the March-May quarter.
Primark has been a surprising and innovative business model in the fashion retail industry. In the last years, it has been gradually increasing its global apparel market share to become one of the largest players behind Inditex, H&M, Gap, and Fast Retailing (Uniqlo). Its main differentiating factor has been the remarkable low price of its products, made possible thanks to an efficient supply chain, a rapid turnover, limited operating costs, and very large stores. While gross margins at Primark are much lower than competitors like H&M and Inditex, their operating costs are more moderate. Contrary to popular belief, Primark has higher sales per sq feet than its peers and probably higher inventory turnover (ABF does not report Primark’s balance sheet, so it is difficult to compare some key metrics.)
But one of the weaknesses of Primark is its 100% reliance on its physical shops and the difficulty of adapting their mix of stores. The company tested ecommerce in 2013 through ASOS, but decided to stop online sales. The truth is that its business model makes online selling very difficult, as Mr. Marchant, Primark’s CEO has recognized before. Its main competitors have, however, embraced online sales as a critical element of their strategy. This has mitigated sales declines in the covid-19 pandemic. For example, Inditex has reported a 50% surge in online sales in the last quarter and a 95% during the month of April. And H&M has increased 36% of its online sales in the months of March to May. While Inditex has unveiled a €2,7 billion investment in its proprietary IT platform, to speed up its digital transformation, Primark does not seem to have a digital transformation strategy as strong as those of its closest competitors.
Had this Black Sawn being a major cyberattack rather than the coronavirus, probably Primark would have been hit less than its peers. But the digital transformation of the industry is not a Black Sawn. It has been here for some years, and will probably speed up in the next few years. Primark will have to decide whether to stay loyal to its current strategy. Its competitors are presumably in a much better position to extract value to the new digital technologies.
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The digitalization of the consumer journey is manifested beyond online sales. For example, social media platforms, where Primark is particularly strong, has produced a change in how fashion trends emerge. It is not clear how Primark will be affected by this trend. On the one hand, major brands might have a smaller influence in dictating fashion trends. On the other, Primark’s extensive product portfolio and strong customer appeal in some markets may benefit them in these platforms. However, competitors such as Inditex or H&M are faster at recognizing fashion trends and adapting their designs.
Other digital technologies are also promising to have a profound impact on the industry. For example, body scanning and avatars for size matching, voice assistants, and recommendation systems will forever change the customer experience. And a myriad of other technologies will have a significant effect on production. For instance, digital and laser printing and automatic sewing or 3D knitting might allow some retailers to transfer part of their production closer to their stores, lowering logistical costs and reacting to customer tastes faster than ever.
Nevertheless, there are other reasons to think that Primark’s future is still bright. The current pandemic might result in a more prolonged economic crisis than initially anticipated, and Primark’s business model, focusing on low prices and a different purchasing experience, is especially attractive to a cash-constrained consumer. Besides, even in the absence of e-commerce, many digital technologies could help Primark improve its back-end activities and reinforce the store experience.
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