LONDON/MADRID (Reuters) - Discount
fashion chain Primark has made its mark in Europe by offering
fast-changing fashion at rock-bottom prices. The secret of its
success: placing huge orders for top-selling items like socks, tops
and jeans and passing on the savings to shoppers.
That is the formula it hopes will help it crack the $200 billion
U.S. market next year. With an initial capital investment of under
200 million pounds ($340 million) Primark plans to open a store in
downtown Boston toward the end of 2015, have 10 stores in the north
east of the country by Easter 2016 and build out from there.
"We're a volume business. We sell 300 million pairs of socks a year.
We sell 150 million T-shirts a year. We don't have major overheads.
We have a very efficient supply chain," said Primark's business
development director Breege O'Donoghue.
While there have been some successful European exports to the U.S.,
such as Philip Green's Topshop chain, Spain's Inditex and Sweden's
Hennes & Mauritz, there are several costly failures including
attempts by Marks & Spencer and most recently Tesco.
If Primark can overcome the challenges of entering the market in
America, where it will compete against established discount rivals
Target and Forever 21 as well as players like Gap, American Eagle
and Aeropostale, it could be a game changer.
"It's a big if, and that's how investors have got to look at this,"
said John Bason, finance director of Primark's parent Associated
British Foods, which is 55 percent owned by the Weston family.
"The bull case is it is absolutely a step change, suddenly the
population opportunity for Primark has just doubled – if it works.
If it doesn’t work then Primark is a western European brand."
O'Donoghue thinks the move to the United States will be helped by
the fact the north east of the country has a similar climate and
strong cultural links to Britain and Ireland, but said Primark was
also keen to adapt to a new market.
"We are cautious. We take our time to learn. We want a U.S.
business, not a Spanish business, not an Irish business," she said
at a store opening in Madrid in May.
CHALLENGES
A push into the U.S. presents major challenges for Primark.
It will have to establish warehouses as the country is too far away
for stores there to be serviced by its five European warehouses.
It will initially source clothes for the United States from its
traditional supplier markets of China, India, Bangladesh, Cambodia,
Vietnam and Turkey. But rather than crossing Europe, clothing from
Asian markets will come across the Pacific, through the Panama Canal
and up the east coast.
"They have to develop another supply chain. That’s going to be a
challenge but not necessarily a killer,” said Maureen Hinton, global
research director at Conlumino, a retail research agency.
Ultimately Primark believes it will make financial sense to
establish suppliers from countries closer to the United States, such
as Guatemala, Costa Rica and Mexico.
While many retailers suffered in the economic downturn Primark
thrived. Its profit more than doubled from 233 million pounds in
2007-08 to 514 million pounds in 2012-13, driving a fivefold
increase in the share price of its parent, which also has major
sugar, agriculture, grocery and ingredients arms.
Founded by Arthur Ryan in Dublin in 1969, Primark now turns over
more than 4.3 billion pounds a year from 275 stores in nine
countries, contributing half the profit of its parent.
If current trends continue, Primark's customer base in the UK will
be equal in size to that of Marks & Spencer, currently Britain's
biggest clothing retailer, within two years, according to Kantar
Worldpanel, the market researcher.
Reflecting optimism for Primark's future, AB Foods trades on 27.7
times forecast earnings, at a premium to that of the world's biggest
fashion retailers, Inditex on 24.6 times and H&M on 22.0 times.
That rating was justified, said one institutional investor because
of Primark's growth prospects and track record of delivery. “The
evidence so far is Primark is proving year after year to be a
phenomenal story," said the investor.
The business has taken elements from both Inditex and H&M, which
have both been successful in the U.S.. H&M entered the country in
2000 and currently has 318 stores. Inditex entered in 1989 and now
trades from 50 stores, 48 of which are Zara stores.
Like H&M, Primark keeps prices low by souring basic garments from
Asia. Like Inditex's Zara, it keeps shoppers coming back for more by
constantly adding new styles.
Laura Garcia, shopping at the new store in Madrid, is a typical
customer: "I probably come to Primark every week on my afternoon
off," the 34-year-old said.
Ann Marie Cregan, Primark's head of buying for womenswear, says
about 10 percent of the lines in store are brand new each week, with
stock turning over six times a season compared with an average of
two times for most U.S. retailers.
SHORT LEAD TIMES
Basic garments are produced in Asia with a lead time of about 90
days, while "fast fashion" is manufactured in Turkey or eastern
Europe with a lead time of eight weeks, allowing Primark to respond
more quickly to demand for popular items.
"H&M forecasts two years in advance. We only do six months, based on
fashion trends. Trading in season is where a lot of our upside comes
from," Cregan said at a store opening in Berlin this month.
While Primark's target market is 18-35-year-olds, Cregan said the
firm gets its biggest sales volumes from items which appeal to all
ages, like white camisoles, jeans or flip flops.
"The efficiency of the company at all levels should mean we always
have the best price in the market," said Iberia head Jose Luis
Martinez de Larramendi, who will lead Primark's push into the United
States.
Primark's low prices model came under scrutiny last year after over
1,100 people died in the collapse of the Rana Plaza factory in
Bangladesh, where clothes were made for various international brands
including Primark. However, Primark was quick to compensate the
families of the victims and pledge safety improvements, and the
tragedy has not dented sales.
Primark says some 98 percent of the clothing it buys comes from
factories that also supply other major retailers. The big
difference: Primark charges less for comparable quality.
To demonstrate this point, Bason holds up three similar T-shirts
made in the same factory in Bangladesh, by the same workers, paid
the same wage.
The one manufactured for Primark retailed for 6 pounds, he said, one
made for a mid-market British retailer sold for 35 pounds and one
made for a designer label sold for 60 pounds.
Bason said Primark has the same cost of goods as other major
retailers but has a much smaller gross margin - the amount it earns
from selling products before the deduction of any selling and
administrative expenses.
He won't disclose what the gross margin figure is but says it shows
through in a net margin, which on a lease adjusted basis (taking
account of freehold stores) is a bit below 10 percent - about half
the level of many of its competitors.
RECYCLING
Along with large volumes, Primark's success is driven by focusing on
a target market of young people, selling a limited range of sizes
and keeping all overhead costs down.
That extends to having few, if any, customer toilets in its stores,
the recycling of the cardboard cartons used to ship clothing into
Primark's trademark brown paper bags and the recycling of 23 million
coat hangers a year.
Primark also keeps costs down by doing little advertising and
marketing, relying instead on word of mouth and digital and social
media.
The prohibitive cost of TV, radio and print advertising in the U.S.
as well as the lack of a Kate Moss type figure that helped propel
Topshop, means Primark has little choice but to retain this
advertising strategy.
In this respect starting in Boston looks like a shrewd move, said
Matthew Hook, managing director of Carat UK, part of media planning
and buying specialists Dentsu Aegis Network, noting the city's huge
community of tech-savvy students.
"To get a decent groundswell of word of mouth, you are talking
hundreds of thousands of pounds rather than tens of millions," he
said.
“Lots of parts of the U.S. will be disposed against brands and
companies that are coming from outside the U.S. but Boston is one of
the most cosmopolitan cities."
Bason is well prepared for a steep learning curve.
"There's no problem with that in Primark. There is the expectation
that every season you get stuff wrong - just discount it and get it
out."
(Additional reporting by Emma Thomasson in Berlin; editing by Anna
Willard)
