Primark - more cheer than fear despite tough times to come

“Primark is back”. That was the message from parent ABF’s finance boss John Bason as the value fashion giant posted impressive full-year sales and profit uplifts.

But after such a successful 12 months when Primark rebounded as the pandemic receded, the retailer once again faces more unsettled times. Inflation, currency volatility and the war in Ukraine have conspired to swell the cost of doing business and unnerve shoppers whose spending power has been eroded.

However, Bason was upbeat as he looked forward to a post-Covid Christmas, a bolstered digital presence and the opportunities that a new strategic board can help realise.

Near-term margin hit

Primark’s sales rocketed 40% last year and adjusted operating profits surged 135% – a testament to the power of its stores and value proposition.

While the retailer has increased some prices, it pledged there would be no increases beyond those already in place or planned, “to stand by our customers, rather than set pricing against highly volatile input costs and exchange rates”.

Inflation in areas ranging from labour costs to raw materials, and higher purchasing costs on the back of the strength of the dollar, will push Primark’s adjusted operating profit margin next year below 8% from 9.8% in the year just gone.

However, Primark was confident that its stance supported a “core proposition of everyday affordability and price leadership” and would enable “market share growth over the longer term” when it envisages “returning to an adjusted operating profit margin of some 10% as commodity prices moderate and consumer confidence improves”.

Post-Covid Christmas joy – ‘night and day’ contrast with last year

Despite the current turmoil, one threat that has diminished is Covid, and Primark chiefs are pleased with trading so far.

Bason told Retail Week: “We’re trading well in the UK; Primark is certainly back. We’re looking forward to the Christmas season. It’s the first in three or four years that’s less affected by Covid.

“Compared to last year, I think it will be night and day. You’ve got to remember at the end of November last year, Boris Johnson stood up and told us about omicron and the effect it had leading up to Christmas.”

Increased digital focus – but don’t expect home delivery

A bricks-and-mortar powerhouse, Primark has flourished despite not selling online.

But the retailer is devoting greater energy to bolstering its digital appeal following the launch of a new UK website, which Bason describes as a “huge success”  and a credit to its overall performance in the UK. 

The site, which it plans to bring to other markets, incorporates innovations like in-store stock checking and a click-and-collect trial and presents an opportunity for Primark to understand its customers better by allowing them to build up personal profiles, preferences and other useful data.

“Until now we’ve not had any of that and it’s a really interesting and exciting area for us to go into,” says Bason

Do not expect home delivery any time soon, however. Bason says: ”I come back to the economics of it. I think a number of the pureplay, home delivery retailers are, let’s put it this way, having a way more difficult time of it.

“What is dawning on people is the cost to serve that particular mode – it’s incredibly high per item. Whichever way you look at it, it’s about picking and packing, it’s about delivery and returns – the cost is really quite different.”

German restructuring

While Primark has performed strongly in its core Ireland and UK markets, this has not been the case everywhere – most notably Germany where it generated sales of £800m last year.

Primark booked an exceptional, one-off non-cash impairment of £206m in the value of various German assets and store closures and downsizing there – where it has 31 branches – look likely.

On average, German stores are much bigger than the average across Primark but sales densities have been falling for some years. 

But Bason maintains there will be no retreat from Germany: “We’ve got a big business there and a loyal customer base so we’re very committed but the sales densities are too low for a profitable business. That’s the thing that we need to address,” he says.

He points to the example of the US, where Primark had some teething problems but is now performing well and where it will double selling space this year, as evidence that it can turn around its performance in Germany

New board to maximise Primark’s potential 

ABF veteran Bason is stepping down as finance director – a post he has held since 1999 – but will become senior adviser and chair of a new strategic advisory board at Primark from next May.

He hopes to put together a group of experts, likely to vary according to areas of focus, who can support Primark’s executive board led by chief executive Paul Marchant.

Bason says: “There’s a huge amount of experience out there. My role is to bring people with very relevant experience and skills to advise.”

They are likely to look first at the US. He says: “The US market is a massive potential for us but there are pitfalls. I think we’ve navigated it well over the past few years but if we’re going to become a very, very significant player in the United States then [we will be] talking to people who’ve done that retail expansion – what are the things to look out for?”

Digital is another likely area of priority. Bason adds: “What I find interesting about our approach is that it is different. There are some later adopters. One that I find interesting is Ikea and the way they went and their digital engagement with customers.”

The board may also look at how best to run “a big, big international business that’s in many markets. What’s central, what’s devolved? How do you get a retailer that’s both agile and has the benefit of being able to pull together?”

Another area is likely to be “strategic sourcing in a world that is changing.” Bason says: “As China and South Asia change, as we become bigger in the Americas, what is our strategic sourcing strategy?”

He concludes: “If that’s not enough to be getting on with then I don’t know what is.”

As far as he is concerned, Primark has plenty of petrol left in the tank and will motor on despite bumps in the road this year.

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