Nick Bubb's Verdict: Primark - What is the secret of its success?

Expectations were high for today’s Primark interim profits from Associated British Foods (ABF) but they still beat them, with amazing 55% growth. How do Primark do it?

Primark accounts for little more than 30% of ABF’s total turnover, but in terms of implied stock market value it has become so important that the conglomerate ABF (with a market cap of nearly £15bn) has rapidly turned into a value fashion retailer with some odd food manufacturing interests attached, rather than a food manufacturer with a small retailing operation.

How wise ABF was to resist the blandishments of all those investment bankers who wanted to demerge or sell Primark for them some years ago.

And it is astonishing how quickly Primark has turned into a pan-European player of real scale. At the beginning of the century it was already very profitable, but annual profits were only around £30m and it had little more than 50 stores in the UK, with well under 1m sq ft of selling space.

Primark now has 9m sq ft of selling space across the UK and Europe, from nearly 260 stores, and its total profits this year will be not far short of £500m.

As far as the 55% profits growth in the first half to March 2 is concerned, it helps that the comp was quite soft.

A year ago ABF reported that Primark’s profits were broadly flat at £154m, despite good trading and more store openings, because of the pain of absorbing higher cotton prices into their gross margins.

A year on and that gross margin pain has been reversed and, with helpful foreign exchange movements and lower stock markdowns, the overall reported operating margin in the first half has leapt from a depressed 9.6% to as much as 11.9%, boosted by the positive leverage from 7% like-for-like growth (total sales were 24% up).

The stock market was expecting 40% to 45% profits growth, but the £238m outcome was even better than the bulls had dared hoped for.

Unusually, of course, for a retailer in this day and age, Primark is not doing well by embracing the online shopper: its average basket size is too low for the economics of online retailing to make sense. So its success is down to the old-fashioned retail principles of having the right product in the right place at the right time.

Primark’s buyers have always been good at doing deals with suppliers and the strength of the supply chain remains a huge asset for the business - Primark couldn’t sell clothes for the ultra-low prices that they do without being highly efficient at sourcing.

But anybody can sell cheap clothes; the key is being able to sell cheap clothes in attractive, exciting store environments that become destinations for value fashion.  

Primark’s second store on Oxford Street, the 82, 000 sq ft unit near Tottenham Court Road, opened many people’s eyes when it was unveiled last year and the quality of Primark’s visual merchandising continues to put most mid-market clothing retailers to shame.

The Primark formula has been eminently exportable and the expansion in Europe has been a notable success, with stores now open in Spain, Germany, the Netherlands, Belgium and Austria. Spain has been more of a struggle recently, given the weak economy, but Primark is pressing ahead with expansion into France early next year.

Back in the UK Primark is now a relatively mature business, but still keen to take more prime space in big cities.

The enlarged Primark store on Northumberland Street in Newcastle formally opened at the end of March and in the summer it opens a big anchor store in the Trinity Leeds shopping centre and will be keeping the existing shop on Briggate.

And next year Primark is to replace the BHS store in Cardiff’s St David’s Centre and will apparently keeping the existing store opposite. In the centre of Manchester, Primark is expanding its flagship store again on Market Street: when it opened in October 2001, it was 75,000 sq ft, but was later increased to 100,000 sq ft by converting stockroom space. It is currently under refurbishment and extension to add an extra 50,000 sq ft of retail space to turn it into a 150,000 sq ft monster.

The way things are going, Primark will soon be making more money than Marks & Spencer and M&S should be concerned that its status as a key anchor tenant for shopping centres is being undermined by the relentless growth of this upstart.

There is room for both, as there in Westfield Stratford, but that may not be the case for ever, despite the success of M&S food. Now, there’s a thought; what if Primark diversified into discount food retailing?