Will Primark’s expansion be a success for Associated British Foods (ABF)?
By Rob Griffin
Updated
Discount clothing chain Primark certainly doesn’t lack ambition. The retail operation of UK-based conglomerate Associated British Foods (ABF) is plotting a major global expansion.
The five-year plan is to have 530 stores around the world and introduce more customers to the successful low-cost business model it has operated for half a century.
This would mean opening another 130 outlets, despite inflationary headwinds, the increasing move towards buying online and global supply issues.
Humble origins
Achieving this goal would be a significant milestone for a business that started out with one store in Dublin back in the late 1960s. It would also illustrate the enduring appeal of low-cost retailing.
ABF financed the first Primark shop – then called Penneys – in Mary Street, Dublin, in 1969. It was based on the vision of Arthur Ryan who saw the potential for affordable clothing stores.
During his 40-year tenure as CEO, Ryan expanded Primark into a leading international fashion retailer with 165 stores in six countries. The original store is still open for business.
Financially important
The importance of these retail operations is illustrated by ABF’s results. It contributed around £5.6bn ($7.6bn) of ABF’s total £13.9bn revenue in the year to 18 September 2021.
Primark, which has become the fashion chain of choice for millions of price-conscious shoppers, is also dubbed ‘Primarni’ as a nod to its affordable ranges of designer-inspired clothes.
Danni Hewson, financial analyst at AJ Bell, isn’t surprised by the retailer’s success.
“Its offer is simple, and it never fails to deliver, [with] low cost, plentiful options in a myriad shapes, sizes and colours that give a nod to current trends,” she told Capital.com.
‘Bonkers but headline-worthy’
While there are concerns that increased remote working may mean less city centre footfall, Hewson believes Primark can turn the situation to its advantage.
“It has had success in smaller towns and with so many properties lying vacant and rents now being offered at rock bottom prices there is a huge opportunity for growth both in the UK and across the rest of Europe,” she said.
Hewson insisted Primark was canny and cited its “bonkers but headline-worthy” tie up with baker Greggs as a prime example of its innovative approach.
The collaboration, which was recently announced in a joint video on YouTube, will see Greggs launch its very first official clothing range in partnership with the retailer in 60 Primark stores.
Existing store locations
There were 398 Primark stores open at the end of ABF’s financial year on 18 September 2021. The UK had the highest number with 191. Spain, the Republic of Ireland and Germany followed with 52, 36 and 32 outlets respectively, while France and the Netherlands notched up 20 each.
The other Primark locations were the US, Portugal, Belgium, Italy, Austria, Poland, Czechia and Slovenia.
Recent developments
In a trading update on 20 January, 2022, ABF said there were now 401 Primark outlets, following the opening of city stores in Catania in Sicily, Italy, and in Vigo and Girona in Spain.
“We are making good progress with new store signings in line with our ambition to grow our store estate with a particular focus on the major markets of the US, France, Italy and Iberia,” it stated.
In recent weeks, a number of leases have been signed, including a new store in the centre of Bucharest, the retailer’s first in Romania. With Slovakia, this will take Primark into 16 markets.
Global expansion plans
The US is seen as a particularly important part of Primark’s longer-term strategy. The plan it to accelerate the pace of expansion, growing the US store estate from 13 to 50 over the next five years.
In a statement, Paul Marchant, Primark’s CEO, said it was clear that US customers were loving “the unique Primark offer”, since the first store opened in Boston six years ago.
“With our current portfolio of 13 stores trading really well, it feels like we’ve established a strong foundation from which to accelerate our expansion in the US market,” he said.
Potential problems
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said Primark was “Associated British Food’s biggest moneymaker” in normal times.
However, the retailer had been at a disadvantage to peers that offered delivery and in-store collection during the Covid-19 lockdowns.
“A new website is due to hit the UK next month which will give customers the ability to check item availability but stops short of offering a full e-commerce experience,” she said.
According to Streeter, this could potentially cause problems further ahead.
“The group sees huge potential in the American market in particular but without an e-commerce offering, its success may depend on how well it is able to grow a desirable social media presence in the US to ensure shoppers keep piling through the doors in large numbers,” she said.
Inflationary issues
Then there are the inflationary pressures. While Streeter believes it’s currently “well-placed to ride out” the storm, it depends on how long the situation lasts.
“If costs continue to soar, it could become a problem for Primark as the group has very little space to increase costs due to its position as a discount retailer,” she added.
However, Anubhav Malhotra, an analyst at Liberum, is optimistic. He retained his ‘buy’ rating on ABF, along with a £26-a-share target price, after the company’s January trading update.
“We believe the Primark proposition remains highly relevant and resonates even with today’s digitally native consumers, a fact that remains underappreciated by investors,” he said.
Instagram success
Malhotra noted the threat of online clothing retailers has increased for all brick-and-mortar players post Covid-19, but argued Primark shared “more than a transactional relationship” with customers.
“It has the highest number of Instagram followers among store-based UK retailers despite no online presence and is ahead of even pure online players like Missguided and boohoo,” he added. “Customers that shop at ASOS and Boohoo are more likely to shop at Primark than any other online or store-based retailer, highlighting the popularity of the brand amongst young shoppers.”
Emerging stronger
Malhotra also believes ABF will come out of the pandemic in a better position.
“The exit of major bricks and mortar peers such as the Arcadia Group and Debenhams, as well as store closures by the likes of John Lewis, throws Primark a major opportunity to take market share and expand into new space in a reshaped UK clothing retail market,” he said.
He is also confident about the Primark brand’s future global prospects with around 30 new stores opening yearly, primarily in France, Italy, Iberia and the US.
“The US and Eastern Europe continue to provide many more years of space expansion opportunities to the business,” he added.