Will an online business presence work for the popular Primark?

Primark has been a department store favorite for several years – loved by many for its cheap, fast fashion spanning all ages and its collections of desirable household items.

But while many of its competitors also have a significant digital presence, Primark has never ventured into the world of online shopping – perhaps until now.

Primark’s parent company, Associated British Foods (ABF) has been hit hard by the pandemic, which forced its street-level stores to close for most of 2020. The subsequent “pingemia” also hampered sales of Primark.

“Although Primark is back in the game, the lessons of the pandemic clearly persist and the £ 1.1 billion in lost sales due to store closures will not be forgotten overnight,” says Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown. “There will now be investments in a new digital platform, and while it’s unclear whether this will be transactional, the fact that the company says Primark is looking for talent to build new digital capacity in the business seems to be a big deal. suggests that online sales will be part of the retailer’s future.

To date, Primark’s online presence has been used to display and market in-store products. This model did not benefit the company, however, when the pandemic forced all retailers to close.

But is a transactional website something that Primark, whose popularity remains high due to its inexpensive products, can achieve?

“There is no such thing as a free meal with selling online, as suggested by the pretty slim profit margins generated by some online-only retailers. The investment in IT and warehousing can be substantial, websites need to be kept up to date and up to date, inventory availability needs to be good, and more and more consumers are expecting next day or even overnight delivery. same, so the logistics have to be smooth, ”says Russ Mold, chief investment officer at AJ Bell. “A key issue also comes in the form of product returns which can increase costs and erode margins, a key consideration when Primark is working with relatively low prices to begin with. “

Pandemic boom and collapse

Online shopping has exploded during the pandemic, with Asos recording sales of £ 2 billion in the last fiscal year and Boohoo recording a 41% increase in sales.

Almost 20% of all UK retail sales were online in February 2020, but by May of the same year it had risen to 32.8% and remained at 30%, according to a study by KIS Finance. , despite the reopening of retail stores. once lockout restrictions are relaxed.

This change, fueled by the pandemic, was the last nail in the coffin for many retailers – Debenhams was one of the latest casualties, confirming it was shutting down for good and selling its remaining 118 stores after Boohoo bought the brand and online business for £ 55million.

The online retail boom has also had a negative impact on employment – in 2020, 180,000 retail jobs were lost, with KPMG predicting that could reach nearly 400,000 as the move away Main Street continues to gain ground.

Amazon, meanwhile, said it plans to create at least 7,000 new jobs in the UK as its fast and reliable online shopping model remains popular among consumers.

Fast fashion hybrid

There are, of course, instances where both online and street presence have worked in harmony. Next, for example, was able to use its click-and-collect service during the pandemic to fully serve its customers.

“Following uses [this] with great effect and this is one of the reasons his boss, Lord Wolfson, maintains that his high street stores are still valuable to the business, even though that value may slowly decline over time ” , explains Mold.

Fairview Investing chief investment officer Ben Yearsley also wonders if Primark’s success without a website suggests it’s not necessarily essential.

“I thought in this new modern world, where social distancing is encouraged, you have to have a website to be successful. Primark has shown that you don’t necessarily have to and that brick-and-mortar stores can thrive if you give the consumer what they want, ”he says.

He adds, however, that there is no indicator as to whether the business really needs an online retail presence.

“The sales numbers suggest not, so it’s interesting that they are thinking about it now,” Yearsley says. “If it feels like being able to shop physically, it will probably be a success. “

Raise the share price

In April 2020, Rachel Reutter, UK Opportunities Manager for JOHCM, opted to sell ABF due to the impact the distance from Main Street was likely to have on Primark.

“When we sold our shares in ABF last April, we were concerned that in-store volumes were not returning to pre-pandemic levels and question marks about the sustainability of fast fashion in general. “she said. “We see ABF’s announcement of the launch of a consumer website as a positive development for the company. The Covid-19 pandemic has undoubtedly accelerated the shift to online shopping. “

The fund currently owns Next, which has invested heavily in its online platform and, according to Reutter, 90% of the company’s sales are generated through its website.

“One of the big positives for Next has been the development of its online platform to sell third-party brands in addition to the Next brand which has leveraged its platform and increased the number of in-store collections.

“The Primark brand will undoubtedly be popular as an online offering, but we believe there will still be challenges for the company to grow and make it profitable given the low average ticket price and existing positions held. by Next and ASOS. “

With Primark a jewel in ABF’s crown, all eyes are for now on short-term stock price movements and whether the recent falls will see it drop from the FTSE 100 list.

Mold explains, “Stocks are down about 2% today. [Monday 13, September], currently placing them at the bottom of the FTSE 100. While it would be wrong to read too much into one-session trading, investors still clearly rate ABF’s proposed online strategy, although they are probably more concerned about the short term by the admission of the company it is difficult to find new sites suitable for its stores and the difficulties which it meets with its supply chain.

Streeter adds that Primark, although dented by the pandemic, has proven its resilience.

“For now, Primark is still running at full throttle and its robust operating model meant that even the pingemia, which hampered summer sales, didn’t prove the bump in the road to deviate from its course.” , she says. “Although fourth quarter sales were disappointing, adjusted operating profits for the full year are now expected to be even higher than expected as lower operating costs for staff and stores resulted in an increase in profit margins. “

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Anne G. Cash

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