Primark And The eCommerce Debate (2024)

Across various press, industry news and analyst reports, there have been numerous articles about Primark’s ecommerce presence, or lack thereof. These largely lead with detail of the lost revenue and featuring commentary from senior leaders in the Primark business stating that they have no intention to go online. Understandably, this has raised a lot of questions from the ecommerce community, many are advocating that Primark should launch e-commerce operations with a few dissenting voices arguing otherwise.

As a spoiler, (and for those who haven't the time to read the detail) my thoughts concluded that whilst it would be theoretically possible for them to do so through development or acquisition, it’s not plausible for them to do so currently and whilst the business will continue to prosper in the short to medium term, it may ultimately lead to the long term demise of the much loved retailer as competitors respond to the opportunity presented by the eCommerce shift.

Business Model & Customer

Primark has two main strengths, customer proposition and operational cost efficiency, the latter allowing them to deliver the former. The Primark business model is relatively easy to understand; ever changing, fashionable products at low relative cost to the customer delivered through managing costs as efficiently as possible.The low-cost culture is embedded across their organisation and deeply engrained within their culture. The culture is driven from historical and current leaders in the business, permeating through all levels of the organisation.

It is near impossible for competitors to replicate this model due to the scale of the Primark operation.

The business isn’t fully vertically integrated; in that they do not own farms or factories, and whilst the majority of factories used are also used by other brands, the sheer scale of operation enables them to exert considerable power in the supply chain. The manufactured product is stacked onto pallets at the factory, moved to national distribution centres and then shipped to stores. These pallets remain unopened until they reach the store where the product sits until it’s terminally marked down and sold through.There is no individual replenishment of inventory, anything replenished is done so by the pallet.

Primark operate attractive, large format stores offering many options at very low prices,feeding the insatiable consumer appetite for fashion; embodied by the famous “Primark Haul” which permeates across social media and consists of a large basket of products bought at Primark’s famous low prices. The Primark customer is encouragedthrough the door for one or two items, picking up the large net constructed shopping basket on the way in. Drawn by low prices, inevitably, they leave the store with a far larger basket of goods than they anticipated and a feeling of getting great value. Customers largely self-serve up to point of purchase at the tills. Returns are low, the process cumbersome and kept away from the main transactional till points. Acumbersomeprocess and low prices generally ensure a low volume of returns. Whilst the stores are well designed andpleasantshopping environments, the cost minimisation culture is demonstrated through a limited number of changing rooms relative to the options available and a low staff to customer ratio, floor staff focus on maintaining good visual merchandising order and rapid operation at the transactional till points.

This has been a hugely successful formula, delivering sales revenue of £7.8bn in 2019 and £5.9bn in 2020 despite the disruption caused by COVID-19.Whilst the decline is sharp, the numbers are still huge and it is worth noting the pictures of the queues of loyal Primark shoppers that patiently waited outside their stores upon the lifting of initial restrictions.

Market Competition

Primark occupy a relatively unique position but are not without challengers.

High street competition in Primark's core markets comes mainly from H&M and Inditex, who operate similar models at global scale, this has made them two of the largest fashion retailers in the world. Both businesses operate smaller format stores than Primark, operating multiple consumer brands/facias targeting different market segments, however, the model is fundamentally the same. H&M’s challenges with excess inventory are well documented, with approximately $4bn unsold, however the business still recorded revenues of $21.9bn in their financial year 2019, with Inditex recording sales of $19.8bn in their fiscal 2019 highlighting their pre-pandemic revenue strength. Both H&M and Inditex are investing heavily in eCommerce, both launched operations relatively late, however in 2019 H&M announced that they would reduce their store openings and switch investment towards eCommerce, in June 2020, Inditex announced a further planned $3bn investment in it’s ecommerce operations with the goal of increasing the share of revenue to 25% from it’s pre-pandemic level of approximately 14%.

Online pureplay businesses are also competing with Primark with similar principles, low prices and low operating costs. Perhaps, the most notable is Manchester-basedBooHoo.com, the online retailer uses low-cost manufacturing to produce a high volume of fast turn products, sold at very low prices online and delivered quickly to the customer at home. BooHoo's supply chain has recently come under significant scrutiny, it has been reported that their low prices are achieved through poor factory conditions and exploitation, the company has robustly responded with assurances that it would tighten it’sgovernance processes. Despite this public criticism the consumer appetite for their fast fashion offering does not appear to have diminished, thefashion retailer reported revenues of £1.28bn in fiscal ‘20 (year end April 2020) they followed with guidance in September 2020 that revenues will be in the +25%-28% range for fiscal’21. In their most recent earnings report in January 2021, they reported growth of 40% for the quarter and announced the opening of a new UK warehouse and distribution centre in April. Undoubtedly, some of this growth will have been at the expense of Primark, as it’s high street stores were closed and travel was restricted.

Whilst this is a snapshot of only 3 retailers, it is clear that Primark's main competitors are focussed on the ecommerce opportunity, as a result of consumer demand, in the case of BooHoo, and with the additional need to protect their competitive positions in the case of H&M and Inditex.

No eCommerce thought process would be complete without mentioning Amazon. To date, Amazon have been relatively unsuccessful in the fashion vertical in comparison to the other categories in which they operate. Despite Amazon’s undoubted logistical dominance, the fashion industry has been wary of its commoditisation of brands and challenges with counterfeit product. My personal view is that Amazon is fantastic at search but, but unless you know broadly what you want the browse and inspiration experiences are not strong. Amazon are addressing this through Amazon Fashion and have embarked on high profile collaborations with the likes of Rihanna’s Fenty brand. Given Amazon’s huge financial firepower and logistical capability it’s only a matter of time before they work out how to address the challenges faced. The reluctance of brands to join the platform may limit their long-term options and one route they could choose is to build an own-brand, fast-fashion business to compete directly with Primark, H&M and Inditex. There would be major hurdles for Amazon to overcome in the supply chain area, but with their resources and determination when they choose to focus on a particular area considered, this could be very real future threat.

Cost of Entry at Scale

The weight of analyst opinion, commentary in online forums, social media, online search volumes and competitor revenues all indicate that the Primark customer would like to have an eCommerce option, if the decision was made to respond this, Primark would have to enter the market at considerable, immediate scale. To do anything less would damage their brand through failure to meet the customer expectations set through their own stores and by their online competitors. The Customer would expect the same choice, experience and of course, the incredibly low prices alignedto it'sstores.

The requirement to enter the market at this scale would directly translate to a high cost of entry, I would estimate that this could be as much as £1bn taking technology,logistics and organisational changecosts into account.

The highest individual costs will be incurred in fulfilment operations; with a requirement to operate multiple properties across multiple territories with associated infrastructure. There is an argument that this could be handled by an established 3PLbut this doesn’t negate the total cost of establishing the operation, it is unlikely that property sizeable enough in the locations required would be easily available, driving lease costs upward and causing and lengthening in the time required to get to market. Whilst there are options to reduce operating costs in this area through mechanisation, automation and robotics, these are CAPEX intensive projects that carry significant risk, exacerbated by the inexperience within the organisation.

Existing supporting technology systems; ERP, CRM and Merchandise Planning for example, are unlikely to be able to meet the single-unit demands of an organisation configured by the pallet. Introducing or upgrading existing systems to meet these new requirements will also carry significant costs and lead times. As a grossly oversimplified example to illustrate the point £7bn in sales at an average net unit sale price of £10 would mean that current systems handle 700 million units across their pallet based logistics operation, if launching at eCommerce at scale drove £1bn in net revenue, then using the same metrics Primark would need to be able single unit logistics and technology operation capable of handling 100 million units of product in the first year.

Assuming core fulfilment operations could be implemented, Primark will then need to manage the complexity, cost and limited capacity of carriers facilitating the delivery and returns at much higher volumes than they are used to operationally handling. With fashion returns running from 20%-30% it’s also likely that dedicated warehouse facilities, systems and people will be required to manage this.Again to use the over-simplified example to make the point, they could be looking at a returns volume at the scale of 20-30million units of product for every £1bn of sales, something their current model does not allow for.

The Customer facing online experience would need to be world class at go-live, incorporating platform, content and ability to scale. launching a fully featured ecommerce storefront equipped with the latest merchandising, search, transaction handling, experience management and product management capabilities right at the point of launch. This would also be a challenge to implement, particularly the integration components to existing systems. To be able to do this in less than a year would be a challenge for even the largest potential partners in this space. It is worth noting that Primark already publish a large proportion of their product catalogue online, running the SAP Hybris / SAP Commerce Cloud platform, although it is clear from the site that this is not integrated with it’s inventory position.

Platform implementation would be accompanied by vast content production requirements, withhigh volume of products and rapid stock turn requiring heavy content production capabilities, either internally or outsourced. The high customer expectations for product photography, product descriptions and supporting editorial content have already been set by the companies Primark will be competing with, such as BooHoo.com, ASOS, Zalando, H&M and Zara. As stated above, Primark do publish a large amount of their product catalogue online already, however, the photography standards, product descriptions and styling notes are not aligned to the quality of their competitors.

An eCommerce launch at Primark scale would have global significance and the bandwidth capacity required to handle initial traffic would be immense, the last thing the Primark business would need is a disastrous launch where the website slows or fails due to the traffic load, the media would not be kind in this instance and many potential future customers would immediately be lost.

Despite these high costs, Primark and its parent company ABF, could undoubtedly afford it. However, the final point and most important point is centred on the organisational, cultural and process re-engineering requirements that would be required and very difficult to achieve. Cultural change is the single most likely reason they would be unable to attempt entry to the ecommerce space. The organisation is not culturally aligned to make the switch from pallets to single units at base level, but the scope of change required will touch every area of the business and force a change in thinking and approach. Public statements from the senior leadership, undoubted resistance from the existing retail teams and a lack of belief across the business will translate to an internal political environment for those involved embedding a project of this nature, size and scope that risks being unmanageable and therefore completely undeliverable.

Acquisition Route

An alternative option open to Primark and parent ABF is acquisition of competitor. This would buy them immediate scale, capability, infrastructure and skills in the area. Walmart achieved something similar with their $3.3bn acquisition of Jet.com, buying them technology, expertise and a younger more affluent customer base.

Primark itself was acquired by parent company, ABF (Associated British Foods) in 1997. In turn ABF is 54% owned by Wittington Investments. Wittington Investments is the main British holding company of the Weston family, 100% owners of luxury retailers Fortnum and Mason and Heals. The Weston family, through it’s Canadian arm, George Weston Limited own or control over 200 companies including luxury retailers Selfridges in the UK, Holt Renfrew in Canada, De Bijenkorf in the Netherlands and Brown Thomas / Arnotts here in Ireland.

This indicates two key points; firstly that through it’s ownership structure and scale, Primark would have the financial capability to acquire a pureplay competitor in the space, however, the acquisition would be likely to be expensive. The Market Cap of online pure players in the fashion space is currently extremely high, at the time of writing, Market Cap for Boohoo was £4.1bn on revenue of £1.2bn, ASOS is £4.6bn on revenue of £3.4bn and Zalando at €28.75bn on revenue of €6.5bn. These are staggering numbers and each business isn’t directly comparable to Primark or each other, however, they would bring expertise, scale, infrastructure and extension to Customer base, but the likelihood here is very low. A smaller, privately owned business such as Missguided, who trade revenues ~£250m would be more affordable but lacking in the actual scale that would be required by Primark to achieve real acceleration relative to the risk. In all cases, Primark would struggle to achieve the required synergies through a lack of cultural alignment across all businesses.

The second point is that the group already has an existing, high level of ecommerce expertise, however, this expertise is firmly rooted in luxury retail, a model far removed from the Primark business. Whereas Primark are focussed on high volume, own brand, low price point, low margin products the luxury retailersfocus their efforts on lower volume, multi-brand, high price and high margin products that allow them to absorb the additional costs associated with their experience led store and eCommerce operations. Transferring these capabilities across a complex group structure combined with the fundamental business differences in operating models mean that this is also highly unlikely approach where synergieswill be difficult or impossible to realise.

Whilst the acquisition route would be theoretically possible, it would probably not be feasible. Similarly, leverage of group capabilities would be possible but likely unsuitable for the Primark business. Financial impacts aside, differences in business and operational models combined with cultural differences would be the biggest hurdles in all cases.

So What's The Conclusion?

Primark isn’t going anywhere for the time being, and not making a moveonline won’t break them in the short-medium term.Their proposition remains relatively unique and they have continuously grown revenue through their existing model.

My personal concern for the brand is that they may begin to lose relevance with the current, younger, digitally native customer with high levels of loyalty to online pureplay business such as BooHoo and ASOS whilst high street competitors H&M and Inditex work to defend their own market positions through continued investment into addressing the challenges they have that are similar to those of Primark.

Over the long term, failure to address eCommerce will render Primark largely irrelevant to these customers as they will be able to buy from businesses to match the Primark proposition from the comfort of their mobile device. Whilst the conditions of entry today are not insurmountable they will only become increasingly challenging and expensive to overcome. I believe that Primark should act now to protect it’s future.

I’m personally of the view that the future is omnichannel, stores have a role to play and shopping is a social, entertainment led activity for many people. I believe this will continue and the role of retail stores will change to drive inspiration, loyalty and become the important physical embodiment of a retail brand. Customers will demand flexibility on their terms and will shop accordingly, seeking brands that meet their needs through the touchpoint most relevant at that moment.

I would be very upset to see Primark disappear into irrelevance, and whilst it’s not likely now, 15 years ago, there were no predictions that Arcadia’s TopShop would slide into irrelevance, in part, because customers behavioural trends and the changing competitive environment were ignored.