Primark continues to deliver strong performances from its stores and as such its growth strategy remains wholly wedded to opening more big stores.
For a fast fashion business that sells to a young demographic – the digital natives – this is surely highly questionable. This group of shoppers are increasingly choosing to shop online and so a greater proportion of their disposable income is continuing to shift from physical shops.
This will inevitably lead to diminishing densities and returns from Primark’s stores. But I guess management know what they are doing and believe they can manage this shift and gradual decline in the value of its stores base.
Problem one with this strategy is that the company still very much has its foot on the store-opening accelerator. The second problem is that as a quoted company (Primark is part of ABF) it is ultimately up to the City to decide whether the company can be left to accept lesser returns from its stores.
Experience suggests this will not be the case as institutional investors don’t quite work this way. What will more likely happen is that sales will start to slow and the City will hammer the business as an ex-growth, legacy player that needs to flog off some of its weaker stores and get shifting its business online.
Martin Newman, founder of Practicology, says this move from stores to digital is all about a mindset and it can be seen at many retailers: “They’ve been in business for years and only known growth and that has always been from their stores. And they also say it is hard to make selling online stack-up at its low price points. But others do it!”
Boohoo.com is one of them. It sells to very much the same audience as Primark but it has built a strong business only selling online. And the City liked its model sufficiently to give it the big thumbs up at its recent IPO.
Newman does not believe this tardiness in going online is a terminal mistake but by delaying the inevitable the likes of Primark are storing up problems and putting their businesses at a disadvantage over others that are working hard at building sizeable businesses online.
There are simply far too many retailers out there who seem unable to extricate themselves from their existing mindsets and grasp the reality that their stores businesses are in decline and they need to shift attention to their online operations.
Much of the blame must be placed at the hands of the boards of these companies as they seem wholly unsuitable at handling such fundamental changes in the retail sector.
Pets at Home finds itself in exactly this position. Its strategy continues to involve opening big box stores whereas it should be more gung-ho about its digital division. Just like Primark, its store estate has served it very well to date but this is not where it’s future lies and it needs to act now otherwise it will find the City and shoppers deserting it.