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Living wage is a ‘manageable’ headwind, says Primark finance boss

The national living wage will present Primark with an additional bill “in the single-digit millions” in the UK, the finance director of the value retailer’s parent company, Associated British Foods (ABF), said today.

But John Bason played down the impact of wage increase, which comes into effect in April, explaining that “it is of a scale we have seen before and it is manageable”. He said the extra cost would not force Primark to adjust its pricing.

He added: “There is no doubt it is a headwind but it is one that we are embracing.”

He was speaking as the value retailer today reported that sales for the year to September 12 were 13% ahead of last year at constant currency and committed to accelerating its expansion plans in the year ahead.

Operating profit was up by 5% to £673m during the period, although adjusted operating profit margin fell 0.8% to 12.6%.

He said the fall in margin, which he had previously forecast, was caused by a bumper year in 2014 when there were low levels of markdown, and a return to a more “normal level” of markdown this year.

The retailer is also bracing itself for a margin hit from currency fluctuations during this financial year, although Bason said the buying team had been working closely to minimise its impact as much as possible.

“We will see that the full-year 2016 margins are down but not by as much as they should be with the FX currency calculations,” he said.

Nonetheless, the retailer is ploughing on with its expansion and expects to open around 30 stores during the new financial year.

“During the last financial year, we opened 20 new stores with 1m sq ft of new space, and this year we will open 30 new stores, with closer to 1.5m sq ft,” said Bason. “In capital expenditure terms, we spent around £300m on new stores last year and it will be around £400m in the year ahead.

“In October, we opened a 133,000 sq ft store on Gran Via in central Madrid, which is twice as big as any other of our stores in Spain and the second biggest in the portfolio. It is early days but that store has the highest sales densities of any Primark store at launch. The next big one to open will be the King of Prussia mall [in Pennsylvania] later this month.”

Primark made its debut in the US at the end of the financial year, with a 77,300 sq ft store in Boston, which will be followed by a further seven stores across the northeastern US over the course of the new financial year, all served by a Primark distribution centre in Bethlehem, Pennsylvania.

Bason said the Boston store is performing well but maintained that it is still too early to gauge its full trading performance.

“The Boston store is trading very well but we all need to recognise that it is one store that has been trading for seven weeks, so it is very early days. By this time next year, we will have eight stores open in the northeast US, which will give us a range of experiences and insight from a massive store at King of Prussia mall in Pennsylvania to smaller, more local stores like the one at Burlington Mall in Massachusetts.

“We have found that some styles have worked and some have been a bit slower but we did do a lot of research before we went in,” he said.

Primark also plans to roll out some of the new features in the Boston store across its retail estate, such as more changing rooms and more seating to enhance the customer experience.

Bason also ruled out adopting the US tradition of Black Friday promotions in the UK, explaining there would be no change of strategy from last year, when the store did not participate in Sales or discounting.

“We saw an increase in footfall during the week of Black Friday last year and then saw a decrease the following week, so we’re expecting much of the same,” said Bason.

The retailer will take part in the promotional day at its two stores in the US, with the King of Prussia store opening just days before.

Bason also underlined that Primark’s commitment to bricks-and-mortar stores is unchanged, and it has no plans to launch ecommerce or click-and-collect because of the “cost to serve” these types of operations.

He maintained that the retailer is not shunning the digital world altogether, adding: “Now we are very adept at social media platforms like Facebook, Twitter and Instagram, and Primania [Primark’s customer image-sharing platform] is exactly the sort of website that our younger customer wants.”

 

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