Consumer spending is down but Primark is set to report stellar Christmas sales and is gearing up to threaten the specialists.
The new year kicked off with the usual doom and gloom headlines. The future of several retailers, notably footwear specialists, was thrown into doubt amid tales of terrible Christmas trading and backers potentially walking away from retail investments.
However, value chain Primark appears to have emerged from Christmas unscathed. The retailer’s parent company, ABF, will issue a trading update next week, which is expected to be one of the only positive statements post-Christmas thanks to rising sales on the back of massive expansion.
The prospect of Primark adding another 500,000sq ft of retail space by September through the thick of the economic downturn – it grew its space from 4.8 million sq ft to 5.3m sq ft in 2007 – has retailers quaking in their boots, with many ready to blame the chain for any retail specialists potentially falling into administration in 2008.
So far, the opening of so many new large-format stores does not seem to have cannibalised Primark’s sales to the level that analysts predicted, and although like-for-like sales rose just 1% for the year to September 15, sales for the period were up 37% and profits rose 20%, a performance that rivals say is almost certain to continue throughout this year.
Shore Capital analyst John Stevenson says Primark’s Liverpool store, which opened last year, is on track to take about £65m a year. “Like-for-like performance may not have been spectacular but cannibalisation from new openings has not been anywhere near what commentators or Primark expected. We thought Liverpool would hurt Manchester in terms of sales, but that has not happened.”
The managing director of one respected young fashion chain illustrates just how much of a threat Primark has become. He says: “The market is so tough and other than Primark, no one is doing well or had a good Christmas. Primark is still taking market share from young fashion and will carry on doing a good job this year. The economic picture is not pretty and retailers are not brimming with confidence, and while Primark is doing a good job it’s even tougher for the rest of us.”
The director of a mid-market fashion chain adds: “Primark had a great week in the run-up to Christmas and will be in the winners’ enclosure when it reports.”
Aside from hammering middle-market businesses such as Bhs and rival value operators including Matalan, Primark has begun to battle the specialists such as accessories and footwear multiples. Stevenson says: “Primark has taken market share from Bhs and Matalan, but you can move further down the line now and it is hurting other less obvious retailers too. This is because Primark is very good at what it does.”
The value chain’s lingerie offer, which is branded Secret Possessions, is understood to be nipping at the heels of lingerie specialist La Senza to become the second largest lingerie retailer by volume, with market share of just over 8%. Marks & Spencer remains the market leader, with about 27%.
To gain a picture of the potential force of Primark’s assault on the lingerie sector, compare entry price points on a fashion bra. Primark’s pink satin bra retails for just £5. Meanwhile, La Senza’s entry price on a fashion bra is about £14 and M&S’s is about £12. On swimwear, Primark starts at £6 for a halterneck bikini. Can you hear the middle market gulp? Throw in Primark’s plans for new store openings in 2008 and it makes frightening reading for any retailer making a living selling knickers.
The middle-market fashion chain director says: “The new Primark stores have massive lingerie departments so it is inevitable that it is starting to hurt lingerie retailers, especially as it is opening so much new space.”
One branded lingerie source adds: “Primark dominated the price-led end of the lingerie market in 2007 and value has been the biggest trend from a retail perspective in the last 12 months. However, there could be a backlash against Primark if the ethical movement gathers pace, and Primark does not sell online, which is a growth area for lingerie.”
Footwear and accessories are other sectors in which Primark has not yet realised its potential. The chain’s footwear departments remain relatively small in comparison with overall store sizes. However, footwear specialists claim the Primark effect, coupled with the economic downturn, is making it even tougher for the likes of Dolcis, Faith and Stead & Simpson, which are understood to have suffered exceptionally difficult trading last year. Both Stead & Simpson and Dolcis have been linked to possible administrations in the past week.
The director of one footwear chain says: “What is happening with the economy is terrifying. The footwear sector is facing a Wal-Mart-type predator in the form of Primark. What is clear is that unless you have must-have items like Ugg in the middle market, it is horrific. As a shopper, why would you buy a Marc Jacobs-style court shoe from Faith for £60 when there is a similar one in Office for £40, one in New Look for £20 and one in Primark for £10? The Primark shake- up is still to come in footwear.”
One footwear retailer claims that Primark has placed an opening order with a supplier for a million pairs of ballet pumps this season. The rumoured retail price is £3.50 and profit margin is expected to be less than 10%, or about 30p a pair.
Similarly, sources say New Look laid down orders of 500,000 pairs of some footwear styles last year. With volumes such as this, and high street footwear styling so hot, it is a wonder so many mid-market footwear operators have survived this long.
Although 30p profit seems hardly worth bothering with, another footwear managing director says: “This is what Primark does best – the supermarket ‘can of beans’ effect. If it does put ballet pumps in at £3.50 this spring, that will certainly drive people in store and result in multiple purchases. It’s going to start hurting other players such as Priceless and Shoe Zone too. Primark is already gaining footwear market share by volume.”
Stevenson agrees that Primark’s strong performance is making inroads into peripheral categories. “If you look at Primark’s new stores, the set-up is giving more prominence to the likes of accessories and health and beauty,” he says.
“There is more point-of-sale material appearing around the tills to support these categories and Primark is not just about knocking down middle-market clothing retailers any more. The size of Primark’s new stores means it has huge opportunities to push into other areas.”
If Primark can continue to successfully translate its low-priced, fast fashion model into lingerie and accessories, then specialist retailers will need to be hot on backing winning items just to stand still this year.
While the story of the first half of 2008 will not just be about penny-pinching shoppers piling into Primark – not everyone trades down in a recession – the chain will certainly have the price advantage through an economic crisis. As a result, Stevenson is backing Primark to continue as a winner in 2008. “The less people spend, the more Primark will benefit,” he says.