Tuesday 24 April 2018

Primark's US move may halt calls to break up €35bn ABF

Fashion chain aims to crack lucrative US market with low-key Boston entry, writes Nick Webb

Analysts believe the US market may be responsive to Primark’s low-cost fashion, such as this black
dress from Penneys
Analysts believe the US market may be responsive to Primark’s low-cost fashion, such as this black dress from Penneys
Nick Webb

Nick Webb

Low-cost fashion retailer Primark's opening of its first US store in Boston may silence calls for it to be spun off from parent group Associated British Foods (ABF).

Primark - better known as Penneys in Ireland - started as a single shop in Dublin in 1969 and has grown into a 292-strong low-cost fashion phenomenon. Led by Dubliner Arthur Ryan, the chain pioneered 'flash retail', which involves rapid turn around of stock based on much faster responses to customer tastes. This is enabled by a super-efficient and much shorter supply chain.

Whereas some rivals may take months to develop and sell a new line of clothing, Primark is able to slash the time to a matter of weeks, while still selling garments for lower prices than its rivals. Penney's cutting-edge style has seen it nicknamed 'primani' by fashionistas.

Sales have risen fivefold in the last few years, jumping from £1bn (€1.35bn) in 2005, following the purchase of a group of Littlewoods stores, to £5bn as it expanded rapidly in Europe. It has also become the profit engine of its parent group ABF, chipping in with 62pc of group profits - up from 32pc just eight years ago.

The growth of Primark has led to increased pressure for the company to be spun off from food company ABF into a separate business.

"Investors don't own ABF because of the grocery business or sugar," Richard Chamberlain, analyst at RBC Capital said last week.

"They are buying into a relatively scarce, early-stage international roll-out story."

Last year Morgan Stanley analysts said that investors in ABF, whose grocery brands include Silver Spoon sugar and Twinings tea, were "fundamentally mispricing" the Primark business.

Morgan Stanley suggested that Primark could have a market cap of some £30bn (€40bn) as a standalone business. Primark's global network is less than a tenth of rival retailer H&M's, but it already generates sales equivalent to H&M a decade ago, when it had 1,000 stores and was valued at only 20 times earnings, Morgan Stanley's research showed.

The billionaire Weston family controls ABF and may not wish to spin it off - at least until the US consumers respond to $35 fringed faux suede jackets or $15 oversized check shirts.

Other retailers, such as Tesco and Marks & Spencer, have entered the US market with high hopes, only to have American consumers give them a cool response. The US market is well served with discount fashion chains, such as Target or Forever 21, but analysts believe Primark offers something different.

While the firm has "a very good price proposition" its styles are "more interesting for the consumer. A lot of discount players can have quite mundane offers in the US," according to Neil Saunders of retail research firm Conlumino. Primark's prices are "about 20pc below Forever 21, 33 pc below Old Navy and 40pc below H&M," according to analysts at Bernstein Research.

Penneys has avoided opening - so far - in the higher-profile fashion capital of New York. This follows the same strategy that saw it roll out across the UK, Germany, Spain, Portugal, France, Belgium and the Netherlands where it opened shops in less fashionable cities, like Marseilles or Derby to test demand.

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