How Primark makes money selling $ 3.50 t-shirts
SAND OUT for a shopping spree with $ 100 and you can pick up a pair of Levi’s jeans or a HermÃ¨s half tie. Or you can pop over to Primark and fill a closet. The fast fashion discount supplier, which thrives in America from its base in Europe, will whip you a T-shirt for $ 3.50 and pants for a tenner. Such awards seem too good to be true to activists, who assume they can only be the result of sweeping cuts in an industry plagued by questionable labor practices. Rivals such as Zara from Spain and H&M from Sweden, which was considered cheap before Primark’s arrival, was already operating tight ships and squeezing suppliers hard. What is Primark doing so differently that it can sell cheaper goods while still making money?
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A lot, it turns out. While Primark looks like it’s in the same business as its budget rivals, behind the seams its business model couldn’t be more different. When it comes to strategic decisions, the business has zigzagged as much of the clothing industry collapsed. As other companies try new approaches, such as reconfiguring their businesses for the Internet age, Primark has stubbornly stuck with a retail approach to retail that would seem familiar to the chief executive of his. first store, opened in Ireland in 1969. The strategy has its limits, especially when it comes to new growth. But for now – and despite the strange pandemic – it is proving its worth.
The giants of fast fashion have grown up embracing speed. From the 2000s, Inditex, owner of Zara, made a name for itself by increasing the metabolism of the apparel industry. Previously, buyers had to wait entire seasons for mainstream brands to replicate the new catwalk looks. It took at least that long to make cool dresses and ship them from distant Asian factories with long delivery times. Zara stole a march on the industry by manufacturing part of her collection in Europe, which allowed her to get designs into stores in just a matter of weeks. Like a hot pair of heels, the business model was quickly emulated across the industry. When impatient consumers moved online, Zara, H&M and others hastily followed them there, regardless of the questionable economy of door-to-door delivery.
Primark, part of Associated British Foods, a Â£ 16bn ($ 22bn) conglomerate that also sells Twinings bread and tea, has stayed on the slower path. His bet is, overall, that buyers will agree to be a little less avant-garde in exchange for big savings. The designs are simple to reduce the cost of sewing. Where more sophisticated competitors boast that each store has a unique assortment of regularly updated products, Primark orders millions of identical dresses months before they hit shelves. It’s a lifetime in the age of Instagram influencers. But it allows Primark to charge rock bottom prices.
This strategy allows it to concentrate manufacturing in low-cost countries, notably Bangladesh, where monthly wages in the clothing industry start at around $ 100. These are often the same factories used by other global retailers, which should blunt criticism that Primark is an outlier when it comes to labor practices. The company does sane things like limiting outsourcing and does a lot of audits to make sure working conditions are right. And its slower approach means orders can be placed during low fashion times, when factories are grateful for the work. Manufacturers know they can keep staff sewing Primark dresses during lean weeks, while also offering more lucrative short-term runs for less patient brands. The clothes are shipped to the end markets by the slow boat.
The cost savings are passed on to consumers, with a remaining portion to shareholders. Before the pandemic collapsed, everyone’s books, Primark reported a gross margin – sales minus cost of goods sold – of 41%. It is well below 57% or H&Mis 53%. But Primark’s parsimoniousness extends to operating expenses. It has relentlessly reduced the costs of marketing and selling goods. Take that into account and it ends with a “BAIIâBy about 12%, in line with the industry standard.
Part of this is due to the pinching of common rooms or the garden. While H&M Spends 4% of its total sales on marketing, Primark runs virtually no advertising. In an industry that often discounts, which squeezes margins, Primark assumes its prices are already low enough. Outside Britain, its outlets are huge – on average, nearly six times the size of those run by Inditex – and often in out of town malls where rents are cheap. The jumble vibe they give off works: Primark sells about ten times as many items as H&M per square meter of store, according to Aneesha Sherman of Bernstein, a broker. On a recent visit, a young shopper in front of Schumpeter in the dressing room queue took 14 items.
Where Primark has strayed the furthest from the fashion pack is in its refusal to sell anything online, which it considers impractical at its prices. This kept margins high as the company avoided spending too much money to develop applications and runtime capabilities. The lack of an online presence caused Primark to lose up to 100% of its sales as the pandemic closed stores around the world. Extended closures, especially in Britain, which is home to around half of its 380 outlets, have cost it Â£ 3bn in sales and possibly Â£ 1bn in profits.
Hare brain or intelligent as a turtle?
Primark’s cost-cutting strategy is so multifaceted that it’s virtually impossible for rivals to replicate, Ms. Sherman argues. However, its peculiarities reach their own limits. The pace of store expansion, limited to Europe and America, seems icy to investors, but go faster and the model’s delicate economy may stop working. Critics question the environmental sustainability of the $ 1 panties. And new online rivals look threatening, particularly Shein, a fast-growing Chinese super-discount.
Still, queues outside Primark stores when they reopen after closings suggest some punters can’t wait to splurge in person. Sales are now higher than before the pandemic, aided by the covid-related demise of some once formidable rivals, like Topshop in Britain. In the world of fast, slow, steady and cheap fashion can be a winning strategy. â
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This article appeared in the Business section of the print edition under the title “Primark’s Slow Fashionistas”