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Associated British Foods plc

Why it makes no business sense for Primark to move online

Because Primark’s clothes and accessories are so cheap, the shipping and return costs are often more expensive than the cost of the goods themselves

primark store
It is estimated that almost three-quarters of clothes bought online are returned

Associated British Foods plc (LON:ABF) has taken some flack from some in the past for not having an online store for Primark – its value fashion chain and the group’s star business.

The UK high street has struggled over the past year or two as stagnant wage growth and above-target inflation have hit consumers’ pockets hard, while the few quid that they do have to spend is increasingly being spent over the internet.

Data last week from the Confederation of British Industry showed that those trends are unlikely to change any time soon.

READ: AB Foods says Primark first half profit to be “well ahead” of last year

So it’s no surprise then that shops are clamouring to build their presence online – a strategy that the likes of Asos PLC (LON:ASC) and Boohoo Group PLC (LON:BOO) have been handsomely rewarded for adopting.

But Primark isn’t one of those following the herd: it hasn’t looked to move online, nor does it have any intention of doing so.

“Primark does look at alternative business models from time to time, but there are no current plans to trade online,” said a spokesperson.

“Customers enjoy looking online at the latest offers, and then come to stores on the high street to buy. The in-store design and experience is part of Primark’s attraction to customers.”

Some in the City have dismissed the refusal to move online as a sign of naivety or stubbornness, but Liberum analyst Robert Waldschmidt thinks there’s a very good reason why it hasn’t happened yet and why it is unlikely to in the future.

Return costs ‘would eat Primark alive’

“The rationale behind them not selling online now is the fact that as much as three-quarters of the basket purchased online is returned,” Waldschmidt told Proactive.

“Given Primark’s price points per item, that doesn’t make for a very profitable model. As it stands now, if they sold online, they’d probably be losing money on the online sales.”

It’s not just the cost of returning goods, sending them can often cost the same amount, if not more, than the price of the goods themselves.

“As you can imagine, the margins are so small that it can be difficult to sell a £3 t-shirt when you’re spending the same amount just to ship it,” said AB Foods chief executive George Weston back in 2013 after the end of a trial with online fast fashion giant Asos.

“The shipping costs for an online business it the key reason why online-only retailers can’t compete with us.”

No need to chase sales

Liberum number cruncher Waldschmidt also believes that not only does it not make sense financially but that Primark has no need to chase online sales.

“In contrast to a large number of retailers, Primark is actually growing absolute sales…and is still taking [market] share,” he said.

“I’d prefer that they do that on a profitable basis as opposed to growing the top line and destroying the profits. I do not see right now how they have a viable pureplay online-only option; the returns would eat them alive.”

Click and collect could work though

The analyst does acknowledge that there is still an online option available to Primark bosses that have proved popular with its bricks-and-mortar retail peers: click and collect.

“If you look at what makes the Primark model work, it’s the sales densities within the stores.

“And how do you drive more density in your existing estate? Well, it would be having more people click and collect.

“You buy online, you go to the store, you pick it up and potentially pick up some more stuff. It also addresses that issue of returns quite easily.”

AB Foods shares were down 1.8% to 2,272p on Monday afternoon.

Quick facts: Associated British Foods plc

Price: £23.43

Market: LSE
Market Cap: £184.4 m
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