Primark is no stranger to existential threats and its advocates will point to the fast-fashion retailer’s recovery post-Covid as evidence of its Lazarus-like qualities.
Nevertheless, investors fear that price hikes designed to protect margins may undermine what has thus far been a resilient business model.
The high street staple is now set to increase prices of its autumn/winter range in the face of rising inflation having previously resisted the urge to pass on costs to the consumer.
No doubt it was a difficult decision for Associated British Foods PLC (LSE:ABF), Primark’s London-listed parent company.
However, it may be a decision that impacts those with the lowest incomes - Primark’s largest customer demographic.
Alienating core customers?
Alienating them could fundamentally undermine the business, the respected retail team at Deutsche Bank reckons, adding that low-income households will feel the pressures of inflation more than most.
Low price-point retailers such as Primark are will bear the brunt of rising inflation and the cost-of-living crisis, experts believe.
Lifting prices brings Primark into closer competition with premium retailers. It’s the opposite of the traditional case study in which discount: Retailers do better from people 'trading down' the price pecking order in a recession.
Rising inflation hitting the poorest people in the country hardest coupled with Primark increasing its costs, on the surface, means the retailer faces a balancing act as it looks to keep a hold of customers while also protecting its margins.
Russ Mould, investment director at AJ Bell, adds that while Primark has done well so far in “providing the right product at the right price point”. But rising inflation and sagging consumer confidence will make that task much more difficult to achieve
Against this backdrop, it is perhaps difficult to imagine a way that Primark can maintain sales volumes, which surged 59% to £3.54bn according to ABF’s first-half results.
It feels like we have been here before
Rewind to 2020. Primark appeared doomed to fail without an online presence as high streets and shopping centres shut their doors to the pandemic.
Yet, it came out the other side with its entirely store-based business relatively unscathed – once its doors swung open again. It now looks set for second-half sales to be ahead of the same period in 2019.
The fundamentals of Primark’s model are seen as the reason behind its success, at least that’s what the analysts say.
High stock turnover with products pitched at low costs means Primark is never left with too many unwanted items. It allows in-store pricing to remain at or close to the original ticket and helps preserve margins.
Looking forward, it may possibly also benefit from a change in its attitude toward the digital.
Primark has always been a bricks-and-mortar operation without online sales. And, while that is still the case, the company has been “investing significantly in its digital proposition” according to Pippa Stephens, an apparel analyst at GlobalData.
Edging towards digital
Stopping short of fully-fledged e-commerce, a revamped online platform is slated to come at the end of April. It’s expected to allow shoppers to see their favourite items and check whether they are in stock at the local store.
According to GlobalData’s own research, 48% of customers said they would be more likely to purchase a product if they knew the item was available in a store beforehand.
Still Primark doesn’t intend to burden itself with the logistical headache of direct online sales, which keeps costs down and means it avoids maintaining centralised stock.
Primark will hope the new digital approach can help maintain footfall into its stores, even as the pricing strategy becomes compromised.
There’s both scope and competition online. GlobalData says that 76.6% of consumers would be more likely to purchase a product if a click and collect service was available.
Meanwhile, low-cost manufacturers in China can increasingly cut out the high street middle-merchants with apps like Shein selling directly to British consumers in increasingly big numbers.
As inflationary forces bite, Primark may find it difficult to keep a hold of customers as market share becomes unthreaded at both sides of its pricing proposition.
However, its strong business model has seen it survive tough times before, while the digital enhancements mentioned above look set to be popular, and, crucially, open another avenue to maintain or even improve its margins.