Last week Associated British Foods (ABF), the parent company of Primark, announced plans to take the cut-price fashion retailer to the USA. The first store, a 70,000 square-foot building in downtown Boston, will open at the end of 2015, but that’s just the start. Negotiations are underway to unveil further shops across the North East by mid-2016, all supported by in-country warehousing.
ABF’s ambitious plan to take on the American consumer is a huge step certain to raise a number of eyebrows. The US market might offer huge possibilities, but it's notoriously difficult for foreign companies to break into. Many have learned the hard way. Common mistakes have included underestimating start-up costs, discounting local competition and ignoring the distinct regional differences that make up America. The track record of UK plc is patchy. Tesco's Stateside foray resulted in a costly exit, Marks & Spencer pulled out too and others, including WH Smith and HMV, have tried and failed. These need to be set against a number of successes - not least TopShop, Pret a Manger and (from Sweden) H&M.
As for Primark, critics will be quick to point out that the US already has an established discount or 'outlet' clothing market, saturated with players like Burlington Coat Factory, Marshalls and Frugal Fannie’s, to name just a few. Primark's Boston flagship will even be on the former site of Filene’s, a department store whose discount offshoot, Filene's Basement, went bankrupt in 2011. Cut-price shopping is so mainstream in America that consumers expect, and are given, bargains galore. So what makes Primark special?
Three qualities, in our view, make Primark capable of success in the US: cheap prices, hot fashion and a decent store environment. The stores might seem chaotic at times - usually down to the sheer number of shoppers - but they're essentially laid out like any other high-street clothing retailer. This is in stark contrast to the US discount sector. There, the focus is not on offering trendy own-brand collections, but rather on re-selling well-known labels that are out of season or slightly shabby (stained, torn). The stores tend to be massive warehouse-style buildings, with seas of clothes raging rough across the vast space, so that it's hard to find what you want in the size you want. Primark is civilised by comparison.
We asked ABF's finance director, John Bason, why he thought Primark would succeed in the US. “We’re successfully operating in seven continental European countries and the same question might have been asked when we entered Germany, which also has a reputation for value and discount retail,” he said. “We have not failed yet and we think consumers in the North East of the US will take well to it.”
If Primark does take the US by storm, this would be great news for ABF. The retail business is becoming an increasingly vital source of earnings growth for the group. In the six months to 1 Mar, retail accounted for three-fifths of group operating profit - up from under half the year before. This is important because ABF's core sugar business is struggling. The division has seen profits pulverised by lower prices and volumes - the result largely of intensifying competition ahead of the abolition of EU sugar quotas in 2017. At the half-year stage, sales were down 22 per cent to £1.03bn, which sent operating profit tumbling 60 per cent to £64m.
With the malign sugar environment expected to persist throughout the year, the prospect of tapping into the US retail market is a tantalising one. The obvious caveat for investors is that success in America is by no means guaranteed. It will cost a great deal of money, heightening the execution risks. The horror scenario is that Primark enters the US all guns blazing, opening too many stores too quickly, rather than allowing the first to bed down to learn from early mistakes. Yet management has historically adopted a prudent approach to expansion, and we assume this will apply to its latest move.
