Why Primark Is Thriving While Retailers Like Forever 21 Are Closing | WSJ The Economics Of
Summary
TLDRPrimark, a European fast fashion retailer, thrives without an online presence, focusing on physical stores despite a rise in e-commerce. They avoid the high costs and slim margins of online sales, including returns. With a trial Click and Collect service, Primark maintains a low-cost web presence while encouraging in-store purchases and impulse buys. Their large retail spaces and low-profit margins on a vast array of products keep prices competitive. Despite a slow start in the US, they've adapted and continue to grow, capitalizing on the resurgence of in-store shopping post-pandemic.
Takeaways
- đĄ Primark, a European fast fashion retailer, has chosen to focus exclusively on physical stores and does not sell online.
- đ Despite the growth of e-commerce, Primark made 9.5 billion in sales revenue last year without any online sales.
- đïž The company plans to open 60 new stores in the next five years, while many other retailers are closing shops and filing for bankruptcy.
- đ Online retailing involves significant logistical costs, including hubs for dispatching goods and local distribution centers for last-mile delivery.
- đ Returns are a major issue for online retailers, with the cost to process a return averaging $26.50 for every $100 of merchandise.
- đŹ Primark's strategy is to maintain low profit margins by focusing on in-store sales and avoiding the costs associated with e-commerce.
- đ« The COVID-19 pandemic forced the temporary closure of Primark's UK stores, but the company did not pivot to online sales even with a significant drop in revenue.
- đ In 2022, Primark introduced a 'Click and Collect' service, allowing customers to order online and pick up in-store, reducing logistical costs.
- đïž The 'Click and Collect' service also encourages additional in-store purchases, leveraging the concept of shopping momentum.
- đ Primark offers a wide range of products, including clothing, beauty, home, and travel items, to attract customers and increase sales volume.
- đ While online shopping peaked during the pandemic, there is a trend of consumers returning to physical stores, which plays to Primark's strengths.
Q & A
Why can't you buy the Primark T-shirt on their website?
-Primark does not offer online shopping and focuses exclusively on physical stores.
How much revenue did Primark make last year without online sales?
-Primark made 9.5 billion in sales revenue last year without any online sales.
What is the impact of online shopping on retailers' profit margins?
-Online shopping adds extra logistical costs and increases the likelihood of returns, which can significantly reduce profit margins.
What is the average cost for a company to process a return for $100 worth of merchandise bought online?
-The average cost for processing a return for $100 worth of merchandise bought online is 26.50.
Why did Primark decide not to venture into e-commerce?
-Primark believes it cannot make money from e-commerce and has chosen to focus all resources on its physical stores to protect its margins.
How did Primark manage to expand during a time when many retailers were struggling?
-Primark plans to expand to 60 stores in the next five years by focusing on its physical store presence and avoiding the costs associated with e-commerce.
What is Primark's trial service called, and how does it work?
-Primark's trial service is called Click and Collect. It allows customers to select certain products online and then pick them up in-store.
What is the advantage for Primark when customers pick up their Click and Collect orders in-store?
-Customers are likely to browse and make additional purchases while in the store, increasing the potential for extra sales.
How does Primark's in-store shopping model give it an edge over digital-only competitors?
-80% of shopping still happens in-store, and Primark's large retail spaces and low-profit margins attract customers looking for bargains.
What challenges did Primark face when it first expanded to the US?
-Primark struggled to find the right store density and initially had low foot traffic in US malls compared to the constantly busy areas in the UK.
How did Primark adapt its strategy to succeed in the US market?
-Primark learned that a 35,000 square foot store size was optimal for the US market and focused on finding the right store density to support its large format stores.
What is the current trend in retail shopping post-Covid?
-Growth in online shopping is slowing as people return to in-store shopping, which aligns with Primark's strategy of focusing on physical stores.
Outlines
đïž Primark's Brick-and-Mortar Success
Despite the rise of e-commerce, Primark, a European fast fashion retailer, has achieved significant sales revenue without engaging in online shopping. The company has chosen to focus on physical stores, a strategy that sets it apart during a time when many clothing retailers are struggling. While others like Forever 21 and JC Penney have filed for bankruptcy, Primark plans to expand its physical presence. The script highlights the high costs associated with online retail, including logistics and returns, which Primark avoids. Instead, Primark capitalizes on in-store purchases and the 'shopping momentum' that encourages additional buying. The company's large retail spaces and low-profit margins, enabled by sourcing from Asia and avoiding online sales, allow it to offer competitive prices. Although Primark faces competition from digital-only players like Shein, its in-store model is still favored by a majority of shoppers, according to The National Retail Federation.
đ Primark's US Expansion Strategy
Primark's journey in the US market has been a careful and calculated process of learning and adaptation. After opening its first store in Boston in 2015, the company initially faced challenges in finding the right store density and competing with the high retail presence in US downtown areas. Primark's large store model required substantial foot traffic, which was not guaranteed in malls where its US stores were primarily located. Through experimentation, Primark determined that a 35,000 square foot retail space was optimal for its US operations. The company's approach has been characterized by a deliberate expansion strategy, avoiding the pressure of rapid growth that could lead to risk. This patient and methodical approach has been a cornerstone of Primark's culture across all markets. As the retail landscape shifts with the decline in online shopping's peak during Covid, Primark's commitment to physical stores seems to align with a resurgence in the preference for in-person shopping experiences.
Mindmap
Keywords
đĄE-commerce
đĄBricks and mortar
đĄLogistical hub
đĄMargins
đĄReturns
đĄClick and Collect
đĄShopping momentum
đĄFoot traffic
đĄRetail density
đĄFast fashion
đĄSourcing
Highlights
Primark made 9.5 billion in sales revenue without online shopping.
Primark focuses on physical stores instead of e-commerce.
Retailers like Forever 21 and JC Penney have closed stores and filed for bankruptcy.
Primark plans to expand to 60 stores in the next five years despite the retail crisis.
Online shopping is expensive for retailers due to logistical costs.
Online returns are a significant profit loss, costing companies on average $26.50 per $100 of merchandise.
Primark decided not to pursue e-commerce to protect its profit margins.
During the pandemic, Primark's decision not to have an online presence was challenged.
Primark launched a Click and Collect service in 2022 as an alternative to traditional online shopping.
Click and Collect allows customers to pick up online orders in-store, reducing logistical costs for Primark.
Primark benefits from shopping momentum, where customers are likely to buy more when they pick up their orders.
Primark offers a wide selection of products similar to a department store to attract customers.
Primark relies on selling a lot of items at low profit margins.
Primark sources much of its clothing from Asia to keep prices low.
80% of shopping still happens in-store, giving Primark an advantage over digital-only competitors.
Primark's US expansion started slowly with a learning curve regarding store size and location.
Primark learned that 35,000 square feet is the optimal store size for the US market.
The overall retail market is shifting, with growth in online shopping slowing as people return to physical stores.
Primark's decision to focus on physical shopping has been successful post-Covid.
Transcripts
- [Narrator] Let's say you wanted
to buy this Primark T-shirt.
If you're shopping on Primark's website,
you'll quickly discover that you can't.
(buzzer dings)
Over the past 10 years,
e-commerce sales have more than doubled.
But last year,
European fast fashion retailer Primark made 9.5 billion
in sales revenue without a single penny
from online shopping.
- We made a very clear choice
and our clear choice is bricks and mortar.
- [Narrator] This comes at an uncertain time
for struggling clothing retailers.
Retailers like Forever 21, JC Penney,
and Neiman Marcus have closed stores
and filed for bankruptcy.
And while a UBS report shows up to 80,000 retail stores
will close in the next five years,
Primark plans to expand to 60 stores in the same timeframe.
- [Speaker] Is driving two hours from Toronto
to Buffalo to shop at Primark worth it?
Heck yes, I used to fly six hours to do so.
- So how is Primark expanding without online shopping?
This is the economics of Primark.
- Fashion retail is incredibly competitive,
more so than ever.
There's not many players, especially in fast fashion
that are making fat margins.
Pretty much the thinking everywhere is
that you have to have this online presence.
- [Narrator] But online shopping is
actually incredibly expensive for retailers.
- You have to have a logistical hub
from which you would dispatch the goods
and then you'd probably have a local distribution center
from which you have to do last mile delivery.
Each step of that just is an extra layer of cost,
it just eats away at the margin at which
in fashion is very, very slim anyway, but the real killer
for e-commerce is somebody who buys something
on the internet is far more likely to return that product
than somebody who goes into a store.
- [Narrator] Returns are one
of the biggest profit losses for online retailers.
On average, processing a return for $100 worth
of merchandise bought online costs a company 26.50.
For years, online retailers just ate these expenses.
Only now are more
of them deciding to pass the cost back to the consumer.
- Primark have just stayed right from the beginning,
we don't think we can make money out of e-commerce.
We're not even gonna try.
We're gonna focus all our resources
on the physical store and protect our margins.
- [Narrator] And that wasn't an issue
for the retailer until.
- Now Primark is expected to close all 189
of its UK stores tonight
and it doesn't have an online offering to fall back on.
- E-commerce was a lifeline for a lot of retailers
during the pandemic.
They couldn't open their stores, but they were still able
to make some sales on the internet.
- [Narrator] But Primark didn't budge,
even as consumers urged
for it to offer online shopping and even
after its revenue dropped by almost 2 billion pounds.
- And I think their confidence in this model
of having no digital sales and only using stores I think,
was probably shaken by the pandemic.
Who knows what would've happened
if it had gone on for longer?
I think the closures weren't quite long enough
to really tip the scales
and force them to fundamentally rethink the model.
- [Narrator] Instead of traditional online shopping,
in 2022, Primark launched a trial service called,
Click and Collect in select UK stores.
Customers can select certain products online,
then pick up their orders in store.
So Primark still has some cost to maintain its website
but it's cheaper than running a true online shop.
- So Primark makes a sale, but they don't have any
of the logistical costs that would be involved
in packing it up and then shipping it out to your home.
- [Narrator] And there's another bonus for Primark.
Since the customer has to go inside
to collect their purchase, they're likely to browse around
and maybe even buy more.
- They make the sale online,
but then they have a good chance
of making some extra sales when that person visits them.
- [Narrator] Consumer psychologists
call this shopping momentum.
Essentially, once you've already decided to make a purchase,
it's easier to justify adding more to your cart.
- It always feels just overwhelmingly busy
with people who are in there looking for bargains.
- [Narrator] And it's not just clothing.
Primark lures consumers with beauty, home,
and travel products similar to a department store.
- What we like to say about Primark here in the US is
that we're all treasure without the hunt.
- [Narrator] So customers may go in
for a new t-shirt and leave with a suitcase.
- [Speaker] Primark that I can drive to and don't have
to fly to is a dream because that means there's no limit
to what I can buy and bring home.
- [Narrator] To carry this vast selection of items,
Primark finds large retail spaces
because it relies on selling a lot.
It's one of the largest retailers in the UK
by volume and one of the largest across all of Europe.
Last year, Primark made about 9.5 billion in sales revenue
in part by selling a lot of things at low profit margins.
And it does this by sourcing a lot
of its clothing from Asia.
Combined with not offering online shopping,
this enables Primark to sell its merchandise
at lower prices,
even lower than many other fast fashion retailers.
- Where they do have serious rivals on price is
with the digital only players that like Shein for example,
they are often even cheaper than Primark.
- [Narrator] But according
to The National Retail Federation,
80% of shopping still happens in store,
giving Primark an edge
over its digital only competitors, even so,
its in-store shopping model got off
to a rocky start in the US.
Primark opened its first US store in Boston back in 2015.
Although it was already popular in the UK,
its US expansion started slowly.
Over four years, it opened nine stores.
After years of experimentation,
Primark learned it would have to change
to succeed in the US.
- When we first opened,
we took a similar store size that we would've had in Europe.
- [Narrator] But when Primark opened its stores
across the northeast,
it struggled to find the right store density.
- What they found in the US is that retail is
so much more competitive.
There's a lot more retail in downtown areas in the US
than there is in the UK, for example.
So you just can't support a massive store.
It's just not possible to get enough revenue for the size.
- To support its large store sizes,
it needed a lot of foot traffic.
But unlike the UK stores which were located
in constantly busy areas, US stores were mostly in malls
where during the week, foot traffic dwindled.
- We learned that actually, 35,000 square foot
of retail selling space is actually the sweet spot for us.
- They didn't face the commercial pressure
that a publicly owned company might have faced
to suddenly open 100 stores
and get really big really quickly
and then possibly risk disaster
because they hadn't thought it through.
- The culture of Primark has always been
to take our time and to test and learn.
And we've done that in every country
where we've introduced the brand.
This wasn't about growing market share at all costs.
- [Narrator] And the overall retail market is shifting.
Online shopping hit a peak during Covid, but now,
growth is beginning to slow as people return to stores.
- And I think that's never been so important
as it is since we came outta Covid.
I think there has been a massive rediscovery
of being in malls, being together, physical shopping,
and I think as a business
that took the decision a long time ago
to have that as our core strategy,
has continued to allow us to be successful.
(upbeat music)
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