Why Primark Is Thriving While Retailers Like Forever 21 Are Closing | WSJ The Economics Of

The Wall Street Journal

31 Jul 202307:14

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

💡 Primark, a European fast fashion retailer, has chosen to focus exclusively on physical stores and does not sell online.
📈 Despite the growth of e-commerce, Primark made 9.5 billion in sales revenue last year without any online sales.
🛍️ The company plans to open 60 new stores in the next five years, while many other retailers are closing shops and filing for bankruptcy.
🚚 Online retailing involves significant logistical costs, including hubs for dispatching goods and local distribution centers for last-mile delivery.
🔄 Returns are a major issue for online retailers, with the cost to process a return averaging $26.50 for every $100 of merchandise.
🏬 Primark's strategy is to maintain low profit margins by focusing on in-store sales and avoiding the costs associated with e-commerce.
🚫 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.
🛒 In 2022, Primark introduced a 'Click and Collect' service, allowing customers to order online and pick up in-store, reducing logistical costs.
🛍️ The 'Click and Collect' service also encourages additional in-store purchases, leveraging the concept of shopping momentum.
🌍 Primark offers a wide range of products, including clothing, beauty, home, and travel items, to attract customers and increase sales volume.
📉 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

00:00

🛍️ 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.

05:01

🌏 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

💡E-commerce

E-commerce refers to the buying and selling of goods or services using the internet, and it has seen significant growth over the past decade. In the context of the video, e-commerce is a critical component of modern retail, yet Primark, the subject of the video, has chosen not to engage in it, focusing instead on physical stores. This decision sets Primark apart from competitors and is central to their business model.

💡Bricks and mortar

Bricks and mortar is a term used to describe traditional physical retail stores as opposed to online or digital businesses. The video emphasizes Primark's commitment to this model, highlighting their choice to forgo e-commerce in favor of expanding their physical store network. This strategy is particularly notable given the industry's shift towards online shopping.

💡Logistical hub

A logistical hub is a central facility in a supply chain responsible for the consolidation and distribution of goods. The video mentions that setting up a logistical hub is costly for online retailers, which is one reason Primark avoids e-commerce. It illustrates the expenses associated with online retail operations, including the need for local distribution centers and last-mile delivery.

💡Margins

Margins in retail refer to the difference between the cost of a product and its selling price, indicating profitability. The video explains that fashion retail margins are slim, and the costs associated with online operations, such as logistics and returns, can significantly erode these margins. Primark's avoidance of e-commerce is partly due to the desire to protect its profit margins.

💡Returns

Returns are a significant issue for online retailers, as customers are more likely to return items purchased online than those bought in-store. The video states that processing a return for merchandise bought online can cost a company $26.50 on average, which is a substantial drain on profits. Primark's focus on in-store sales helps it avoid these costs.

💡Click and Collect

Click and Collect is a service model where customers can order products online and then pick them up in-store. Primark launched this trial service in 2022 as an alternative to full e-commerce. This approach allows Primark to maintain a web presence without the high costs of shipping, and it also encourages additional in-store purchases, which is beneficial for their business model.

💡Shopping momentum

Shopping momentum is a psychological phenomenon where once a consumer has decided to make a purchase, they are more likely to buy additional items. The video suggests that Primark's Click and Collect service benefits from this effect, as customers picking up online orders often end up buying more while in the store.

💡Foot traffic

Foot traffic refers to the number of visitors entering a physical retail space. The video discusses how Primark's large store sizes require high foot traffic to be successful. It contrasts the successful busy UK locations with the initially slower US expansion, where Primark had to adjust its store size and location strategy to attract sufficient foot traffic.

💡Retail density

Retail density pertains to the concentration of retail stores in a given area. The video explains that Primark struggled in the US because of the higher retail density and competition, especially in downtown areas, which made it difficult to support their large store format.

💡Fast fashion

Fast fashion describes a retail model that focuses on quickly producing and selling trendy clothing at low prices. Primark is highlighted as a fast fashion retailer that competes on price, even more so by avoiding the costs associated with e-commerce. The video notes that digital-only fast fashion brands like Shein can sometimes offer even lower prices than Primark.

💡Sourcing

Sourcing refers to the process of obtaining goods or services from suppliers, often at the lowest possible cost. The video mentions that Primark sources much of its clothing from Asia, which allows it to offer low prices and maintain its business model without online sales.

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.