Primark’s slow fashionistas
How to sell a t-shirt for $3.50 and still turn a profit
Set out for a shopping trip with $100 and you can snap up a pair of Levi’s jeans or half an Hermès necktie. Or you could pop into Primark and fill a wardrobe. The discount purveyor of fast fashion, which is expanding in America from its base in Europe, will flog you a tshirt for $3.50 and trousers for a tenner. Such prices seem too good to be true to campaigners, who assume they can only be the result of cornercutting in a sector rife with dodgy labour practices. Rivals such as Zara of Spain and h&m of Sweden, which used to be considered cheap before Primark came along, already run tight ships and squeeze suppliers hard. What is Primark doing so differently that it can sell wares for less and still make money?
A lot, it turns out. Though Primark looks as if it is in the same trade as its budget rivals, beneath the seams its business model could not be more different. On strategic decisions the firm has zigged when much of the apparel industry has zagged. As other firms try new approaches, such as rejigging their business for the internet age, Primark has doggedly stuck to a stackithighsellitcheap approach to retailing that would feel familiar to the manager of its first store, opened in Ireland in 1969. The strategy has limitations, particularly when it comes to new growth. But for now— and notwithstanding the odd pandemic—it is proving its worth.
The giants of fast fashion have grown by embracing speed. Starting in the 2000s Inditex, which owns Zara, made a name for itself by raising the metabolism of the apparel sector. Previously shoppers had to wait entire seasons for highstreet brands to replicate the catwalk’s new looks. It took at least that long to get fresh frocks made and shipped from distant Asian factories with long lead times. Zara stole a march on the industry by manufacturing some of its collection in Europe, allowing it to get designs in shops in just a few weeks. Like a hot pair of heels, the business model was soon aped across the industry. When impatient consumers moved online, Zara, h&m and others hurriedly followed them there—never mind the iffy economics of home delivery.
Primark, which is part of Associated British Foods, a conglomerate worth £16bn ($22bn) that also sells bread and Twinings tea, has stayed in the slower lane. Its bet is, broadly, that shoppers will accept being a little less cuttingedge in return for big savings. Designs are simple to keep stitching costs down. Where fancier rivals boast that every shop has a unique assortment of regularly updated goods, Primark orders millions of the same frocks months before they arrive on the shelves. That is a lifetime in the age of Instagram influencers. But it lets Primark charge frockbottom prices.
This strategy allows it to concentrate manufacturing in lowercost countries, notably Bangladesh, where monthly wages in the garment sector start at around $100. These are often the same factories used by other global retailers, which ought to blunt criticism that Primark is an outlier when it comes to labour practices. The firm does sensible things like limit subcontracting and conducts lots of audits to ensure working conditions are adequate. And its slower approach means orders can be placed in fashion’s offpeak periods, when factories are grateful for the work. Manufacturers know they can keep staff busy stitching Primark dresses during lean weeks, while slotting in more lucrative shortturnaround runs for less patient brands. Clothes are shipped to end markets by the slow boat.
The cost savings are passed on to consumers, with some left over for shareholders. Before the pandemic jumbled up everyone’s books Primark reported a gross margin—sales minus the cost of stuff sold—of 41%. That is well short of Inditex’s 57% or h&m’s 53%. But Primark’s parsimonious nature extends to operating expenses. It has relentlessly squeezed the costs of marketing and selling goods. Factor this in and it ends up with an “ebit” margin of around 12%—in line with the industry standard.
Some of this is down to commonorgarden pennypinching. While h&m spends 4% of total sales on marketing, Primark runs almost no ads. In an industry that often discounts, which crimps margins, Primark assumes its prices are already low enough. Outside Britain its outlets are enormous—on average, nearly six times the size of those run by Inditex—and often in outoftown malls where rents are cheap. The jumbleemporium vibe they exude works: Primark sells about ten times as many items as h&m per square metre of shop, according to Aneesha Sherman of Bernstein, a broker. On a recent visit, a young shopper in front of Schumpeter in the queue to the fitting rooms took in 14 items.
Where Primark has strayed furthest from the fashion pack is in its refusal to sell anything online, which it sees as unfeasible at its price points. That has kept margins plump as the company avoided a wodge of spending on developing apps and fulfilment capabilities. The lack of an online presence meant that Primark lost up to 100% of sales as the pandemic shut shops around the world. Extended closures, especially in Britain, home to about half of its 380 outlets, cost it £3bn in sales and perhaps £1bn in profit.
Hare-brained or smart as a tortoise?
Primark’s costslashing strategy is so multifaceted as to be virtually impossible for rivals to replicate, argues Ms Sherman. Still, its idiosyncrasies hit limits of their own. The pace of expansion of shops, which is limited to Europe and America, feels glacial to investors—but go any faster and the model’s delicate economics may stop working. Critics wonder about the environmental sustainability of $1 knickers. And new online rivals look menacing, particularly Shein, a fastgrowing Chinese superdiscounter.
Yet the queues outside Primark shops as they reopened after shutdowns suggest that some punters cannot wait to splurge in person. Sales are now higher than before the pandemic, helped by the covidlinked disappearance of some oncefearsome rivals, such as Topshop in Britain. In the world of fast fashion, slow, steady and cheap can be a winning strategy. n
Trade has flowed through the port of Ningbo on China’s east coast since the Tang Dynasty in the 8th century. After the first opium war ended in 1842, it was one of five points of entry forcibly opened to foreign merchants. And in the first half of this year the port (which merged with the nearby Zhoushan port in 2015) handled more tonnes of cargo than anywhere else in the world. A tour group of 80 students recently spent three days admiring the freetrade zone and the port’s “hardcore” power, as the Ningbo city government put it.
But on August 11th activity at one of the port’s busiest terminals came to an abrupt halt. A 34yearold dockworker, who had come into contact with visiting crews, was diagnosed with the Delta variant of covid19 despite having received two shots of the Sinovac vaccine. That solitary infection was all it took for the government to shut down operations and consign 254 of his close contacts (and a further 396 of their contacts) to quarantine.
The case is revealing in three ways. It illustrates once more how hard it is to keep the Delta variant at bay. It demonstrates how hard China will nonetheless try to do just that. And it shows how widely around the world this struggle will be felt. The terminal shutdown follows a similar closure at Yantian port on China’s south coast in May (as well as disruptions wrought by last month’s typhoon InFa). It now takes about 70 days for ocean freight to travel from its point of origin in China to its final destination in America, compared with 47 last August, according to Freightos, a digital freight marketplace. Some experts worry that the shipping delays and the prospect of future shutdowns may even disrupt Christmas shopping in the West.
The port infection is part of an outbreak that was first discovered on July 20th at Nanjing airport. By August 10th it had spread across a dozen provinces. Unlike other countries, which are learning to live with Delta, China has imposed a hardcore combination of widespread testing and uncompromising quarantines. Anyone who tests positive is whisked to hospital, even if they are free of symptoms. Anyone judged to have come into close contact with them (based on mobilephone data and other indicators) is quarantined, as are close contacts of these contacts. By August 10th China had quarantined 50,808 people, more than 20 for every active confirmed case. The government has discouraged nonessential travel between cities and provinces. And two of the worsthit cities, Nanjing and Zhengzhou, have postponed the start of the school year. According to a gauge of lockdowns devised by Goldman Sachs, a bank, China’s restrictions are now as tight as they were in April 2020.
Their impact is already showing up in highfrequency data. The median amount of traffic congestion in the 12 cities most affected by the outbreak has fallen almost 13% below its prepandemic norm, according to Ernan Cui of Gavekal Dragonomics, a research firm. And airports were operating at only 38% of their capacity on August 12th, according to Flight Master, an onlinetravel platform.
This immobilisation will add to an economic slowdown that was already under way. Industrial production, retail sales, investment and property sales were all weaker than expected in July (see chart on next page), partly because the government is trying to curb steelmaking to preserve the environment, and housing speculation to preserve financial stability. Ting Lu of Nomura, another bank, expects gdp to be only
0.3% higher this quarter than last. He has cut his forecast for growth this year from 8.9% to 8.2%, which might warrant further easing from China’s central bank, even as housing curbs remain.
The slowdown is moving markets at home—the csi 300 index of large Chinese stocks fell by 4% in the week after August 10th—and abroad. The price of iron ore has slumped by more than 20% since the end of last month; copper has fallen by more than 5%. China’s tough stance will also prevent any revival of foreign travel. That is bad news for places like Thailand, which relied on Chinese visitors for almost 30% of its tourist receipts before the pandemic.
China’s fight against Delta will be costly. But it is also proving successful. New local infections (excluding imported cases) dropped to just six on August 16th. The outbreak has started to narrow in scope as well as scale: 134 neighbourhoods remained at risk, by the government‘s reckoning, down from 224 on August 10th.
China has both an unusual ability to contain Delta outbreaks and a strong incentive to do so. It lacks two of the characteristics that have allowed other countries to tolerate an otherwise disturbing rate of Delta infections. Relatively few of China’s people have caught covid19 in the past. As a consequence, few have any natural immunity to the disease. And although a respectable percentage of the population has received two jabs (over 55%, according to the government) China’s vaccines appear less effective than Western versions. The share of China’s population that enjoys some kind of immunity is lower than India’s or even Indonesia’s, according to Goldman Sachs, even though its vaccination rate is far higher. If China were to drop its defences and tolerate the infection rates common in America and Europe, the number of people suffering from severe illness could rise to alarming levels.
China is unusually good at fighting Delta. And it needs to be. Having failed to fail against previous waves of the disease, it is now obliged to succeed again. n
with minimal economic damage.
By comparison, recent exchangerate wobbles have been modest, which has limited the extent to which higher import prices add to inflationary pressure. So far this year the Brazilian real and the Indian rupee have weakened against the dollar by about 2%. (The real sank by nearly a quarter last year, and by about 20% during the ructions of 2013.) Vigilant central banks probably helped keep investors from growing skittish.
But higher interest rates are tough medicine at home. Large increases pose a risk to growth. Slower growth in turn hurts the public coffers, even as higher interest rates raise governments’ borrowing costs. Among the large emerging economies, the risk of a crisis is perhaps most palpable in Brazil, where a loss of confidence in the public finances contributed to a deep recession in 2015 and 2016. If the fiscal risk premium that bondbuyers demand continues to rise, then the government may soon face a terrible choice between slashing spending while unemployment remains high and a fullblown fiscal crisis. Indeed, on August 12th Roberto Campos Neto, the head of Brazil’s central bank, fretted that markets were beginning to perceive a “fiscal deterioration” that could jeopardise economic recovery.
Recent woes only make the inflation problem starker—and at risk of spilling over to other countries. A severe drought in Brazil has reduced the capacity of its hydroelectric plants and sent energy prices soaring. It also threatens the production of export crops like coffee, leading to reduced supplies and higher prices. Low levels of the Paraná river have forced firms like Vale, a mining company, to reduce the loads of iron ore being carried on barges, causing
global shortages. Russia’s government is taxing wheat shipments abroad, contributing to higher prices worldwide.
The fever could break later in the year, as bottlenecks ease and as demand from America and China cools a little. Yet there is also a risk of new disruptions: fresh outbreaks of covid19, more natural disasters or social unrest, perhaps related to higher food prices. And for exporters like Brazil, softer commodity prices bring their own problems, such as a tumbling currency and an economic slowdown. A turn for the worse in one country could sour investor sentiment towards other places. Emerging markets have handled the economic strains of the past 18 months with fortitude. But a break in the heat cannot come soon enough. n