primarkBusiness models that don’t evolve are always threatened by disruption.

The US specialty apparel sector is a fascinating case study in businesses, and brands, entrenched for long periods of time (decades), seemingly safe, but now facing imminent destruction. The concept of the shopping mall is dated; millennials have different habits than teens in the 80s & 90s. It’s no longer a valid plan to simply have a store in the mall, pay high rent, and expect shoppers to arrive, happy to pay high prices. Consumers (especially young ones) are more “global culture aware” and use technology/apps to find the very best price points. The retail graveyard is full of stores that failed to invest in technology, kept prices too high, and never modernized distribution to incorporate faster turnover of inventory and fashion. In this instance, fashion-forward Europe does it better.

Yesterday’s stores included Gap, Old Navy, Express, Abercrombie & Fitch, American Eagle, and Aeropostale. Poor inventory management, mark downs, margin compression, and store closures, all combined to devastate stock prices. The first round of disruption commenced 10 years ago with the arrival of H&M (Swedish), Zara (Spanish), and Forever 21 (Korean family-owned). International apparel retailers challenged the traditional approach of resetting floors 4-6 times per year, and instead, reset every 2-weeks. Fast fashion came to the US and shoppers took notice.

The competitive threat is accelerating; relentless store growth in new geographies applies increasing pressure. For perspective, a quick table on the stock prices of two buckets of apparel retailers since January 2014:

         ticker       01/01/2014       09/21/2015          Return
Abercrombie           ANF            $32            $22          -31%
Gap Stores           GPS            $42            $32          -24%
American Eagle           AEO            $14            $16           14%
Aeropostale           ARO            $9             $1          -89%
Express          EXPR            $19           $19            0%
H&M        HMB SS            290           316           9%
Inditex (Zara)         ITX SM             23            30          30%
Forever 21         private

On September 10th, Primark, a retail segment of Associated British Foods, opened its first store in Boston. The 77,000 square foot Downtown Crossing store is in the former Filene’s flagship location. Filene’s failed to adapt too. Primark is all about fashion at very low prices. And low means low. Women’s jeans list at $7.00, t-shirts at $3.50, and tank tops at $1.60. This beats Walmart. A second store will open in King of Prussia Mall on November 25th. Within the next year, there will be 8 large format stores scattered throughout the northeast. Primark keeps costs low by generating lots of volume in the stores to cover overhead, and relies on word of mouth buzz as opposed to advertising. If Primark rivals the success of H&M, Inditex, and Forever 21, mall-based apparel retailers will obsolete quicker.

Business model and technology change is often a deflationary force. Primark’s low prices and the resulting deflation are not driven by the Phillips Curve, nor directly controlled by the Fed. Deflationary forces will remain throughout very large swaths of the economy based on secular change, technology, deleveraging, and demographics. Be wary of the investment and policy implications of these changes.

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  1. Kidchowda on September 22, 2015 at 10:39 am

    Great post, CJF! However, I wonder how sustainable Primark’s prices are. I think it’s a matter of time until we hear about abuses in their supply chain, etc. There could be a stigma associated with it — related both to anticipated reports of labor abuses and the Walmart factor. Trendy urban consumers don’t want to go to a place that is just cheap. If they did, they’d already be shopping at Marshalls. So, it seems to me, Primark’s key is branding. Like H&M, they need to combine cheap with cool. Apparently, they have figured it out. I guess they are as cool as H&M but even cheaper?

    Also, in light of your previous post about the fed failing to raise interest rates, I can’t help taking note of your comments on deflationary pressures abounding. Yet another reason not to raise interest rates.

  2. crackerjack on September 23, 2015 at 7:57 am

    Primark will be a sustainable business model if they do high volumes per store to cover rent and create effeciencies in distribution. So it comes down to sales. The concept works in the UK; we’ll see in the states. Yes prices are much lower than H&M.

    Per the Fed, don’t take issue with them not raising rates. I take some issue with the communication before hand. Yellen, and several Fed governors are staunch believers in an economic relationship called the Phillips Curve (look it up). They prepared the market for a hike because unemployment is much lower. The reason they didn’t hike is markets/china. It would have just been cleaner to not prep the markets for a hike beforehand. Risk of inmates running the asylum now….that’s all.

    But I don’t think they should have hiked to be clear. The meeting was poorly handled though.


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