Primark’s margins remained stable in its most recent quarter. How is the fashion giant achieving this?
When fashion retailer Primark unveiled its interim results earlier this year it warned that sterling weakness would impact margin in the second half.
The retailer guided analysts that margin would be down 200 basis points year on year in the second half but margins have remained stable at minus 160 basis points in its most recent quarter.
What has helped the fashion titan manage its under-pressure margin?
Primark is one of the few established retailers in the envious position of achieving strong volume growth. In its year to date, Primark’s sales are up 9%.
“We are already market leader in volume and we are growing,” says John Bason, finance director of Primark-owner Associated British Foods.
Sales growth of this magnitude can bring economies of scale and reduce the price of raw materials and labour.
Negotiating with suppliers over currency gains
Since the UK voted to leave the European Union, the value of the pound against the dollar has plummeted 13%. With the majority of suppliers taking payment in dollars, the weakness in sterling has hit retailers hard.
“Nobody else is managing to grow at 9%, so suppliers want to work with us”
John Bason, Associated British Foods
However, this shift is also benefitting suppliers.
Primark is using its power as a fast-growing fashion retailer to negotiate with suppliers to keep costs down.
Bason says: “Nobody else is managing to grow at 9%, so suppliers want to work with us. We have been in a negotiation with them, saying we are an important customer for you so share some of your currency gains with us.”
Primark has been taking a more “forensic look” at the make up of its supplier costs, such as whether their labour is paid in a local currency. Suppliers are then “giving away” some of the currency uplift it has been benefitting from to Primark.
Another secret of Primark’s margin mitigation is simply selling more at full price. Of course, this is easier said than done when faced with a discount-hungry consumer that is being bombarded with price cuts across the high street.
Primark’s already low prices help, however, Bason insists the real driver has been great buying.
“We have the right stuff in stores and people want to be in store. We are on-trend in so many areas from clothes to flamingo inflatables,” he says.
When product is must-have, shoppers want to buy, whatever the price, which can protect under-pressure margins.