Case Study: Primark Stores Limited

Primark, the clothing retailer, has recently experienced rapid growth and is in the
middle of a major strategic change from ‘pile it high and sell it cheap’ discount
retailer to mid-market brand with celebrity status. It has gained market share at the
expense of established clothing retailers such as Next and Marks and Spencer
(M&S). It has also battled effectively against supermarkets, such as Asda and Tesco,
which offer low-cost clothing lines. Primark’s success has been most apparent in the
growing UK womenswear sector which, in 2006, had total sales of £18bn. It has set
itself the objective of overtaking M&S and becoming the UK market leader in
womenswear.

Primark’s recent growth has been rapid. In 2006, it increased its number of outlets by
22 %, and its total selling space by 40 %. Originally, Primark tended to locate in
cheap, out-of-town sites in areas of low income. These locations kept costs down
and meant that the company was close to its target market. Recently, however, it
decided to take its discount approach into the mainstream market. It has begun
targeting middle income customers and competing more directly with M&S,
Debenhams and Next.

Primark has achieved this in a number of ways including moving into town centre,
high street sites in larger, more affluent locations. It no longer targets exclusively the
low income customer, and now says that its primary target market is “young, fashion
conscious under 35s” who want fashionable clothing at competitive prices. It helps
that people are no longer embarrassed to be seen wearing low-cost clothing brands.
Primark has been featured in fashion magazine “Vogue”, and celebrities have been
seen wearing Primark clothing.
As Primark’s strategic direction changes, and the company moves into the mid-
market sector, it has realised that low prices alone will not be enough for success
against established companies. Fast product design and innovation, effective brand
differentiation, excellent customer service and a positive shopping experience are all
essential. The company’s organisational culture will have to change if it is to change
from discount to mainstream retailer. Primark’s new strategy is built on a number of
key elements:

• continued rapid growth through careful selection of locations in prime sites in

the right towns
• improved store layouts that are more attractive and shopper friendly
• buying the latest fashion goods at competitive prices from suppliers all over
the world
• an organisational culture that places a much greater emphasis on good
customer service
• attracting high quality staff with a range of retailing skills and experience
• achieving economies of scale as volumes of supplies increase
• publicity featuring celebrities wearing Primark clothing.

Getting good locations is very difficult owing to the shortage and cost of retail space
in town centres, so Primark’s purchase of a number of high street stores from two
large retailers, who recently went out of business, was crucial in boosting growth, as
well as in acquiring the prime sites necessary for the move to the mid-market. When
Primark acquires a new location, the company works with the local community to
promote its shops as a good place to both work and shop. Primark builds links with
local colleges, Job Centres and community groups to recruit the best people.
Before the opening of a new store, employees undergo a three-week induction and
training programme designed to communicate its organisational culture and to build
team spirit. The intention is to motivate and to train staff to maximise sales per
employee and sales per square foot of retail space. The organisational culture
attempts to create dynamic people who can thrive in a fast moving fashion industry
and who enjoy putting the customer first. This is crucial if the company’s present
growth rate is to continue and if Primark is to be successful in its new strategy of
taking market share from competitors such as M&S.

Attracting the right people to work for the company is crucial. But falling
unemployment and skill shortages together with more competition for staff amongst
a growing number of retailers means that Primark might find it harder to recruit and
retain good workers.

The company has recently faced criticism from pressure groups who claim that it
exploits cheap labour in low-wage economies, with no regard for workers’ conditions,
so that it can drive down costs. Primark is accused of allowing its suppliers to exploit
their workers by failing to pay them a decent wage, denying them the right to trade
union membership and by forcing them to work long hours in poor conditions.
Primark claims that it is being more ethical in its decision-making and that it is
attempting to ensure that all suppliers along its supply chain follow its independently
audited ethical code of conduct. Critics argue that the existence of a code of conduct
is not enough and that Primark needs to do more to ensure that the code of conduct
is implemented all along its supply chain. However, Primark also points out that it
buys its goods from the same range of suppliers and countries as its competitors.

Some analysts believe that the cost savings created by buying overseas are
essential if Primark is to continue to be successful. Others believe that Primark
needs to be seen to be acting ethically if the company is to capture more of the mid-
market. However, ethical decision-making often means that costs rise.

Primark has been very successful as a discount retailer. Can it overcome the
challenges facing it to become a real competitor to established retailers such as
M&S?
Appendix A: Selected Performance Data for Primark and Marks and Spencer
2006
1. Assess the difficulties for Primark of changing its organisational culture to one
better suited to competing in the mainstream clothing market.

Better responses focused on difficulties such as managing the staff reactions to a

culture change, and the training and HR problems associated with such a change.
These responses also recognised that rapid growth and the opening of a large
number of new outlets might make the dissemination of that new culture more
difficult or the communication of a new set of values more of a challenge. Very good
responses applied theoretical points to Primark situation and used theory to
construct logical arguments.

2. Assess the likely impact of falling levels of unemployment on the success of

Primark’s strategy to move into mainstream clothing retailing.

The better responses looked at the issues from the perspective of a business
attempting a major re-positioning. The need for more employees to facilitate the
expansion, and the need for more highly skilled employees to enable the greater
emphasis on customer service, were all cited as issues, as was the problem of
competitors being better able to attract and retain workers in such a tight labour
market. Some candidates analysed the possible benefits to Primark demand of rising
disposable income, some contrasting the impact on the original market segment with
that of the new mainstream segment.

Good evaluation recognised that this national trend might not be replicated in all the
areas in which Primark operates, or that the benefits of increased sales might more
than offset the difficulties caused by the labour shortage.
3. Primark has grown rapidly in recent years through internal growth. To what extent
do you think that Primark should now grow through take-overs and mergers rather
than internally?

That external growth through merger or takeover would be quicker, enabling Primark
to grow sufficiently quickly to challenge Marks and Spencer. Many went on to argue
that the horizontal acquisition of a competitor was a quick way to capture market
share, whilst others argued for vertical acquisition of suppliers in order to ensure
quality, or to facilitate a more ethical approach. Some candidates successfully
evaluated the issues, arguing that internal growth, whilst slower might be safer, and
pointed out that Primark had been successful so far through internal growth. As
always, the very best answers balanced these issues and arrived at a logical
conclusion. Weaker responses merely discussed the benefits of growth generally.
For instance, responses that claimed a benefit to be economies of scale, failed to
gain much credit.

4. Do you think that being more ethical in its decision-making will help or hinder
Primark’s attempts to capture market share from competitors? Justify your answer.
- Primark carrying out a social audit
- Primark.s attempts to capture market share from competitors.

Good responses focused on issues such as the potential benefit to Primark brand of
being seen to be more ethical as the company attempts to reposition, and the fact
that an ethical element to decision-making is common in UK retailing. Others
remarked on the likely costs implicit in more ethical decision-making, or on the
difficulties faced by Primark in ensuring such an ethical stance is consistent
throughout its supply chain. There was some very good evaluation which attempted
to balance the costs and benefits in the context of Primark strategic direction.
5. To what extent do you think that Primark is likely to succeed in its objective to
become the UK market leader in womenswear? Use Appendix A and the text to
justify your answer.

Why Primark might reasonably feel confident of achieving its strategic goal of
becoming market leader in women.s wear. For instance, Marks and Spencer did not
experience any growth in clothing sales in 2006, whilst Primark enjoyed growth of
3%. Similarly, candidates argued that at 50%, Primark.s commitment to women.s
wear was greater than Marks and Spencer who had also to focus on numerous other
product ranges. On the other side of the argument, candidates pointed to the higher
profit, outlets and sales area enjoyed by Marks and Spencer. This was often quoted
by candidates as an unassailable market position, at least in the short to medium
term. Again, there was some very good evaluation, balancing the superior current
position of Marks and Spencer with the faster growth rate of Primark.
The UK clothing market

Consumers in the UK can buy clothing from several types of retail outlet. These
include department stores, fashion chains, supermarkets and smaller independent
retailers. Table 1 shows the total percentage change in the UK retail prices of
clothing between 2003 and 2007.

By 2007, UK clothing retailers were buying the vast majority of their

products from
foreign businesses based in countries with low manufacturing costs, such
as
Bangladesh and China. The strength of the UK foreign exchange rate also
helped to
keep buying costs down (see Table 2).

The UK clothing market can be divided into smaller markets. One of these is the
‘value clothing’ market. This is a highly competitive market where customers
expect low prices but demand up-to-date fashions. The size of the ‘value clothing’
market has been growing and, in 2007, accounted for nearly 25% of UK clothing
market revenues.
Supermarkets, such as ASDA and Tesco, sell their own brands of ‘value clothing’ at
comparatively low prices. Customers purchasing ‘value clothing’ from supermarkets
often show little brand loyalty and will purchase from the supermarket currently
offering the best combination of price and quality. However, some consumers are
concerned about the low wages paid to the foreign workers manufacturing ‘value
clothing’ and the environmental cost of transporting these clothes over long
distances.
The ‘value clothing’ market

In the 2006 to 2007 financial year, Primark, a ‘value clothing’ retailer, increased its
sales by 37% and its profits by 20%. This increase in sales led retail analysts to
predict that Primark would overtake ASDA to lead the ‘value clothing’ market in
2007.

Primark appeared to have gained customers from ‘value clothing’ market rivals
through investment in new stores. During the 2006 and 2007 financial year, Primark
expanded its UK store space from 3.5 to 4.8 million sq ft. The new stores are
situated in prime locations and are fitted out to a high standard. Primark also
entered the Spanish clothing market by opening two stores in Spain. Due to the
success of these stores, Primark planned to open five more stores in Spain.

In 2007, ASDA sold its ‘George’ range of clothing through several types of
UK retail outlet.

* ASDA – 327 supermarkets selling a wide range of food and non-food products,
including the ‘George’ range of clothing.
* ASDA Living – 13 large non-food outlets, located in edge-of-town retail parks,
selling the ‘George’ range of clothing on the top floor and electrical, home and
beauty products on the bottom floor.
* George – 12 high street stores selling the ‘George’ range of clothing and fashion
accessories.

In 2007, ASDA was considering the future of its stores. George high street stores
were not as successful as ASDA had hoped. Instead, the retailer appeared to favour
the more successful store format of ASDA Living. In December 2007, ASDA had
13 of these stores and planned to increase this to 20 by June 2008.
In response to signs that consumers were increasingly seeking improved quality
rather than just a low price, ASDA launched its ‘G21’ fashion range in 2007. This
was intended to be a superior version of its standard range of clothing. ASDA said
that the initial sales of the ‘G21’ range were encouraging.
UK clothing market trends

The following information, published in February 2007, identifies key

trends in the
UK clothing market and contains forecasted data.

1. ‘Value clothing’ market retailers, such as Primark and ASDA, will

continue to
grow and are forecasted to increase their share of the entire clothing
market by
5.9% at the end of 2011. However, the high sales needed to be profitable
means
that the ‘value clothing’ market will become dominated by a small number
of
large retailers.

2. The growth in the ‘value clothing’ market for women is slowing down.
Retailers
need to focus on differentiating their products and encouraging customers
to pay
higher prices.

3. Mainstream clothing retailers, such as River Island and Marks and

Spencer,
should be able to increase revenues by persuading consumers to pay
higher
prices, e.g. by focusing on exclusivity, design innovation and promoting
ethical
values.
4. The market for men’s clothing is still developing and ‘value clothing’
retailers
should be able to increase their revenues.