July 19 (Bloomberg) -- Primark’s newest store in Berlin has been open for less than an hour and already a mannequin’s right hand dangles by a cord, knocked loose in a shopper’s vain struggle to remove its 7-euro ($8.58) denim shorts.
The battered, half-naked figure illustrates a clamor for budget fashion that has helped the retailer’s recession-chic apparel gain more than a fifth of the 11.4 billion-pound ($17.8 billion) U.K. discount clothing market in three decades. Buoyed by that success, Primark is taking on Europe by exploiting a gap between deep discounters and pricier, fashion-led chains, such as Spain’s Inditex SA and Hennes & Mauritz AB of Sweden.
“It’s difficult to find any European retailer that has the same clout and impact as Primark,” said Maureen Hinton, U.K. retail practice leader at Verdict Research in London. “You can say they’re in a class of their own.”
Founded in Dublin as Penneys in 1969, Primark generates more than 3 billion pounds in annual sales from 238 stores, employing about 40,000 people in seven countries. The business is crucial to parent Associated British Foods Plc, accounting for almost 40 percent of profit at the London-based maker of Twinings tea. AB Foods shares have risen 19 percent in the past year, while the U.K. FTSE 100 Index has fallen 1.2 percent.
The 59,100 square-foot (5,491 square-meter) Berlin store, which tallied the highest first-day sales in company history and drew busloads of shoppers from as far away as Poland when it opened on July 11, is Primark’s eighth in Germany, a nation of 81 million that Investec Securities analyst Martin Deboo estimates could house as many as 100 locations.
“Primark is really an addition to the German market, as there are few economy clothing retailers which offer fashionable clothing,” Isabel Cavill, an analyst at Planet Retail, said in an interview, referring to competitors such as department store Karstadt, the Tengelmann Group’s Kik, and Takko, owned by London-based private-equity firm Apax Partners LLP.
Primark, based in Reading, England and the Irish capital Dublin, first ventured away from home in 2006 with the opening of a store in Madrid. It now has 27 Spanish outlets and is also present in Portugal, the Netherlands, Germany and Belgium, with two Austrian stores opening later this year.
In 10 years, almost half of the retailer’s store space will be in continental Europe, up from 21 percent today, according to Graham Jones, an analyst at Panmure Gordon. Morgan Stanley analyst Toby McCullagh estimates that Primark will almost triple its presence in the region by 2017, helped by stores twice the size of its old ones in cities such as Madrid, Berlin and Vienna and a new warehouse opening next month in northwest Germany.
Primark’s European expansion may weigh on sales at C&A, the discount chain owned by Switzerland’s Cofra Holding AG, which has 450 stores in Germany, and H&M, the biggest specialty apparel retailer in the country, according to Euromonitor.
In the U.K., shoppers are deserting more traditional clothing retailers such as Marks & Spencer Group Plc in favor of Primark. Last week, AB Foods reported a 2 percent third-quarter gain in sales at Primark stores open at least a year, a key retail metric that’s been positive every year since at least 2000. Marks & Spencer said general merchandise sales, which are mostly apparel, fell 6.8 percent in the 13 weeks ended June 30.
Primark may plow future profit into an acquisition to expand in Germany or beyond, according to Jones, the Panmure analyst. France and Poland are the leading candidates for the chain’s next entry, he said, and beyond Europe, Primark could one day land in Australia or South Africa.
Then there’s Dubai, where counterfeiters opened a fake Primark store in the Bur Dubai district this year. AB Foods spokesman Chris Barrie said the store will close soon or remove the Primark brand. Its presence illustrates Primark’s widening global appeal, according to Verdict’s Hinton.
To draw shoppers, Primark’s Chief Executive Officer Paul Marchant relies on a formula of low prices and on-trend fashion. The 44-year-old executive, who took the reins three years ago from founder Arthur Ryan, has also spruced up Primark’s once-dreary stores with eye-catching merchandise displays on the walls and on video screens spread throughout the store.
Menswear, which once consisted largely of black socks and 10-packs of underwear, now includes a range of 10 suits for 40 pounds each in some larger stores and accounts for about 20 percent of sales, Marchant said in an interview in Berlin.
“Our shoppers’ boyfriends used to shop for clothes elsewhere,” the CEO said. “Now they shop here.”
Marchant, a native of Kent, England, has also introduced higher-quality women’s lines like “Limited Edition,” where blouses and skirts sell for as much as 25 percent more than Primark’s usual range, and have appeared on pages of British fashion magazines.
“He’s got a great eye for fashion,” Phil Wrigley, Marchant’s former boss at British retailer New Look Group Ltd. and now chairman of Majestic Wine Plc, said in an interview.
Primark’s low prices, such as 13-pound belted chiffon dresses, come in part from avoiding big marketing campaigns, keeping labor costs low, and forgoing a London headquarters.
Those prices have also drawn criticism. A 2008 British Broadcasting Corp. television program accused Primark suppliers of using child labor in India. A later investigation by BBC Trustees found that video footage featured on the broadcast was doctored, prompting the BBC to apologize in 2011.
What has also kept prices in check was a decision by AB Foods to absorb cotton prices that surged at the end of 2010 rather than raise the prices of its frocks. Primark’s operating profit margin narrowed from 12.5 percent of sales in 2010 to 9.7 percent in the second half of fiscal 2011, and should widen to 10.6 percent in the second half of 2012 now that cotton has declined, Irish brokerage Davy estimated in a July 10 note.
“It was a very good strategy because it stopped their customers from going elsewhere,” Hinton said.
Primark’s profit has risen sixfold since 2000, making the chain a growth vehicle that AB Foods will continue to invest in rather than look to spin off, according to Deboo.
“Nothing in ABF’s track record says they are sellers of growth businesses,” Deboo said in an interview.
Back at the Berlin store, Sophie, a 22-year-old university student, is shoving a 19-euro denim jacket in her shopping bag.
“It’s cheap and it’s trendy,” she said, before heading off into a scrum of mostly female shoppers to find shoes. “There’s nothing like this.”
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