Primark is about to disrupt the US speciality apparel sector
Crackerjack Finance states that business models which don’t evolve are always threatened by disruption and suggests the US speciality apparel sector is a fascinating case study with brands entrenched for decades now facing imminent destruction. It points out that shopping mall concept is dated as millennials use technology to find the very best price points and that Primark, newly launched in the US is all about very low prices. The linked article cites the decline of share prices in Abercrombie, Gap and Aeropostale vs the rise in H&M and Inditex (Zara) as evidence of the first round of disruption, which started a decade ago.

Business 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.