In 1935, Garfield Weston sought to expand his family’s already successful Canadian baking business by acquiring seven bakeries in the UK. This proved to be just the beginning of a bigger journey, culminating in the global food processing and retailing group known today as Associated British Foods (ABF), operating in 53 countries.

The Weston family continues to be heavily involved in ABF, with the Garfield Weston Foundation the majority shareholder and Garfield Weston’s grandson, George Weston, the CEO. The group has grown organically and through acquisition to become a portfolio of cyclical businesses (sugar and agriculture) combined with more stable industries (food manufacturing, ingredients and clothing retail). We discuss the various divisions, particularly Primark, in reference to the evolution of ABF’s operating profit since 2005, as charted below.

• Sugar: ABF has sugar businesses in Europe (UK and Spain), China and Africa (through its subsidiary, Illovo). Contributions to group operating profit have varied significantly over time, highlighting the cyclical nature of the commodity and the benefit the group enjoyed from the favourable EU sugar reform – phased out in September 2017. Globally, recent performance has been poor due to weak sugar prices as supply exceeded demand. However, current prices have recovered and profits in this division have somewhat normalised.
• Grocery: The most profitable global grocery brands in this division are the leading hot beverage brands, Twinings (tea) and Ovaltine (malt-based beverage). ABF also produces a range of cereals (Jordans and Dorset), crispbreads (Ryvita), bread (Kingsmill) and cooking sauces (Patak and Blue Dragon) in Europe. It has a sizeable edible oils and baking ingredients business in the US and Mexico, and produces a broad range of meat and bread products in Australia.
• Ingredients: ABF is an international leader in yeast and bakery ingredients, which are supplied to bakeries and foodservice companies worldwide. The speciality ingredients produced are value-added products such as enzymes, speciality lipids and yeast extracts (for use in food and non-food applications).
• Agriculture: This division produces a range of animal feed and other specialist co-products, which are supplied to farmers and food manufacturers.
• Retail: Primark has been an enormous success for ABF, growing its operating profit from £100 million in 2005 to over £900 million in 2019.

Primark: more for less
Primark began trading as Penney’s in Ireland in the 1960s and subsequently grew in Ireland and the UK, which now comprise 58% of its 384 stores. This tremendously successful fast-fashion clothing retailer has disrupted the clothing market with its low-cost, high volume business model – much like Aldi and Lidl have done in European food retailing. Primark products can be likened to those of South Africa’s Mr Price, although prices are comparatively lower and the overall shopping experience is on a far larger scale.

A unique business model
Primark has struck a balance between good quality products and very affordable prices, winning the hearts and wallets of consumers. Prices are often as much as 50% cheaper than competitors due to the significant volumes of product that Primark typically sells, which results in bulk sourcing at very competitive prices. Primark is estimated to sell six times the number of items than H&M (a competing large clothing retailer) in the UK¹.

Primark’s supply chain and store base is designed for large volumes and, therefore, most of its stores are huge (averaging 3 700 square meters) – usually three times the size of competitor stores – with around 55 till points available (compared to an H&M store with only five or six).

Despite selling items at a massive discount relative to its two primary listed competitors (Inditex and H&M) and having significantly larger stores, Primark’s sales densities (sales per square meter of floor space) remain consistently superior, as indicated below. With rental and other operating expenses dictated by store size, having high sales densities is vital to boost overall store profitability.

¹_{Based on Morgan Stanley estimates, on a per square foot basis.}

Bucking the online trends
A strategic element in Primark’s business formula is that none of its products are available online, therefore customers must shop in store. A weak online offering has seen many competitors fail as consumers increasingly opt for the convenience of shopping online – a trend further bolstered by the recent COVID-19 mobility restrictions. In the UK alone, online clothing sales have increased from 6% of the market in 2005 to 26% in 2019, and yet, Primark has continued to gain overall market share in the clothing category despite a complete absence of online participation. This demonstrates the strength of the Primark brand, its value offering and the consumer store experience, which results in customers’ healthy appetite to shop Primark’s wide array of products in-store.

Slow and steady wins the race
As shown in the left chart below, Primark has expanded at a steady, measured pace over the years – initially just in Ireland and the UK before entering Spain in 2006. Thereafter, the company gradually entered other Continental European countries, opening its first stores in Germany and the Netherlands in 2009. Since then, the European expansion has continued apace, with most key regions targeted. Recent successful store openings in the vast retail market of the US and the high-growth Eastern European markets, suggest that Primark is at the early stages of its growth journey.

Primark has rolled out an average of 22 stores per year since 2005, underlining a conservative management strategy, despite an evidently successful, proven business model. In contrast, the aggressive store rollouts of its competitors, H&M and Inditex, have averaged 291 and 368 stores per year respectively, resulting in massive global businesses (right chart below). In our view, this highlights Primark’s growth opportunity, with huge potential for expansion given that the current store base is markedly lower than competitors. This is a vastly different proposition to almost all other established clothing retailers that are presently shrinking their physical store bases as footfall traffic declines due to online shopping.

Surviving the pandemic
The COVID-19 pandemic and resultant hard lockdown in early 2020 placed huge strain on the revenues and cash flows of clothing retailers worldwide. While Primark was not spared, it weathered the storm by reducing cash burn to an acceptable level (mainly through furloughing staff and delaying/reducing rent) and trading at strong levels after reopening. In many ways, this has further highlighted the robustness of the business model and customer offering.

The whole attractive package
In our view, the Primark business model is very difficult to replicate due to the massive upfront scale requirements needed to compete on price. For existing retailers to compete with Primark pricing, volumes would need to be increased greatly, to the point where supply chains would not be able to cope.

Primark is undoubtedly the star of the ABF show. However, consistently good growth and returns from the other divisions over the years has resulted in these cash flows being reinvested into Primark, enabling its phenomenal growth. This recipe of sound capital allocation and measured expansion should clear the runway for future growth at ABF – one that is evidently long and bright.