It was the best of times, it was the worst of times. If you’d been asked to compare the fortunes of Primark and Dixons Carphone a few months ago, it would have been clear which part of Dickens’ famous opening line applied to which business.
Dixons Carphone - which owns Currys, PC World and Carphone Warehouse - was reeling from a second profit warning in two years. Profits for the year ending April 2019 were down by 22 per cent (from £382m to £298m), largely due to declining mobile phone sales.
Contrast that to Primark.
The Associated British Foods owned budget clothes retailer has been hailed over recent years as one of the high street’s outstanding success stories. It had thrust off the dogma that a modern brand needed to invest in e-commerce - it only sells gift cards online - and been the exemplar of a retailer excelling through offering value and creating consumer experiences.
ABF’s retail division (which only includes Primark) posted revenues of £7.9bn, with operating profits of £913m for the year ending September 2019.
But the coronavirus pandemic has changed their relative fortunes.
With its entire network of stores closed and with no established e-commerce offering, Primark’s first quarter sales were down from £650m a month, to zero. The firm has furloughed 68,000 of its global staff, written off £284m in unneeded stock and rented a third more warehouse space in order to hold nearly £1.5bn more.
By contrast, in the five-weeks to April 25, Dixons Carphone has seen online sales surge by 166 per cent. This has helped to recover two thirds of lost store sales, according to the group’s recent trading update.
The FTSE 250 business is in the middle of a five-year turnaround strategy under CEO Alex Baldock, focusing explicitly on scaling back its bricks-and-mortar footprint while increasing emphasis on digital sales. The brand has expanded its online product range, attempted to improve its digital customer service and in March announced that it will close all 531 of its standalone Carphone Warehouse stores.
Clearly these aren’t normal times - the coronavirus pandemic has suppressed demand (and supply) for both markets, albeit perhaps to differing extents. McKinsey estimates that global revenues for the fashion industry will contract by as much as 30 per cent this year while consumers are confined to their homes. Shipments of smartphones meanwhile fell over 10 percent, and notebook computers over 20 per cent, just in Q1 this year, according to Trendforce.
But the lessons for businesses is clear.
What was successful once is not guaranteed to last, and you know what they say about putting all your eggs in one basket. Primark, along with the likes of Aldi and Lidl in groceries, has succeeded by doing one thing brilliantly. A black swan event, that no one could have predicted, has meant that for the time being at least, that model no longer works.
Hindsight is a wonderful thing, and looking back you can’t blame Primark executives for the approach that they’ve taken, which had been working so well. The black swan event could easily have been a massive cyberattack rather than a pandemic, undermining Dixons Carphone’s ecommerce business and leaving Primark untouched instead.
But it illustrates the very dangers that can come with resting too hard on your laurels.
Over the long term, Primark still remains the stronger business in its fundamentals. ABF CEO George Weston says that the chain has enough cash in the bank to stay afloat even if all stores were closed until May 2021 - that is a direct result of the strength of its previous performance.
But one imagines it’s likely that executives will be thinking long and hard during that time about the merits of diversification.
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