Plenty of companies around the world have bemoaned inflationary pressures thanks to the rising cost of labour, raw materials and energy. The latter is now taking an even bigger bite out of company profits and causing further pain.
Primark owner Associated British Foods is the latest to warn on profits because of higher energy bills, as well as unfavourable foreign exchange rates. It will be hoping that Liz Truss can pull a rabbit out of the hat when she unveils her plan to deal with the energy crisis, praying that help is given to businesses as well as consumers.
“Primark has a lot of lights to keep on as it is one of the few retailers to still prioritise physical shopping outlets, rather than online. Pressure on energy costs means its margins will be squeezed, which is not a good situation for a low-ticket seller,” said AJ Bell’s Russ Mould.
“Making matters worse is declining disposable income for consumers. Primark might benefit from people trading down from more expensive retailers. However, a good chunk of its core audience sits in the lower-income category and these individuals are really feeling the pinch.
“Primark’s business has thrived over the years as many customers who visited its shops intending to buy one item ended up walking away with a bundle of clothes, having been tempted by the low prices. Now we face a situation where many of its customers will have to think hard about every shopping decision, and the historical ‘load up the basket’ mentality may no longer apply.
“Ultimately Primark works as a volume business – prices are cheap, but it needs to sell a lot of items to earn big money. The risk now is that the average basket size falls and costs keep going up. The fact it buys most of its clothing stock in dollars adds to its problems, given that sterling is under considerable pressure.”