Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

In a highly competitive marketplace in which all UK retailers are fighting to sustain their sales against a slowdown in consumer spending, Primark is doing remarkably well. What is the secret of its current success?

Primark is a major UK retail group employing more than 11,800 people. It operates 122 stores in the UK and Ireland, where it trades under the name of Penneys. Approximately one-third of its stores are currently in Ireland and two-thirds in the UK.

The UK high streets and malls are packed with no-frills fashion retailers. That means that Primark has plenty of competitors all aiming at the same type of customers. It is not easy to sell cheap fashion. Well-established rivals such as Matalan and Bhs are struggling, while results at Primark are booming.

The market segment targeted by Primark is the fashion conscious under-35s with the slogan "Look good pay less". It offers fashionable clothes at very competitive prices (for example, jeans for £4) and reasonable quality: in other words, a value for money strategy. In competitive strategy terms, Primark is a pursuing a classic 'focus cost leadership' strategy.

The American management professor Michael Porter of Harvard University developed a well-known approach to the competitive strategy of firms. He argued that companies could achieve a higher rate of profit (or at least potential profit) in one of two ways: they could either provide a product or service that is identical to that provided by rival companies, but at a lower cost than rival firms, or they could provide a product or service that is differentiated from that of rival firms such that customers would be prepared to pay more for their product than for a rival firm's product.

The first approach would mean that the firm has a cost advantage over rival firms, allowing it to pursue a 'Cost Leadership' strategy; the second approach would mean that they had a differentiation advantage, allowing it to pursue a 'Differentiation' strategy. Firms selling a 'no-frills' product are usually attempting a cost leadership strategy, such as Easyjet (UK) or SouthWest (USA) airlines. The 'focus' part of Primark's strategy is the specific customer segment it focuses on i.e. that of the under-35s. It is not attempting to sell to everybody. It has selected a particular customer segment, just as the '18-30' holiday company has selected a clear market segment based on age group within the leisure industry.

In the last three years Primark has got a lot of things right. Some of its strongest successful competitors are TK Maxx and George at Asda. However, although all three are in the 'value' segment and therefore have similar market positioning, the other two have different strategies to that of Primark. TK Maxx sells heavily-discounted prestige brands and George at Asda has created its own private-label brand mostly at out-of town stores. Primark is a high street retailer which has a family of brands and focuses much more on buying, logistics and supply chain management rather than branding.

In its pursuit of ever-lower costs, teams of buyers in UK and Ireland travel internationally both to identify fashion trends and to seek out the most competitive suppliers. The company uses computerised customs clearance (speed to market) and dedicated warehousing and distribution facilities, such as the giant warehouse owned and run by the logistics company TNT but dedicated solely to Primark stock distribution. This one warehouse is centrally located for the whole UK market, near a junction of the M1 motorway and it houses 50% of Primark's UK stock, receiving 30 lorry loads each day. (This warehouse was destroyed by fire in November 2005). Computerised warehousing and distribution systems are linked to computerised daily sales and stock information (rapid restocking of fast-selling items) by size and colour for each item in every store to optimise turnover.

What lessons can we learn from Primark's success?

1. They understand their customers' requirements very well, providing them with high fashion items at very low prices.


2. They have a very clear market positioning at the cheap end of the market. That helps them avoid some of the 'stuck-in the-middle' positioning problems faced by other competitors such as Marks & Spencer or BhS.


3. They manage their costs very tightly, mainly by sourcing overseas in developing economies. This is obviously critical for businesses pursuing a low-cost strategy.


4. They have so far been very clever in their choices of which catwalk fashion items to copy for the mass market.


5. Their time-to-market has been very fast, both in terms of copying designs rapidly after they come out & in terms of getting the new stock into their stores while items are still 'hot'.

So how sustainable is Primarks' 'no-frills' strategy over the longer-term? A cost leadership strategy is a perfectly sustainable strategy but it does require very tight management. To continue to be a market leader with this strategy the company must in practice not just be low cost but lowest cost in their market segment. What tends to go wrong is management allowing overall efficiency levels to drift slightly. In particular, managers must recognise that a low cost strategy is not a cheap strategy for a company to pursue. It demands continuously high levels of investment in the latest technology - for example, for warehousing & distribution or point-of sale. As the singer Dolly Parton once famously said: "It takes a lot of money to look this cheap."

Further reading 

• The importance of brands – the value of brands explained by this extract based on Open University Business School course material
• Competitive advantage – in business, the race is always to the swift, but how can companies keep ahead?
• Contemporary Strategy Analysis 4th edition (Chapters 7, 8 & 9) by R. M Grant, published by Blackwell

About the author

Susan Segal-Horn is Professor of International Strategy at the OU Business School. Susan's research focuses on international service industries and service multinationals, and she has published a number of books.

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

"Dotcom shares still spook investors…" announces a news item in March 2005. However, just three months later, the online poker firm, PartyGaming, was floated on the London Stock Exchange for over £4 billion, valuing the eight year old company at more than British Airways. It would seem there are some that are still willing to believe the internet can offer big winnings.

A safer bet?

So will on-line poker prove to be a better investment than other dot.com ventures?

Sites such as Party Poker can be considered as a type of online marketplace. This is a virtual location where buyers or users can come together to find what they are looking for – in this case, a chance to play poker. In their research on business models for electronic marketplaces, Dai and Kaufman identify three basic functions of traditional markets that online markets would seek to replicate; aggregation, matching and facilitation.

Aggregation is the provision of a wide range of goods and services that enables a buyer or user to be sure they will find exactly what they are looking for. As an example of aggregation, there's the vast product ranges offered by online retailers. Matching is the ability to balance supply and demand and is illustrated online by auctions. Finally, facilitation refers to making the process of buying goods or using the service as easy as possible.

So how do the online poker services address each of these functions?

"It's less intimidating for beginners than walking into a casino"

With 1.8 million estimated to play online poker each day, these services can certainly claim to aggregate players looking for a game. PartyPoker alone has an average of 120,000 players per day. With this large number of users, matching supply and demand becomes easier, as observed by one industry expert "you can always find the game you want, at the limit you want, at any time of day". Finally, it has been observed that the online game is less intimidating for beginners than walking into a casino, facilitating the uptake of the game by many new players and allowing them to play at any time of day – or night.

Clicks or cards

Poker also illustrates another emerging lesson from the online world – the importance of a multi-channel approach. While some businesses have thrived with an online only version, most are finding that a mixture of different communication and distribution channels are important. In the case of poker, the growth in the online game is both fuelling, and riding on the back of, a boom in the game in the 'real' world. Much of this is led by the rise of the game on television. The online poker boom has also led to a resurgence of poker at traditional casinos – and at a time when casinos in the UK are benefiting from the recent abolition of the 24 hours registration period and there is a huge expansion planned in the number of casinos in the UK.

The risks

Whilst the foregoing might all suggest that online poker, and the companies that provide such services, will continue to prosper, there are a number of concerns.

An important risk is associated with perceptions of gambling’s potential for social harm (see for example Gamblers Anonymous or GamCare). For this reason gambling is subject to strict legislation in many countries. In the USA, a major market, the federal government take the view that online gambling is illegal, although this has yet to be tested in court. Given that users in the US currently account for 70% of online gamblers and around 90% of the revenues and profits for some organisations, the loss of their customers would wipe out many of the online providers.

"Their customers, by definition, are not risk-averse"

Another risk comes from the very success of these online offerings – and all the attention they are receiving. Descriptions such as "this spews out cash like you have never seen" – are likely to attract other providers into the market. Strategic theory teaches us if a market has low barriers to entry, customers have low switching costs and it is difficult to differentiate your offering, then competition in the industry will increase, eroding margins. In the case of online gambling, entry to the market can be bought for the price of gaming software and the cost of promoting the service. Whilst excellent execution will always differentiate a good organisation from a poor performer, the only clear differentiation in this market appears to be in the aggregation of players. However, whilst encouraging familiarity and building a brand name can help aggregation, by their very nature, these customers are not risk averse and are likely to be happy to move elsewhere if the thrills and stakes are more attractive to them.

It would appear that investors have recognised such risks in the online poker providers. In September 2005, despite announcing strong growth, over £2 billion was wiped off the value of PartyGaming, representing approximately 30% of the value of the company. Concerns included a slow down in the growth of users, the increased costs associated with attracting new users and the lower stakes and less time spent playing by new users.

Perhaps the most interesting question arising from the online poker phenomenon isn't 'Is this a chance for investors or organisations to make easy money?', but 'Why do we still think that online businesses are immune to the rules that apply to traditional businesses?' It would appear that the answer may be the same as that driving the users of gambling sites – a belief that this time it really will be different!

Further reading

• The online gamble – what rules apply for a business when it moves online?
• 'On-line Retailing: Learning from Experience' by H White and EM Daniel, in Journal of Marketing Intelligence and Planning (Vol 22, No 1, p.10-23)
• 'Business Models for Internet-Based B2B Electronic Models' by Q Dai and RJ Kauffman in International Journal of Electronic Commerce (Vol 6, No. 4, p.41-72)

About the author

Elizabeth Daniel is Professor of Information Management at the Open University Business School where she undertakes research and teaching in the fields of e-business and information systems. Elizabeth also undertakes consultancy work for a number of blue chip and leading public sector organisations.