When fashion chain Primark opened its first store in Germany in 2009, commentators predicted it could become the Aldi of the country’s fashion sector. Its cheap, practical styles seemed suited to a nation which likes dressing down in jeans and sweatshirts to go out on a Friday night.
It has not worked out that way. On Tuesday, Associated British Foods took a £206mn impairment against the German operations of its Primark subsidiary. It is considering shrinking its operations after their profitability fell to “an unacceptably low level”.
ABF says it underestimated cultural differences. Its flexibility was reduced by the need to sign off day-to-day store management issues by works councils. Distrustful consumers thought its low prices signalled unethical supply chain policies. Attempts to burnish its credentials with its “Primark Cares” vision of sustainable fashion were too little, too late.
To be sure, the German retail market is not impenetrable. Indeed, the country is H&M’s largest market, accounting for 14 per cent of sales of the Swedish fashion chain. But Primark is not alone in struggling to break in. Walmart booked a $1bn loss when it pulled out in 2006. It had battled with unions and faced resistance from customers to US-style innovations like assigning staff to pack shoppers’ bags at checkouts.
By contrast, hotel group Whitbread insists it will stay the course. The Premier Inn owner has invested £1bn in the German market since 2016, hoping to benefit — as in the UK — from customers shunning independent guesthouses for its budget branded hotels. Whitbread is targeting a long-term return on capital of 10-14 per cent. Sceptical investors are waiting to see if the hotels become profitable in 2024, as Whitbread hopes.
As Europe’s largest market, Germany is a magnet for inbound investment. The UK ranks as its third largest foreign source of new business operations, according to data providers GlobalData/Investment Monitor. But frugal shoppers, cultural differences and strict labour laws make it a tough market to break into. The energy crisis will only add to that.
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