Analysts have applauded the Associated British Foods management team for their transparency in presenting details of Primark’s supply chain at its first ESG investor day.
Yesterday (1 March) ABF held its first-ever ESG investor day, a virtual event hosted by CEO George Weston, with attendees including CFO John Bason, the director of corporate responsibility, chief people officer, and the company secretary, who formerly ran Primark’s ethical supply chain team.
Primark’s supply chain took centre stage during the event and notably, management went into detail on the price-points of Primark’s goods and how they were able to keep them so low.
“Primark is often (mis)judged to have poor supply chain ethics, due to its GBP4 price point, and has come under scrutiny from investors, consumers and politicians,” points out Aneesha Sherman at Bernstein Research.
“The retailer is often subject to suspicion by both investors and consumers. The retailer has been in the ESG spotlight for potential labour issues for many years and has been subject to several investigations on supplier labour conditions, including multiple interviews by UK Members of Parliament, though all such inquiries have ended with favourable results and a clean bill of health.
“We find Primark’s approach to be best-in-class,” she says. “We have conducted detailed analysis on the economics of the business model and the ability of Primark to make double-digit margins even with an industry-low average selling price. We have also compared Primark versus sector benchmarks, both on the business model and on the investments into supply chain monitoring and tracking. Finally, we have had multiple interviews with current and former executives in the Primark buying and supply chain organisations. Our research suggests that supply chain ethics are a strength, not a liability, for the retailer. We find Primark’s approach to be more diligent and proactive than that of most apparel retailers.”
Clive Black, analyst at Shore Capital, points out Primark has engaged with 80 organisations to work towards compliance on the factory floor of Primark’s supply chain.
“Accordingly, continual audits are undertaken, one thousand per annum, all of which are unannounced; each factory is inspected at least once per year. Audit inspectors are looking for a wide range of issues from machinery and electrical risks, building maintenance (fire exits) to fair pay through payroll checks and worker engagement,” he adds.
He also notes the group’s practice – post the Rana Plaza disaster in Bangladesh in 2013 – of prioritising building structural integrity units apparel supply chain procedures with non-compliance leading to steps to assist with necessary change, and if not, de-listing.
“Primark terminated any procurement from Xinjiang in China some time ago whilst it ceased its trading relations with the Leicester factory base in the UK in 2014, not returning since. Pointedly, Primark also reported irregularities as it saw them to the UK authorities at the time, quite a damning indictment of inept administration, noting the Boohoo crisis of 2020. Primark’s commentary also reflects poorly on the culture and values of Boohoo in our view,” he adds.
A flaw in the system
Where Primark has fallen short though is on communicating its efforts.
Management has been slow to come out with clear messages to investors and consumers, much to the detriment of Primark, says Sherman, as it has allowed “myths and assumptions to dictate perceptions.”
This is particularly true in Germany where Primark has experienced strong consumer backlash on ESG concerns, based mostly on the low price point.
“We have long emphasised that Primark (and ABF overall) is strong on ESG but is not getting credit for the good work the company is doing.”
“In its most recent set of preliminary results, the 24 weeks to 27 February, Primark warned of a first half sales loss of GBP1.1bn (US$1.6bn) as the impact of lockdown restrictions in the UK and Europe takes it toll. The retailer has been hit hard as it does not operate a transactional website.