Primark’s owner is expecting to take a combined hit from inflation of £2bn this year and next as it warned a weak consumer backdrop would also pose a challenge in the coming months.
Associated British Foods said it had “encountered the most challenging economic conditions for many years with sharply rising and broadly based inflation”, with prices at Primark up by about 8% for autumn .
The group said inflation had added about £1bn to costs this year and it expected a similar number in the year ahead.
Despite inflationary pressures, ABF said no further price rises were planned for the coming months at Primark, at a time when households are facing soaring food and energy bills and shrinking disposable incomes. It said there had been no price increases on about half the items it sold including children’s clothing.
George Weston, the ABF chief executive, said: “Looking ahead, substantial and volatile input cost inflation will be the most significant challenge in the new financial year, and our businesses will continue to seek to recover these higher costs in the most appropriate way. Primark has faced significant input cost inflation and sharply moving currency exchange rates.
“We have decided to hold prices for the new financial year at the levels already implemented and planned and to stand by our customers, rather than set pricing against these highly volatile input costs and exchange rates,” the company said.
Prices on food at the group’s brands, which include Twinings tea and Kingsmill bread, will also continue to rise as costs for suppliers, many of which had been offset by long-term agreements this year, continue to feed through despite the price of key inputs including cotton, wheat and sea freight falling back.
The latest monthly spending survey by Barclaycard, which accounts for about 50% of all debit and credit card transactions, found that half of consumers were planning to cut back on presents, food and drink, and socialising this Christmas.
ABF revenues climbed 22% to £17bn in the year to 17 September, while pretax profit rose 48% to £1.07bn.
Primark recorded total sales of £7.7bn, 43% better than last year, as UK like-for-like sale and market shares caught up with pre-pandemic levels. Sales in continental Europe, where the total apparel market is still well below pre-Covid levels, were weaker. Trade was affected by the long heatwave and sales have improved in many markets as the weather got colder. Primark has launched a new UK website and will be testing out click-and-collect in 25 UK stores in the coming weeks.
John Bason, the ABF finance director, said Primark’s share of the UK clothing market was back to pre-pandemic levels despite shoppers putting fewer items in their baskets.
“Everywhere you look people are carefully managing their budgets,” he said.
He said the number of shoppers visiting Primark stores was up, reflecting similar success for budget operators in the food market.
The group plans to open 10 more stores in the US in the year to September, on top of the 13 stores operating there. It said it would close two stores in Germany and “optimise” – likely to mean reduce the size of – further stores after taking a £206m writedown on the business there as sales have not returned to pre-pandemic levels.
Richard Lim, the chief executive of Retail Economics, said: “The retailer is well-positioned to benefit from consumers who are trading down and putting lower costs at the heart of their buying decisions.
“However, there’s a perfect storm of cost pressures facing the retailer from spiralling input and operating costs and the impact of a weaker pound and rising interest rates … It’s inevitable that margins will be hit, but they are likely to weather the storm better than most with a value-driven proposition and diversified business as the economy enters recession.”
Shares in ABF were up 3.5% on Tuesday, making it one of the top risers on the FTSE 100.
