Annual Report - EuroPacific Growth Fund - American Funds

Analyst focusPrimark reshapingEuropean retailLara PelliniInvestment analystNo industry has been impacted more by disruptive companiesthan retail. While much of this disruption has come from theincrease in e-commerce and mobile payments, one brick-andmortarretailer is still shaking up the industry: Primark, a divisionof Associated British Foods that’s quickly become one of themost popular clothing stores in Europe.London-based analyst Lara Pellini, who’s been with CapitalGroup for 12 years, recently spent the day visiting localmanagement at Primark’s first store in Berlin. It has 11 stores inGermany, with a second opening in Berlin this summer. If the firstis any indication, the next one should do just fine. “Customers arewilling to drive three or four hours to come to the store and evenfarther during holidays, when they come from Poland,” says Lara,noting that the Berlin store achieved record sales of €600,000on its first day. “Pent-up demand has been huge. Primark has thepotential to triple its store count, mostly in mainland Europe.”When you think aboutinvesting in mobilepayments, it basicallycomes down to a companythat can enable security,regardless of which systemis being used.Johnny ChanInvestment analystPrimark has been successful at a time when e-commerce isdisrupting the retail industry because it is one of the only brickand-mortarstores whose profit margins are tight enough toremain competitive. “The clothing market is highly fragmentedand retailers generally command higher margins than othercategories, such as grocery stores and home improvementretailers,” says Lara. “Primark runs a disruptive business modelbased on low margins and overhead coupled with high salesdensities. This is why others can’t match its low prices.”Lara is a firm believer in firsthand observation when it comes toevaluating companies she covers, especially when they’re takinga different approach like Primark. “I visit stores and observecustomers’ reactions to better understand what makes it sounique, and in some cases disruptive,” says Lara. “It didn’t takeme long to realize that Primark’s business model of selling themost fashionable items at the lowest prices would be difficultto replicate.” She also had to consider the implications for someincumbent retailers, who were not able to sell items at full pricebecause customers perceived them as being too expensive.EuroPacific Growth Fund 9