Penneys business model set to be tested as it prepares to open in Tallaght

The new Penneys shop due to officially open in Tallaght on Thursday will be the discount clothing chain’s first new outlet in Ireland for six years, since it opened in Liffey Valley. Back then, the economy was in the middle of a steep upswing. The new Tallaght outlet could hardly be opening at a more difficult time.

Penneys, which is known as Primark outside of its home country, is facing significant challenges. Months ago, in its first ever public set of Irish accounts signed off by its parent, Associated British Foods, it committed to expanding its Irish footprint by 20 per cent. Yet just weeks later, ABF issued a profit warning for the Primark group. Its business model is about to be tested like never before.

Low-cost model

The inflation crisis is squeezing Primark from all sides. ABF says its energy bill is increasing at 10 times the normal annual rate. That alone would be problematic enough for its low-cost, low-margin model. Yet its raw material costs are also escalating rapidly, while the weak pound and euro are making its purchases from global suppliers in US dollars relatively more expensive.

Meanwhile, the inflation crisis is also chewing up the disposable income of its budget-conscious clientele. The company does not do online sales, so its ability to cut back costs while still reaching its younger customer base are limited. It must open expensive new shops if it wants to grow.

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The Tallaght shop, in the Square shopping centre in the west Dublin suburb, seems perfect for the brand. The area has a huge – and young –population. Penneys has been trying to open in Tallaght for almost 20 years.

Primark’s annual accounts suggest that its 36 existing Irish shops were pulling in an average of up to €16 million each in sales before the pandemic. If Tallaght had been open back then, it would probably have been one of the group’s best performers, well above average. Maybe it still will be. But it may not hit the high notes that its Liffey Valley opening did in 2016.