Emmet Oliver: Fools rush in, so it makes sense for Penneys to bide its time in adopting e-commerce model

For example, we know that, some day, print newspapers will be replaced, probably lock, stock and barrel, by online alternatives, but nobody really knows when.

We know some day we are unlikely to be burning oil and gas for energy. And we know some day, the option of buying goods via the internet will overtake buying them in a physical store, but again, we don’t really know when that tipping point will arrive.

Firms of all shapes and sizes take a gamble on when these tipping points will be reached. They shape their business models and investments around their perception of when a certain activity is done, and when an alternative activity is entering an explosive growth phase. If they get it wrong, the price can be high. First adopters are rarely winners, late arrivals are often rewarded for their patience and caution.

A case of the latter may be witnessed in the global retail sector as Primark (which trades in Ireland as Penneys) continues to set its face against conventional wisdom by refusing to offer a true e-commerce offering. Recent financials suggest so far, it’s Penneys 2, Conventional Wisdom 0.

This strategy call, by a company which still values ​​the “pile ’em high, sell ’em cheap” credo of founder Arthur Ryan, infuriates some customers and no doubt puzzles many retail analysts who for many years have prematurely called the death of physical stores .

Yes the company, which has 37 stores in Ireland, now offers click-and-collect in some UK locations, but it resolutely refuses to fully Amazon-ise itself by offering a delivery option. While this appears to put the company outside the broad consensus about where e-commerce and retailing are going, the decision is founded upon solid business principles.

Primark is a low-margin business, where cost is an existential metric. Therefore, having a large fleet of trucks going back and forth to consumers’ houses (not just delivering, but also taking returns back) makes little sense.

In addition, the company sells a lot of very cheap clothing which simply cannot be delivered at a profit.

But while e-commerce as an option doesn’t suit the Primark/Penneys of today, its critics will argue it is only a matter of time before it folds. Again, this is the nub of the issue. We know e-commerce is growing, but not very quickly.

For example, even by 2028, over 75pc of worldwide retails sales will still be taking place in a physical store, according to the consultancy Forrester, as e-commerce grows but at something of a glacial pace compared with its early pioneering years.

Ireland is one of the best examples of how timing remains uncertain in retailing, and anyone getting ahead of themselves may be burned. For example just 4.9pc of retail sales in Ireland were done online in May, according to the Central Statistics Office.

Yes, this is likely to be a big

underestimate of the Amazon effect, but the trend line is more revealing. Before Covid, this figure sat at just slightly lower (4.5pc as per March 2020).

In other words, despite the supposed iron certainties of the Covid period, e-commerce is somewhat stalled in Ireland. While growing, it is relatively marginal growth.

Certain categories are a favorite for online ordering – for example, white goods and books – but the progress of getting people to order groceries seems a far slower transition. For Primark/Penneys the picture is mixed. The CSO estimates of total clothing/footwear sales is that about 9.3pc of sales derive from online sources.

So what is happening? For many shoppers, ordering online is simply too expensive or too risky. They cannot afford to order the wrong goods. A visit to a bricks-and-mortar store is a vital part of their spending regime, but also a form of insurance policy and not just retail therapy. ​

We can see a similar picture here in the Irish grocery sector. Who is offering pure home-delivery and e-commerce services? Tesco, SuperValu and more recently Dunnes Stores, which purchased Buymie. But it’s not the choice of German discounters Aldi and Lidl.

This has not damaged them too much, if at all. Lidl, which doesn’t even do click and collect, has been the biggest gainer in terms of market share in the Irish grocery market in the last decade, at the expense of those who offer a full e-commerce service.

The lack of population density in Ireland also makes e-commerce a headache for certain brands. In Ireland there are just over 71 people per square kilometers. In the UK the figure is 279. ​

​Primark/Penneys will look at much of this evidence and conclude its current policy of dipping a toe in the water, via limited click and collect, is the correct approach to e-commerce. In time, it may immerse itself more, but at a time of its choosing. However, it’s hard to see fast-fashion shops and discounters really succumbing to online ordering with their current business models, which depend on high volume and low cost.

Penneys/Primark is a great example of not getting too giddy about market hype, trusting your own internal judgment, and remaining business-model flexible.

It is true that rust never sleeps, but how quickly it spreads matters hugely when you are managing shareholders’ money and your own reputation.

Pilot joy, but Aer Lingus is now IAG’s black sheep

The decision by Aer Lingus pilots to accept a 17.75pc pay rise, and bring the bitter dispute at the carrier to a conclusion, has left assorted casualties littering the battlefield. Not all of the bodies are visible. While the pilots will be happy to have inflation-adjusted pay, local management is nursing a grievance. This is because the future of the carrier as part of the IAG group is now clouded.

Aer Lingus has been the ugly duckling within IAG for a long time. It has the highest staff costs as a percentage of revenue of any of four IAG constituent airlines, the lowest profit margin and the lowest passenger load factor. ​

Now these metrics are likely to deteriorate further, with maybe the exception of load factor.

When one factors in the passenger cap at Dublin Airport, the gap between Aer Lingus and the other IAG members, in terms of financial performance and future growth ceiling, is set to widen. This could mean further capacity is not put into Ireland.​

Remedial action to grow profitability is surely on the cards. That can be done by raising revenue, with maybe more efficient jets or by lowering costs.

The levers local management can pull now seem limited. ​

Aer Lingus was due to get some next-generation Airbus XLR aircraft in the coming months, which could add capacity but with a welcome lower cost structure. But already one of these allocations has been canceled, indicating that while currently employed Ialpa pilots haven’t necessarily lost out from last week’s pay deal, pilots yet to be recruited by the carrier arguably have.