Results season is upon us and what a defining week it has turned out to be for fashion retail.
Indeed, it has proved to be a week of extremes with the winners showing you can defy the downturn if you get your business model just right, and the losers demonstrating how easy it is to get it wrong in the current climate.
Trawling through the various financial reports, what stood out for us on Drapers was how pivotal the various retailers’ discounting strategy and resulting margins has been to their overall performance. Very clearly on the winning side was Asos, not only growing international sales a staggering 42%, but also increasing UK sales by 15%, outperforming the market by some way. Chief executive Nick Robertson pointed to an increase in margins as one of the key factors that helped boost profits.
Asos is, of course, unencumbered by the albatross of an expensive bricks-and-mortar estate, with only its relatively cheap out-of-town warehousing and office space to contend with. But Inditex, another winner, has proved you don’t have to be a pure-play etailer to turn a decent profit.
The Spanish owner of Zara, reported a more-than-healthy 32% increase in profits, all the while opening 166 new stores in a number of markets across the world. This truly global player is cherry-picking the right sites in the right cities and the strategy is obviously paying off.
Back in the UK, Debenhams posted modest interim growth, although analysts commented that this was, in part, at the expense of margin, which had been affected by the retailer’s well-known penchant for discounting. Recently, there has been criticism of the ‘almost constant Sale’ in the chain’s stores, which has led some brands to pull out – most notably Radley – for fear that the pricing is damaging their premium image.
Discounting and loss of margin was also highlighted by one of the week’s poorest performers, French Connection, which posted a loss of £6.3m for the first half of 2012 and has warned that the road to recovery could be a long one in this tough UK market.
Add to this the fact that a number of high street retailers are already going into mid-season Sale, with the weather only just changing to start pushing outerwear sales, and it seems we are already entering vicious circle territory.
Discounting really does seem to be the heroin of the retail world. As soon as you start using it to boost footfall and clear stock, you enter a cycle from which it is extremely hard to recover. Margins fall, and the only option is to drive volume through yet more discounting. With shoppers now hooked on finding a bargain and internet price comparison a given, it is a brave retailer that holds firm at full price while all around are slashing theirs.
We are now reaching the stage, though, where that sort of bravery might be the only hope for some retailers.