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Comment: What does Asos's fall from grace tell us?

In the wake of Asos’s second profit warning in seven months, Stephen Springham, head of retail research at property consultancy Knight Frank argues that ecommerce is not a golden ticket to success. 

stephen springham cropped

Stephen Springham, head of retail research at property consultancy Knight Frank

Consumers shop brands, not channels. Brand equity in retail is everything. 

These two retailing truisms are all too often subordinate to narrative around the growth of online. Sure, the statistics on the latter are staggering. Online fashion spending totalled £19bn last year and online accounted for 26.8% of consumer spend on clothing, market research company Mintel has reported. 

In the past two years, online pureplays have increased market share by 130 basis points, and are now responsible for 12.3% of overall consumer fashion spend. Over the same period, multichannel clothing specialists and department stores saw their respective market shares decline by 190 basis points (to 52.6%) and 80 basis points (to 11.7%). 

The clear, if somewhat facile, conclusion to draw from this is that physical stores are losing out to pureplays. Not only are the latter gaining market share, more importantly, they are also setting the competitive agenda. 

If people aren’t buying clothes, they aren’t buying them through any channel

But lately, this narrative has been subject to challenge with online fashion sales slowing to their lowest rate in record – just 0.6% in the 12 weeks to 2 June, Kantar reports. This is compared with 8% in the corresponding period last year. Is this the beginning of the end for online fashion? Absolutely not, but it’s a definite sign of a rapidly maturing market and the prospect of more challenging growth going forward.

Change in fortunes

Then comes the apparent change in fortunes at Asos, one of the leading lights in the online fashion market. A shock pre-Christmas profit warning prompted a dramatic 38% fall in its share price, before the business revealed an 87% slump in interim pre-tax profits to just £4m in the 6 months to 28 February. A number of staff at its London headquarters and its customer care facility in Watford have reportedly since been put on consultation, ahead of this morning’s second profit warning that pre-tax profit is likely to be between £30m and £35m, rather than the expected £35m. 

The immediate reaction of more naive analysts to the initial profit warning was “if Asos is doing badly, their store-based peers must be doing far worse”. This naivety was predicated on the assumption that being an online pureplay in some way incubated Asos from wider industry pressures. It didn’t. As we now know, last November was a miserable month for fashion sales across the board. If people aren’t buying clothes, they aren’t buying them through any channel.

Online pureplays are as susceptible to industry trends and competitive threats as their store-based counterparts

Online pureplays are as susceptible to industry trends and competitive threats as their store-based counterparts. If consumer demand is soft (as it has been, with clothing sales rising just 1.6% in value in 2018) and competition fierce (as it most definitely is, fashion being the most oversupplied of all retail subsectors) something has to give. Being an online pureplay is little by way of defence.

Survival strategies

Fashion retailing is very much the survival of the fittest – and the fittest players are the ones with the highest brand equity.

Brand equity is one of the vestiges of customer loyalty, whereby shoppers trust the retailer to deliver on most, if not all of their expectations: product, price, value, service and experience.

The problem is that many retailers have undermined their own brand equity over the years with their compulsion to offer constant promotions and discounts. If they don’t cut prices and shout about it, consumers will have no reason to shop there. Black Friday is perhaps the worst manifestation of this and it is no coincidence that retailers who opt not to partake or are passive towards it tend to have the highest brand equity.

Asos’s and Superdry’s past brand equity has tarnished slightly, rather than evaporated completely

Boohoo and Asos’s online pureplay cohort definitely still falls into the “strong brand equity” camp. The reason for Boohoo’s enduring success? Excellent brand(s), customer-centric product and astute leadership, underpinned by strong executional disciplines (notably marketing). The fact that it is an online pureplay and has no physical stores is largely irrelevant. If it were found wanting on any of the core facets, being an online pureplay would afford it precious little resistance. Consumers shop brands, not channels. And Boohoo’s strength lies in its brand, not in its channel of operation. After all, Primark falls into the same camp, with next-to-no multichannel capability.

Asos’s apparent fall from grace is relative, rather than terminal. It has not gone from being one of the best retailers in the country to one of the worst virtually overnight. But it does find itself stuck between the rock of inflated City expectations (and fickle over-reactions) and the hard place of a mercilessly competitive fashion market, and patchy consumer demand (at best). Although probably of little comfort, Superdry is in essentially the same position.

Asos’s and Superdry’s past brand equity has tarnished slightly, rather than evaporated completely. It is restorable over time, but the road to redemption lies less in cutting costs and much more in re-connecting with those that matter most: customers. And customers value nothing more than brand equity.

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