Profits have fallen at Asos. How can the etailer overcome its challenges to ensure sustainable growth?
The once-meteoric profit growth at Asos has slowed as increased costs and warehousing snags have led to it asking suppliers for discounts. Meanwhile, it emerged today that it will be making up to 100 head office redundancies. But even with the setbacks, 2018/19 has been described as “pivotal” by Asos: revenue grew by 13% to £2.7bn for the year to 31 August. The question is whether it can overcome its stumbling blocks and transition from being a dominant UK etailer to a serious player on the global market.
At first glance, Asos’s figures would be the envy of other retailers struggling in the current difficult trading conditions. But the headline results have taken a nosedive in the past 12 months: profits fell by 68% to £33.1m for the year to 31 August, and net debt at the end of the period was £90.5m, reflecting “elevated capex investment in support of the global logistics platform”.
We were overambitious in tackling two international warehouses at the same time
Nick Beighton, Asos
The business had net cash of £42.7m in 2017/18. Investments during the year included the launch and expansion of two new warehouses in the US and Germany and greater investment in sustainability, customer acquisition and customer retention.
Source: Benjamin McMahon
Asos chief executive Nick Beighton described the company’s falling profits as troubling: “Last year [2018/19] was painful and disruptive. With hindsight, we were overambitious in tackling two international warehouses at the same time, and our internal capabilities and bandwidth hadn’t kept pace with the changing scale of our business.”
Despite the profit dive, shareholders and analysts were pleasantly surprised by the latest results, as they had been expecting worse from the etailer following two profit warnings earlier in the year.
GlobalData lead retail analyst Sofie Willmott said: “In the context of the UK market, Asos remains an overachiever. Its UK retail sales reached £993.4m and its growth far outpaces that of the overall UK clothing and footwear market and online spend on the sector, forecast to be 0.5% and 7.3% in 2019 respectively.
“Despite this, it has plenty still to do at home. Last year’s Black Friday mistakes need to be rectified to deliver a solid first quarter and bank much-needed profit over the peak trading period.”
Asos called Black Friday 2018 “disappointing” but said it was “much better set up” for the discounting period this year.
Asos made extensive investments in overseas operations in 2018/19: it opened two new warehouses – in Germany and Atlanta in the US – to fuel international growth. During the period UK sales grew by 15%, those in the European Union were up by 12% and sales in the US increased by 9%.
To be able to move to the next level, it needed to make structural investments
Daniel Bobroff, Coded Futures
Daniel Bobroff, founder of fashion technology agency Coded Futures, said Asos has to be given credit for being bold enough to grow on the international stage: “The UK has always been a forward-thinking retail market place and I see Asos in that mould. To see it investing in its technology and imagining the future of fashion retail in the next five to 10 years, and not resting on its laurels, is not something to slam it for: it’s something to be proud of and support.
“Asos still has solid and growing numbers and, to a large degree, it was inevitable. To be able to move to the next level, it needed to make structural investments, which are expensive, take a lot of time and are not linear [in delivering results].
One young fashion Asos supplier agreed: “When you’re going global, there’s always going to be hiccups and teething problems. It is definitely experiencing a few of those. Now Asos is trying to adapt and twist and change to overcome those problems as quickly as it can, but in a challenging market.”
Growing rapidly in a short timeframe has also caused problems for Asos, one high street supplier noted: “It seems that the US business got out of control, the warehousing got out of control. You often lose control when you try to expand too fast in any business. [Asos] is a classic case of a young company having problems from growth without precautions in place.
“It’s not in trouble as a business, but shareholders may not be happy. Does it have the right people in place to handle this type of growth? That is the question which should be asked. It is going to need to strengthen the board and management team.”
Asos has gone some way to rectify these concerns with the appointment of four new non-executive directors, including Luke Jensen, chief executive of Ocado Solutions. It has also announced plans to hire a chief growth officer, chief strategy officer next year.
One analyst noted: “Key board appointments strengthen the top team to build more robust management structures and reduce reliance on any one person. There are cost savings and more effective marketing strategies.”
The impact of lower growth has also led to a strain on Asos’s supplier relationship. As exclusively revealed by Drapers in August, the etailer asked for a 3% discount to be applied to all orders from September to “fuel joint growth” for suppliers and the business. In a letter Asos said: “Our future growth aspirations not only benefit us but also benefit you, our valued partner.”
The young fashion supplier told Drapers the discounts did have an impact on the trading relationship: “As a supplier and a brand, the discount is a bitter pill to swallow. When this came about, we envisaged that this was because the next round of figures was not going to be great. So that 3% goes somewhat into filling in a bit of a hole for them. [The discount] is now their terms and it’s done. It’s not changing.”
Asos was the go-to place for the 24-year-old, but now there are so many players on the market
With regards to supplier relations and “extra trade discount”, Beighton declined to comment, but said he takes suppliers “very seriously” as they’re “key partners to enable growth.”
Another challenge facing the business is its mix of brands, and one supply source said its reliance on high street players, which have lower margins for Asos, has hit its performance: “[Asos] is chasing a bigger share of the market and profits, but a third of its business is high street [brands], and you don’t make the same margins by selling the New Look or River Island merchandise. That’s had an impact.”
He added that increased competition from rival etailers, including Boohoo and PrettyLittleThing, has taken some of its market share: “[Asos was] the go-to place for the 24-year-old, but now there’s so many players on the market with great ads, and marketing, they are eating up Asos’s market share. Asos has lost out from that.”
Bobroff said the growing awareness of fast fashion’s impact on the environment is also something Asos needs to monitor closely.
“We all feel that Asos is a structural winner in the twenty-something fast fashion market right now. Whether fast fashion will come under pressure in the coming years because of its environmental impact and force Asos to redefine its mission remains to be seen.
“I’d like to see it end up as an exciting fashion tech leader – which is what it’s always been.”
The Drapers Verdict
Although Asos’s figures have taken a hit, the investment in expansion – albeit with hitches – should now begin to pay off. Unlike many debt-driven, growth-orientated etailers, Asos is still in profit, which should give it more flexibility in the coming years to weather any domestic retail storms.
Shrewd management and a focus on innovation could pay off, the next twelve months will tell whether Asos’s 2019 performance was just a bump in the road or a sign of things to come.