The ASOS news this week was to many something of a surprise, but in reality it really shouldn’t be. A profit warning on Monday wiped almost 40% off its share price and impacted other retailers as well. Many of these were those with internet exposure, including Next as well as specialist internet retailers.
From the High Street to the Internet
A common refrain was surprise that the woes on the high street had now extended to internet retailers. I really don’t see how this should be a surprise – many (and I’ll include myself in this) have been repeating ad nauseum that labelling recent retail trading and performance as only a high street crisis is wrong. As Mike Ashley pointed out last week, retail as a whole is in trouble and the high street is simply an extreme example. Internet retailers have been opening and closing for years; ASOS is simply one that has been able to grow sales almost continuously so far.
From 8% to 4% to 2% to ?
ASOS are a big retailer; they sell lots of stuff, some £2bn plus last year. And the profit warning simply reflected sales growth being cut to 15% this year. But ASOS has been here before a few years ago. Margin had to be halved to build infrastructure. Now margin is being halved to fight the competition. But 2% on £2bn sales is not going to create a sustainable business. This is the business model coming home to roost. They will not be alone in profit problems in the internet space.
Blame Black Friday?
Black Friday began as a day sale to kick start the Christmas period over which retailers made most of their money. Some headline bargains to get people interested and ‘in the mood’. But that was then. Now Black Friday seems like a month long lingering self-sacrifice of margin. ASOS seemed surprised that 20% discounts was not enough to compete and so had to give away even more margin. This desperate race to the bottom has eaten the profitability of many retailers and in some cases the entire Christmas period. Consumers have got wise to retailers and have learnt the lesson that full price is not necessarily the final price.
Consumers have Changed
Ten years of austerity, squeezed incomes, a general boredom with buying stuff, worries about Brexit and altered patterns of behaviour have shaken up the market and forced retailers to think again about what gets consumers’ buying. There are plenty of good retail stories around and it is not all doom and gloom. Those retailers who are succeeding are focused on consumer demands and providing excellent products and services at prices and values consumers want. Those that can’t work this out are suffering. But retailers have to work this out and make a sufficient margin; tough when others are willing to beat you to the bottom for short term gain.
Makes one wonder what ASOS would be like if taxation of online retailers was brought in to “level the playing field” or to get out of the business rates problem?