Some thoughts on the ASOS profit warning

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.

A number of elements of the story and its impact struck me as interesting and worthy of some further comment (see The Guardian, The Times and the BBC amongst others for a flavour of the coverage).

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?


About Leigh Sparks

I am Professor of Retail Studies at the Institute for Retail Studies, University of Stirling, where I research and teach aspects of retailing and retail supply chains, alongside various colleagues. I am Chair of Scotland's Towns Partnership. I am also a Deputy Principal of the University, with responsibility for Education and Students.
This entry was posted in Asos, Black Friday, Brexit, Christmas, Competition, Consumer Change, Customer Service, Internet, Internet shopping, Online Retailing, Profits, Rates, Retail Change, Retailing, Tax, Uncategorized and tagged , , , , , , , , , , , , , . Bookmark the permalink.

4 Responses to Some thoughts on the ASOS profit warning

  1. Harry Adam says:

    I note and agree with Leigh’s comment on boredom with buying. I wonder if the number of people in short term rentals with limited storage and the need to move frequently has fuelled the move from buying things to buying experiences?

  2. Leigh Sparks says:

    Possibly, though the importance of buying experiences generally has risen and generations are turning away from physical ownership of things.

  3. Interesting blog post as always Leigh and as you mention there are poor performers in all sections of retail, whether online pureplay, or bricks and mortar stores located on the high street or in retail parks or shopping centres. Another huge operational and cost challenge for all fashion online retailers (and which none have yet solved) is of course managing returns. If anything it’s becoming a bigger problem as consumers become wise to ‘the minimum spend for free delivery’ conditions. Along with ‘final mile’ challenges and associated costs, it raises, as you highlight, some fundamental questions around the current online business model for fashion retailers.

  4. Leigh Sparks says:

    Nelson, completely agree with the cost model point. Having to build infrastructure and systems to handle large proportions of returns, yet being unable to charge a price that covers that cost seems like a long-term recipe for disaster. If there are volume gains to be made in this, then ASOS should have found them by now, but the wider environment is making it harder for them to realise these gains (if they are there). A couple of the cited press reports have made this point, probably better than I can.

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