Damaged internet retailers need a new fashion model

The keyboard and shopping cart can be seen in front of the ASOS logo shown in this illustration taken on October 13, 2020. REUTERS / Dado Ruvić / Illustration /

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LONDON, June 16 (Reuters Breakingviews) – Online fashion retailers are demanding a radical change in business models. Shares in ASOS (ASOS.L), Boohoo (BOOH.L) and Zalando (ZALG.DE) have weakened as much as two-thirds this year as inflation is forcing customers to send more clothes. Abolishing free refunds, as has already been done by Inditex (ITX.MC), owner of Zara’s 69 billion euros, is one surefire way to cut costs. This is also the beginning of the end of the business plan “bedroom as a wardrobe”.

Selling cheap t-shirts and shoes to 20-year-olds is a fickle business. Without physical outlets, customers buy more items to get the perfect shape, size and color. Vendors such as the £ 820 million ASOS and the £ 710 million Boohoo absorb the cost of free shipping and free returns. The latter is particularly difficult. In addition to the physical takeover, there is washing, processing and then a potential discount to get the returned item to resell it quickly. With households tightening their financial belts, customers are returning more and more goods. This increases the administrative costs of retailers and reduces sales.

Established retailers have already given up free refunds. Britain’s Next (NXT.L) has introduced a £ 1 charge in 2018 for certain online items sent back. Inditex followed suit in May with a fee of £ 1.95 for all online returns in the UK. The main idea is to make customers more disciplined in their shopping habits. But retailers can also argue that with fewer vans driving around to pick up unwanted clothes they are becoming more sustainable.

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Still, the change is likely to hurt. In good economic times, free return services can increase sales – customers are more likely to keep items and waive refunds if they don’t feel the problem elsewhere. But with the UK, ASOS’s domestic market, hit by the cost of living crisis, is now the opposite. Based on the company’s multiple estimate of 3.3 times, £ 300m less from the market value of ASOS on Thursday implies nearly £ 100m in EBITDA. That’s 40% of this year’s earnings before interest, taxes, depreciation and amortization, according to analysts’ forecasts compiled by Refinitiv. Faced with such a loss situation, the idea that customers are being charged for returning clothes doesn’t seem so silly.

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NEWS CONTEXT

The British fashion retailer ASOS said on June 16 that it would miss this year’s profit forecasts after a significant increase in product returns from its customers, most of whom are in their 20s.

The company, which has also appointed a new president and CEO, said it expects revenue growth of 4% to 7% in the year to the end of August. Adjusted pre-tax profits would be between £ 20m and £ 60m, it added.

Analysts’ estimates compiled by Refinitiv predicted a pre-tax profit of £ 83 million.

Rival Boohoo said on June 16 that its revenue fell 8% from the previous year to 446 million pounds in the three months to May 31. Boohoo said revenue growth is expected for the entire 2022-23. year to be “low single digits”, adjusted EBITDA margins between 4% and 7%.

Shares of Asos and Boohoo fell 26% and 15% by 08:57 GMT on June 16. German Zalando fell 11%.

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Editors Ed Cropley and Pranav Kiran

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The opinions expressed are the opinions of the authors. They do not reflect the views of Reuters News, which, according to the principles of trust, stands for integrity, independence and freedom from bias.

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