The two largest British fashion retailers online warned this month that they are hurt by rising yields as consumers tighten their belts as they fight inflation and continue to shop in physical stores.
Former users of the closure of “irrelevant” retail during the pandemic, Asos issued a profit warning, while the Boohoo Group recorded the first drop in sales in the UK in its history. Both have struggled as consumers return to ordinary shopping (rates have risen 4.1% in all UK retail destinations in the week beginning June 12), and problems in the global supply chain have persisted since the pandemic.
Fast fashion retailers are also affected by intense competition from rivals such as Chinese retailer Shein in the value market while shoppers are cutting spending amid the cost of living crisis.
In an unplanned June 16 update, Asos reported that the group’s total revenue had risen 4% year-on-year to £ 983.4 million in the three months to May 31. However, it cut its year-round revenue growth targets from 10% -15% in January to 4% -7%, citing market volatility and increased yields.
The projected adjusted pre-tax profit for this year has more than halved from £ 110m- £ 140m to £ 20m- £ 60m.
Asos said net sales were affected by a significant increase in rates of return in the UK and Europe towards the end of the period, reflecting inflationary pressures on consumers, which had a disproportionate impact on profitability.
“We know that the sharp rise in the rate of return during the period occurred at the same time as consumers began to feel the tingling,” said newly appointed Asos CEO José Antonio Ramos Calamonte.
“We started seeing people looking at money in their pockets and thinking their fuel bills had gone up. They spend more on food, so they decided to keep one item less, ”said Mat Dunn, chief operating officer at Asos. “Our strong feeling is that it is timed with the cost of living. It is difficult to conclude that this is something other than that. It will start to normalize, but who knows for how long. “
Asos said higher revenues in the UK have offset the strong performance of casual wear amid rising demand caused by holidays, weddings and events.
It brings back the headache
Higher yields also hit the Boohoo Group’s performance: revenue fell 8% year-on-year to £ 445.7 million in the three months to May 31, 2022, as it is still affected by pandemic and inflation factors that negatively impact costs within its supply chain and international proposal. Sales in the UK fell 1% to £ 272 million in the quarter, but improved month-on-month and returned to net growth in May. The group, made up of Boohoo, Boohoo Man, Debenhams, PrettyLittleThing, Nasty Gal, MissPap, Karen Millen, Coast, Burton, Dorothy Perkins, Warehouse and Wallis, blamed the fall on a tough comparison from last year, when people spent more online during locks and returning fewer items. The group has already halved its sales projections last year.
As for the outlook, there were no changes in the guidelines for the full year until February 28, 2023: Boohoo Group continues to forecast “low single-digit” sales growth and adjusted EBITDA margins between 4% and 7% – although well below its historical margin of 10%.
In contrast, multi-channel fashion retailers are thriving. This month, Swedish clothing retailer H&M Group, which owns the H&M and Monki fast fashion brands, as well as Other Stories, Arket and Weekday clothing brands, said net sales rose 17% year-on-year to SEK 54.5 billion (4 , £ 47 billion) in the three months to 31 May. Spanish conglomerate Inditex, owned by Zara, Massimo Dutti, Pull & Bear, Stradivarius and Bershka, saw revenue growth of 36% to 6.74 billion euros (5.7 billion pounds) in the three months to April 30, compared to the same period 2021..
So why is only online fashion losing its luster, and the return is entirely to blame for that?
Industry observers believe this is a combination of comparable trade figures from last year, when shoppers were still mostly shopping online over the pandemic and people were returning to shops to buy, as well as high rates of return as consumers curbed consumption to fought against the cost of a life crisis.
“The slowdown has been recorded in the online fashion segment,” says Emily Salter, senior clothing analyst at GlobalData. “This big change is the result of overlapping extremely difficult comparisons and simply the inability to consistently generate double-digit growth.
“Misguided’s recent fall into the administration also shows the difficulties facing the online fashion segment – although probably one of the drivers of its decline was [initial] the success of Boohoo and PrettyLittleThing – with returns being a significant issue, which will continue to strain the group’s profitability unless it follows Zara and introduces a fee for some return methods. ”
Inditex’s Zara sparked a reaction on social media in May after it announced it would start charging online refunds to customers in the UK, as part of a broader commitment to sustainability to encourage more customers to return through their stores.
Asos does not charge a refund, and on June 16, he confirmed that he does not plan to do so. The return of the Boohoo Group to the UK is also free.
Clare Bailey, an independent retail expert and founder of The Retail Champion, says: “Obviously, we’ve seen people go back to traditional shopping, but we’ve also seen people who are more concerned about where they spend their money. If people spend, be a little more careful where they shop and maybe ask for discounts, then that will put pressure on those retailers who are a little more ‘irrelevant’.
“They may still order a lot, but then they are a little more picky when they try [items] at home and return perhaps more than they would have done in the past.
“Of course, the refund costs money – big operating costs.”
One former high street retail executive agrees that returns are the biggest impact factor: “Most pureplays have not made a profit, and high incomes are bad – so the cost of returns is a major problem.”
The return to physical shopping also affects clean games, she adds: “Funny, stores may have become‘ new ’now after so long a time of closure. In addition, many now have experience and perhaps shopping has become a social activity as it once was. ”
The executive director of a fast fashion brand for women’s clothing says that the reduction in sales is putting pressure on fast fashion margins and the business model itself: “They are increasingly rushing towards the bottom of prices, and that is not sustainable for many reasons. Asos and Boohoo chasing a 20-pound dress will end in tears.
“Customers are now increasingly restrained and treated, and are aware of the impact on the environment. I am selling a garment with that “delicacy” [more expensive] the price will not only create a healthier business but will increase the number of returning customers. They have to cultivate loyalty. ”
However, in a media call, Asosov’s Calamonte said that the trader is not chasing prices: “As for prices, we compare prices with competitors almost every day. We are not obsessed with being the cheapest proposition. We don’t want to compete with the cheapest. “
Observers believe the situation could worsen in the next few months. For example, one valuable clothing supplier warns that Primark’s decision to trigger a click and charge could “cause more competition for retail only”.
Another threat to pure fast fashion games comes from the government, which released its final business rate review report in October 2021 and said it would consider “arguments for and against online sales tax”. The Treasury’s consultations lasted from February 25 to May 20, 2022, in order to consider how the tax could be managed and implemented, as well as the impact it will have on consumers and businesses. The decision and time frame have yet to be announced.
Estelle Di Lucia, director of partnership development at e-commerce expert Digital River, believes the potential application of online sales tax could “level the playing field for ordinary retailers competing with e-commerce channels for customers”.
Reorganization of the industry
Despite the setbacks, industry experts insist that the online model alone is not dead.
“I do not think it is the end of etail [pureplays]”, Claims the director of a wholesaler.
“I think there is a correction in the market between online and offline.
“Online retailers have really had a huge advantage over the last two years during quarantine, and will always return offline to some degree. Online retailers alone will really need to look at margins, return rates, and shipping and return costs. I think we will see that they will start charging refunds much more. ”
The CEO of one wholesaler agrees that there is a realignment going on in the whole industry: a whole new world.
“If you lower your demand expectations a little, the supply of consumers [from Boohoo and Asos] is still appealing to their target audience: despite its hype about fast fashion coming out of fashion, it isn’t, and cheap trend-driven clothing is still appealing. ”
Retail analyst Bailey believes pressures are spreading: “I think we will see many warnings about profits from retailers around the world [because of inflation and cost of living]. ”
Maternity clothing retailer Seraphine and lifestyle and clothing retailer Joules issued earnings warnings in May, citing inflationary cost pressures.
Bailey continues: “We have never seen anything like it before. In the last few crises and recessions, there have been fewer factors at play. We now have the global conflict, fuel prices and the ongoing debate on Brexit, trade and international trade and so on, as well as labor shortages. All these things together have never been seen before (…) and companies will have to really focus on their operational efficiency and their value in order to remain sustainable. ”
The director of one wholesaler agrees: “The total cost of living, although I’m not sure it will be an event that will end in the world, which the media is looking for, is certainly starting to bite.” Among their target younger consumers, consumer credit is on the rise, younger consumers will tighten their belts, and Asos and Boohoo will feel it. But that’s not the end of it online – it’s just a normal adjustment that we who went through the recession have seen before.
“The pain will be equally acute in normal retail, if not more so: the national minimum wage harms the retail business model, business rates do not agree, renters have not adjusted their leasing models to make them modern and revenue-driven. Now you see the pain with online players because part of the demand has shifted to stores as people go out and buy again. But the pain also comes in retail. ”
He concludes: “As always, a great product and service will win – more than whether it’s online or in-store or a combination of both.”
Ethel giants such as Asos and the Boohoo Group have been on an upward trajectory since their inception, and the pandemic has only accelerated their growth. However, with traditional ordinary purchases returning to the agenda, in addition to inflation and deteriorating rates of return, online pure games have dealt an inevitable blow. But, as the industry suggests, this has only accelerated the natural alignment between online and offline shopping, which is desperately needed.