Boohoo and Asos bullish despite pandemic threat to fast fashion

In a hectic few weeks early last year, online fashion retailers Asos and Boohoo turned years of Britain’s high street history on its head when they grabbed the remnants of bankrupt conglomerates Arcadia and Debenhams.

The takeover of brands with centuries of retail heritage by companies only just getting off the ground in the 2000s seemed to sum up the narrative of the pandemic: store-based retailers would be eclipsed by more nimble online competitors much faster than anyone thought .

Since then, life has gotten a lot tougher for the fast fashion brigade. Cost pressures are mounting as prices for raw materials, labor and freight have risen sharply, while demand has eased as the brand’s customer base, mostly in their 20s, faces its worst income squeeze in years.

Just before the pandemic The market value of Boohoo exceeded that of British high street giants Marks and Spencer. It’s now worth around a third of the value of its more traditional rival. Asos was also struggling, warning of a sharp fall in sales growth and profits in April, months after it sacked its chief executive.

But while investors fear renewed pressure could make the fast fashion model unsustainable, corporate confidence has not faltered.

Boohoo CEO John Lyttle: “With half a billion potential customers in our key markets, the opportunity is huge” © Marco Kesseler/FT

Last week even as Boohoo warned against sales For the fourth time in the last 12 months, it reaffirmed its intention to become an online player comparable in scale to the largest retailers such as H&M and Inditex, owner of Zara.

“With half a billion potential customers in our key markets, the opportunity is huge,” said Chief Executive John Lyttle.

He added that the price increases, along with changes in demand patterns and higher product return rates, are “temporary, not structural, and will taper off as the impact of the pandemic begins to wear off.”

He also predicted that while cost pressures will persist through 2023, revenue growth will eventually recover to around 20 percent a year with profit margins of 10 percent.

Analysts were more cautious. “The transition period seems to be getting longer with every outing,” said Tony Shiret, analyst at Panmure Gordon. “Sales have not held at the expected level.”

Boohoo’s bankruptcy Jefferies is forecasting relatively modest sales growth of 11.6 percent even for the year to February 2024.

Boohoo isn’t the only one with ambitions that are in stark contrast to current reality. British rival Asos held a series of investor meetings last year detailing how it would attack a market it valued at £430 billion.

It aims to grow annual sales from £3.9bn to £7bn “over the next three to four years” and increase profit margins from 2 per cent to “at least 8 per cent over the long term”.

Similarly, Berlin-based Zalando, a larger company with more diverse operations, said this year had “started slowly” with lower confidence linked to inflation fears, but co-CEO Robert Gentz ​​appeared unfazed.

Gentz ​​insisted the company would not backtrack on its short-term goal of €30 billion in sales across its platforms or its long-term goal of serving 10 percent of the European fashion market. “We’re still very early in the journey,” he said when presenting results last week.

action at cost

Online operators’ optimism stems in part from their confidence that they can ease the pressure. They’re investing heavily in warehouse automation, which will help offset rising labor costs. They’ve also shifted production from places like China and South Asia to Morocco and Turkey to cut delivery times and lower transportation costs until freight rates return to more normal levels.

Mat Dunn, Asos’ chief operating officer, who will run the company until a replacement is found for former chief executive Nick Beighton, said container lines are “making a lot of money and adding capacity again”. He was “even more optimistic” that air freight costs would fall once flight schedules return to normal.

But not everyone is convinced that costs will return to pre-pandemic levels. Simon Irwin, an analyst at Credit Suisse, pointed out that the pandemic has accelerated the phasing out of older, larger aircraft and their replacement with smaller jets.

“Even if we go back to pre-pandemic flight numbers, structurally there could be less surplus [freight] capacity out there,” he said.

Retailers also expect consumers to return to work, go on vacations and attend parties and celebrations, events that usually drive clothing purchases but have taken a big hit during the pandemic.

Lyttle said he believes Boohoo’s core audience, younger shoppers, would be least affected by the coming pressure on living standards.

However, Dunn acknowledged that the “vast majority” of e-commerce operators had not been tested in an inflationary environment. “The effect of [inflation] on disposable income is very difficult to predict,” he said.

room to grow

Despite their rapid growth, online operators still have big plans. Even in the UK, which offers the biggest opportunities for Boohoo and Asos, market share lags far behind Next, Primark or M&S.

Both are also targeting the United States. “Its economy is growing faster. . . and consumers there display similar attitudes and behaviors to UK consumers,” said Jacqueline Windsor, partner in retail at PwC.

“But it is [geographically] much larger and the density is much lower, so it’s harder to serve efficiently,” she added, noting that even Amazon has had a hard time rolling out next-day delivery nationwide.

Boohoo builds warehouse in Pennsylvania to speed deliveries and reduce reliance on costly and time-consuming air freight from the UK.

Asos opened a facility in Atlanta two years ago, although the company made an operating loss in the US last year.

Dunn acknowledged “there were a lot of other things Asos had to get right in the US” but said that “you can’t compete at scale without your own warehouse”.

Strong economic growth in the US and lower online penetration justified the significant investments required, he added.

A Zalando marketing poster
Zalando is focused on Europe, but the US is targeted by other fast fashion conglomerates © Artur Widak/NurPhoto/Getty Images

While Zalando’s ambitions are firmly anchored in Europe, the US is also among Shein, a.s.’s target markets privately owned Chinese fast fashion group The has a ruthlessly efficient supply chain, rock-bottom prices, and ships packages directly from southern China, avoiding the tariffs incurred on large shipments.

According to Lyttle, Shein’s rapid growth shows the magnitude of the online opportunity.

But it’s also a sign of how much more competitive online clothing is now than it was a decade ago.

“You have the fast fashion players, launching international fascias like Zara and H&M, the non-clothing retailers getting into the clothing space, and then you have Amazon,” PwC’s Windsor said. Above all, the costs for customer acquisition “rise” as a result.

This increases the risk that scaling will only be achieved through permanent loss of profitability. Operating margins across the sector have already been squeezed by increased costs, with Boohoo estimating around £60m of profits were lost over the year to February.

Rebuilding will be a gradual process, with businesses limited to how much they can pass rising costs on to their value-conscious customers.

“We have to stay competitive [on price]’ Lyttle said.

Boohoo and Asos bullish despite pandemic threat to fast fashion Source link Boohoo and Asos bullish despite pandemic threat to fast fashion

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