In a frantic few weeks early last year, online fashion retailers Asos and Boohoo upended years of British high street history by scooping up the remains of bankrupt groups Arcadia and Debenhams.
The absorption of brands with centuries of retail heritage by companies that only came of age in the 2000s seemed to sum up the narrative of the pandemic: in-store retailers would be eclipsed by online rivals more agile much faster than anyone thought.
Since then, life has become much harder for the fast fashion brigade. Cost pressures are mounting as the price of raw materials, labor and freight have risen sharply, just as demand has eased, with the brands’ customer base mostly comprised of 20-somethings facing the biggest revenue squeeze in years.
Shortly before the pandemic, Boohoo’s market value surpassed that of British giant Marks and Spencer. It is now worth around a third of the value of its more traditional rival. Asos has also run into trouble, warning in April of a sharp drop in sales and profit growth months after it fired its chief executive.
But as investors fear renewed pressures will make the fast fashion model unsustainable, business confidence has not waned.
Last week, even as Boohoo warned of sales for the fourth time in the last 12 months, it reiterated its intention to become an online player comparable in size to the biggest high street operators, such as H&M and Inditex, owner of Zara.
“The opportunity is huge with half a billion potential customers in our key markets,” said chief executive John Lyttle.
He added that the price increases, along with shifts in demand patterns and higher rates of product returns, were “temporary, non-structural, and will subside as the effects of the pandemic begin to wear off.” ‘mitigate”.
He also predicted that if cost pressures persist through 2023, sales growth would eventually recover to around 20% each year with profit margins of 10%.
Analysts were more cautious. “The transition period seems to get longer with each release,” said Panmure Gordon analyst Tony Shiret. “Sales did not hold at the expected level.”
Boohoo’s home broke Jefferies is forecasting relatively modest revenue growth of 11.6% even for the year to February 2024.
Boohoo is not alone in having ambitions that contrast sharply with current reality. Its British rival Asos held a series of investor meetings last year outlining how it would attack a market it valued at £430billion.
It aims to increase annual sales from £3.9bn to £7bn “over the next three to four years” and boost profit margins from 2% to “at least 8% in the long term. “.
Similarly, Berlin-based Zalando, a large company with a more diversified business, said this year had “started slow” with lower confidence linked to inflation fears, but co-chief executive Robert Gentz n was not disturbed.
Gentz was adamant that the company would not back down from its short-term goal of 30 billion euros in sales across its platforms, or its long-term goal of serving 10% of the European fashion market. “We’re still at a very early stage of the journey,” he said when presenting the results last week.
Action on costs
The optimism of online operators stems in part from their confidence that they can ease the pressures. They are investing heavily in warehouse automation, which will help offset rising labor costs. They have also moved production from countries such as China and South Asia to Morocco and Turkey to shorten delivery times and reduce transportation costs until freight rates return to higher levels. normal.
Asos chief operating officer Mat Dunn, who ran the business until a replacement for former chief executive Nick Beighton was found, said container lines were “making a lot of money and adding capacity again”. He was “even more optimistic” that air freight costs would decline as flight schedules return to normal.
But not everyone is confident that costs will return to pre-pandemic levels. Simon Irwin, an analyst at Credit Suisse, pointed out that the pandemic has accelerated the retirement of older, larger planes and their replacement with smaller jets.
“Even when we go back to pre-pandemic flight numbers, there could be structurally less surplus [freight] capacity there,” he said.
Retailers are also counting on consumers to return to work, go on vacation and attend parties and celebrations, events that typically boost clothing purchases but have been hit hard during the pandemic.
Lyttle said he believes Boohoo’s core audience of younger shoppers will be among the least affected by the coming pressure on living standards.
But 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
Online operators still have a lot to do despite their dizzying growth. Even in the UK, which offers the biggest opportunity for Boohoo and Asos, market shares are 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, retail practice partner at PwC.
“But he is [geographically] much bigger and the density is much lower, so it’s harder to serve efficiently,” she added, noting that even Amazon had struggled to roll out next-day delivery nationwide.
Boohoo is building a warehouse in Pennsylvania to speed up deliveries and reduce reliance on expensive and time-consuming air freight from the UK.
Asos opened a factory in Atlanta two years ago, although the company still posted an operating loss in the United States last year.
Dunn acknowledged “there are a lot of other things Asos needs to do right in the US”, but said “you can’t compete at scale without your own warehouse”.
Strong economic growth in the United States and low levels of online penetration justified the large investments needed, he added.
While Zalando’s ambitions are firmly anchored in Europe, the United States is also among the markets targeted by Shein, a private Chinese fast fashion group with a formidable supply chain, rock-bottom prices. compete and ship parcels directly from South China, avoiding customs. fees that apply to large shipments.
Lyttle said Shein’s rapid growth demonstrated the size of the online opportunity.
But it’s also a sign that online clothing is much more competitive today than it was a decade ago.
“You have the fast fashion players, the rollout of international fascias like Zara and H&M, the non-apparel retailers getting into apparel, and then you have Amazon,” PwC’s Windsor said. The cost of acquiring customers in particular “skyrockets” as a result.
This increases the risk that scale will only be achieved by continuously sacrificing profitability. Operating margins across the sector have already been depressed by high costs, with Boohoo estimating that around £60million was wiped out of its profits in the year to February.
Rebuilding them will be a gradual process, with companies limited in how much they can pass on rising costs to their value-conscious customers.
“We have to stay competitive [on price]“, said Lyttle.