Boohoo and Asos bullish despite pandemic threat to fast fashion

 Boohoo and Asos bullish despite pandemic threat to fast fashion


In a few rough weeks early last year, online fashion retailers Asos and Boohoo lifted years of British high street history as they took over the remnants of bankrupt groups Arcadia and Debenhams.

The absorption of brands with centuries-old retail legacies by companies only as old as the 2000s seems to encapsulate the account of the pandemic: store-based retailers will be eclipsed by nimbler online rivals. faster than anyone thought.

Since then, life has become more difficult for the fast fashion brigade. Cost pressures are rising as the price of raw materials, labor and freight has risen sharply, as demand has shrunk for brands that are typically 20-something the customer base is facing the largest. squeezing revenue over the years.

Prior to the pandemic, Boohoo’s market value exceeded that of British high street behemoth Marks and Spencer. It is now worth about a third the cost of its more traditional counterpart. Asos was also hit by problems, warning in April of a sharp decline in sales and earnings growth in the months after it fired its chief executive.

But while investors are concerned that the renewed pressures could make the fast-paced trend model unsustainable, confidence in companies will not diminish.

John Lyttle
Boohoo chief executive John Lyttle: ‘There are many opportunities to have half a billion potential customers in our key markets’ © Marco Kesseler/FT

Last week, even though Boohoo warned of sales for the fourth time in the past 12 months, it reiterated its goal of becoming an online player comparable to the size of most high street operators, such as H&M and Zara-owned Inditex.

“There’s a lot of opportunity to have half a billion potential customers in our key markets,” said chief executive John Lyttle.

He added that price increases, along with changes in demand patterns and higher product return rates, are “temporary, unstructured, and will slow as the effects of the pandemic begin to accelerate”.

He also predicts that while cost pressures will continue until 2023, sales growth will eventually recover to nearly 20 percent annually on revenue margins of 10 percent.

Analysts are more cautious. “The transition period seems to be longer with each outing,” said Panmure Gordon analyst Tony Shiret. “Sales are not continuing at the level they expected.”

Boohoo’s house collapses Jefferies predicts relatively modest revenue growth of 11.6 percent even in the year to February 2024.

Boohoo is not alone in having ambitions that are very different from the current reality. Its UK rival Asos held a series of investor meetings last year outlining how to attack a market that put it at £ 430bn.

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

Similarly, Berlin -based Zalando, a larger company with many different operations, said this year was a “slow start” with low confidence related to fears about inflation, but the co -chief executive Robert Gentz ​​was not bothered.

Gentz ​​assured that the company will not row back to its near -target € 30bn sales of its platforms, or its long -term goal of serving 10 per cent of the European fashion market. “We’re still in the early stages of travel,” he said as he presented the results last week.

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Cost action

The optimism of online operators comes in part from their confidence that they can minimize pressures. They invest heavily in warehouse automation which helps offset rising labor costs. They also shifted production from places like China and South Asia to Morocco and Turkey to shorten shipping times and reduce transportation costs until freight rates return to more normal levels.

Asos chief operating officer Mat Dunn, who ran the company until it found a replacement for former chief executive Nick Beighton, said the interior lines “saw a lot of money and also added that capacity “. He is “even more optimistic” that air freight costs will decrease as 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, points out that the pandemic has accelerated the retirement of older people, larger planes and their replacement with smaller jets.

“Even if we were able to get back to the flight numbers before the pandemic, there could be a little bit of structural excess. [freight] capacity there, ”he said.

Retailers also rely on consumers to return to work, vacation and attend parties and celebrations, events that often push them to buy clothes but suffered a big hit during the pandemic.

Lyttle said he believes Boohoo’s core audience of young shoppers is one of the least affected by the future crackdown on living standards.

But Dunn acknowledged that “most” ecommerce operators have not been tested in an inflationary environment. “The effect of [inflation] of disposables that we are very difficult to predict, ”he said.

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Growth room

Online operators are much more targeted despite their rapid growth. Even in the UK, which offers the greatest opportunity for Boohoo and Asos, market shares are far behind the likes of Next, Primark or M&S.

Both also target the US. “Its economy is growing faster. . . and consumers there display similar attitudes and behaviors towards UK consumers, ”said Jacqueline Windsor, a retail practice partner at PwC.

“But it is [geographically] bigger and lower density, so it’s harder to service in an efficient way, ”he added, noting that even Amazon is having a hard time launching next -day shipments nationwide.

Boohoo is building a warehouse in Pennsylvania to expedite deliveries and reduce reliance on expensive and time -consuming air freight from the UK.

Asos opened a facility in Atlanta two years ago, even though the company still managed to lose U.S. operations last year.

Dunn acknowledged that “there are a lot of other things Asos needs to get in the U.S.”, but said “you can’t compete on scale without your own warehouse”.

The rapid growth of the U.S. economy and the lower level of online penetration justify the significant investment required, he added.

A Zalando marketing poster
Zalando focuses on Europe, but the US is the target of other fast fashion groups © Artur Widak/NurPhoto/Getty Images

While Zalando’s ambitions are firmly anchored in Europe, the U.S. is also one of the markets targeted by Shein, a privately owned Chinese fast fashion group with a relentless efficient supply chain, lowest prices and shipping parcels directly from southern China, avoiding customs. duties applicable to large shipments.

Lyttle said Shein’s rapid growth reflects the magnitude of the opportunity online.

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

“You have fast-paced fashion players, the launch of international fascias like Zara and H&M, non-clothing retailers wearing clothes and then you have Amazon,” Windsor told PwC. The cost of acquiring the customer in particular “goes up” as a result.

This raises the risk that the standard can only be achieved through permanent sacrifice of profit. Operating margins across the sector have been depressed by high costs, with Boohoo estimating about £ 60mn was cut from its revenue in the year to February.

Rebuilding it can be a slow process, with companies restricting how much they can pass on to increase costs to their value-conscious customers.

“We have to stay competitive [on price]”Said Lyttle.



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