19th Dec 2018
The travails of the High Street is well documented: Toys R Us, Mothercare, Carpetright, House of Fraser, to name just a few. But that’s brick-and-mortar, isn’t it? Online retail, with its lower overheads and convenience, was where the consumer now spent their hard earned shekels.
At least, that was the prevailing logic until recently. ASOS, once an online retail darling, delivered an unexpected update on its sales performance for November, and it was not good.
In its update, ASOS noted that while “trading in September and October was broadly in line with our expectations”, November was significantly behind expectations”.
The statement added, “The current backdrop of economic uncertainty across many of our major markets together with a weakening in consumer confidence has led to the weakest growth in online clothing sales in recent years.”
Shares in Asos plummeted by almost 38%, wiping more than £1bn from the value of the company on the stock market.
Weaker consumer confidence means tough times for retailers, with many brands locked in a discounting death spiral hoping to reap ever dwindling disposable incomes. In a statement to investors, ASOS’s chief Nick Beighton directly attributed the retailer’s problems “an unprecedented level of discounting ... across the board.”
Beighton said he had been “astonished at the level of promotions and discounting, especially around Black Friday”, and predicted that heavy discounting would continue in the coming months.
ASOS’s trading update stated the “increased discounting, coupled with the unseasonably warm weather during the last three months” had reduced its average selling price (down 6%), a decline that wasn’t compensated by a “higher units per basket”.
“Consequently, average basket value is now lower year on year. This has driven higher variable costs through both our distribution and warehouse cost lines. All other operating cost trends remain largely in line with expectations. We remain in a period of heavy transition costs which this year remain budgeted at a peak level of c.£30m. This drag on our profitability will decrease during the second half of the current financial year.”
And it’s not just ASOS feeling the pinch either. Mike Ashley, founder of Sports Direct and no shrinking violet, described November as “the worst on record, unbelievably bad”.
Retail chain Next and Marks & Spencer also posted declines, with shares in both companies falling 4.6%, as analysts warned that the squeeze on household finances since the EU referendum was taking its toll. Shares in Dunelm, the home furnishings retailer, fell nearly 11%, while online grocer Ocado shed 4.4%.
Forget online, offline -- it’s just bad retailing
According to Richard Hyman, an independent retail analyst who has worked in the industry for over three decades, the narrative over ASOS and online retail is the wrong one.
“Retailing is retailing,” Hyman told AccountingWEB. “It’s been a complete misconception to hold online retail up as the holy grail.
“Being online or selling fishing rods, it’s not about being in the right channel. It’s about being a good retailer, and there aren’t many good retailers.”
According to Hyman, retailing has developed over generations in a growth economy, and the skills required to prosper in a growth economy is different to a sector that’s hugely over-supplied.
“What’s happened, in the historical context of a growing economy, is retailers have chased growth. Chasing growth meant opening stores, bigger and bigger stores.
“Where we are today, most retailers have too many stores, too big, too many SKUs, they don’t understand what choice means to their core customers, they’ve sacrificed the engagement with their core customers in chasing their peripheral customers.”
Add in a worsening consumer economy, the picture darkens. Margins are tight, Hyman said, and it only takes a small shift in the spending behaviour of a relatively small proportion of people to blow the trading economics of a business out of the water.
“I can predict with total certainty that next year will be worse. The writing is on the wall. We haven’t got a clue about anything: will we still be in the EU, won’t we. This level of uncertainty is ruinous. It encourages everybody - consumers, vendors, suppliers - to think in a very short-term way. It stops investment, employing people, taking leases, in R&D. There are a few retailers who are now trading through their last Christmas.”
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.