Online-only ASOS benefitted from 'not going out'; can it shift back to a 'going out out' business model as lockdowns lift?

Profile picture for user slauchlan By Stuart Lauchlan April 9, 2021 Audio mode
Summary:
ASOS has seen business soar in lockdown, but can it thrive as hospitality re-opens and its core demographic puts on their glad-rags?

ASOS
Nick Beighton

A 275% jump in profits and first half sales that hit a record £2 billion - that's the good news from e-commerce retail  pureplay ASOS, but not good enough to dispel concerns about the impact of lifting of COVID lockdowns on future prospects. 

ASOS is among those retailers to have had ‘a good war’ during the pandemic. In some ways it’s almost been emblematic of the shift in power in the sector as the online-only firm snapped up Topshop, Topman, Miss Selfridge and HIIT from Philip Green’s collapsed Arcadia group for £265 million back in February, taking the iconic brands off of the high street and into a digital-only future. 

For the half year, ASOS total revenue jumped 24% to £1.98 billion, while pre-tax profit shot up to £106.4 million from £30.1 million a year earlier. In the UK, ASOS sales were up 39% to £800 million, 18% in the EU, 16% in the US and 16% in the rest of the world. 

The firm added 1.5 million more users year-on-year to hit 24.9 million active customers. The question now, as non-essential retail in the UK re-opens this Monday, is whether the 2.6 million new users that have shopped with the firm over the pandemic period will stay loyal once the aisles of offline brand are free to browse again?

In its trading statement, the firm acknowledged the uncertainties ahead: 

Overall we saw a net COVID-19 tailwind of £48.5 million, a benefit which we expect to reverse once we see restrictions lifted on the hospitality and tourism sectors…We believe the shift to online retail as a result of the pandemic and the accelerating consolidation of offline retail has increased consumer confidence in shopping online. In the coming months we expect a portion of consumer demand will move back to stores as restrictions are eased throughout our markets, but we expect online penetration to remain structurally higher than pre COVID-19 levels.

In particular, ASOS could be vulnerable to Vaccine Economy behavioral shifts due to the demographics of its target audience - fashion-conscious 20-somethings who splash cash on items of clothing to impress their social circles. But 20-somethings are among the societal groups that have taken a financial hit during lockdown, as well as being among those most likely to have been hit by job cuts. Will the disposal income still be there? 

In addition, ASOS has benefitted from a margins boost due to a lower returns rate during the COVID crisis as shoppers turned their spending to ‘at home’ casualwear rather than ‘going out’ clothing, the latter being more likely to be sent back than a pair of jogging bottoms.

Going out out

But as hospitality venues open up again, there may be a pick-up in higher-end fashion purchasing. 

CEO Nick Beighton says that there has already been a detectable upturn in website searches for evening out clothing in the US where more socialising is already allowed in many states., but the uncertainty remains: 

The ASOS design category has always been dominated by strong fashion product offer with 'going out' gear and 'going out out' gear. This category has struggled through lockdown....Over this half [year], we see a continuation of these trends towards casualization with going out gear continuing to move back in our product mix. As social restrictions reduce in some of our key territories, we're preparing ourselves for the return of going out wear.  We expect this will be led by day wear first, then evening wear later down the line. We still expect this recovery in these categories to be dependent on the social restrictions in place in each territory. So in this recovery we'll have some continued uncertainty.

As the firm prepares for what’s to come, the focus will increase on its TGR - Truly Global Retailer - initiative, he says: 

TGR is a new software management platform for end-to-end product management. Our teams have worked tirelessly on TGR. We conducted a full dual run for six months, starting in September to identify the potential gremlins and we launched it in eight phases over a five week period starting on the 20th of February, culminating a successful launch across the business, a couple of weeks ago. 

Through this roll out we've essentially delivered a seamless rewiring of our entire internal architecture. The new tools and processes will allow us to restructure the way we plan, the way we trade our products, so we can offer the best choice to our global customer. More accurate, more relevant, more timely information will enable better and faster decision-making. The improved visibility of our stockpile management and inbound planning will give us better visibility for forward-looking product offers at each of our multiple fulfillment centers and the system design overall will support better local pricing flexibility across each of our markets around the world. In a nutshell, TGR completely revolutionizes our internal systems to enable us to operate and trade at pace on the global scale.

There will also be an emphasis on expanding logitsics and fulfillment capacity, he adds: 

Building capability in tech and logistics is critical in our sector. We announced that, at the year end, we'll be opening a new warehouse in Litchfield to support our UK and rest of the world territories. The first phase of this will be operational by the end of this financial year. Litchfield will initially be launched as a manual facility with total stock holdings of 6 million units. Over the next two years, with the phased automation we have planned, it will nearly triple this capacity. We are currently in the design phase for the US automation in Atlanta and we expect the full launch to take place in [the second half of] financial year 2023, and this will double our throughput. Make no mistake - we have very ambitious plans in place and by creating this capacity, well ahead of time, and building on the solid operational tech platforms in our existing sites, we anticipate these projects will expand our throughput capacity by further £2 billion in net sales over the next few years to over £6 billion throughput capacity.

There will also be continued investment in technology to enhance the customer experience, pledges Beighton:

Artificial Intelligence and data science are now fundamental tools that we use to deliver a compelling customer experience. We've added improvements to our customer experience, aimed at reducing friction, increasing personalization and ensuring a seamless experience, both on the website, and the app. These include the launch of our ratings and review functionality. So far we've collected a million reviews, with an average rating of 4.1 out of five, and promising early results around customer conversion. The 'New In' recommendations [feature] now uses AI to ensure that the first products displayed on the New page will be recommended to the customer based on their spreferred shopping behavior. We've also introduced homepage countdown review, which lets users know how much time remains for them to buy at discounted prices, which has driven an overall increase in conversion rate. And lastly, we rolled out a 'For You' tab, which is powered by a new model that displays enhanced personalized recommendations.

My take

Stunning numbers, even with the caveats of some uncertainties ahead. It’s perhaps the most telling symbol of the turmoil in the UK retail sector that on the corner of Oxford Street in London is the boarded up shell of the former flagship Topshop store. There were rumors that this might be re-opened by ASOS as a last remnant of the old order, but Beighton makes it clear that this is not to be: 

The main thesis for Topshop and Topman was to create a digital offer, enhance the digital offer, and actually also use some of the partners we acquired through the acquisition. We've done that with digital predominantly. There's been much speculation about whether we would relaunch shops. You know as well as I do that ASOS is a digital offer only.

Welcome to the brave new world of retail.