As noted on a number of occasions, one of the big questions around retail in the Vaccine Economy is how robust and enduring the shift to online will be. As Salesforce’s Rob Garf noted earlier in the week, some flattening out might have been reasonably expected, but what happened to online fashion retailer Boohoo wasn’t so much a flattening out, more a straightforward flattening.
The firm turned in a shocking £117 million drop in quarterly profits, from £124.7 million to £7.8 million. COVID was blamed in large part, as well as issues with distribution and delivery and a rise in return rates. CEO John Lyttle said:
Macro factors have created some short-term headwinds for the business. Our international proposition has been affected in overseas markets due to delivery delays. We're confident that we have the right product and price, which is demonstrated by our great performance in the UK, driving market share gains. The only thing that is not strong enough, currently, in our international markets is our delivery proposition. We're investing in a new DC [distribution center] in the US, which will transform the delivery proposition with next day across our key US markets.
We currently have significant scale with 4 distribution centers in the UK. We have ongoing automation projects in Sheffield and Burnley. In our Sheffield site, we're investing GBP 125 million to build a state-of-the-art facility which will lead to greater efficiencies going forward. To put that into context, that is 3 times what we invested in our Burnley site. We expect payback to be within 5 years, bringing significant cost savings into the future.
We have plans for other sites too such as Daventry, where we will invest to see material cost savings in future years. When our UK automation projects are complete, we'll have over £4 billion sales capacity. When the US distribution center opens, that will take us to £5 billion sales capacity across all of our sites. Significant capacity to support our ambitious future growth plans.
Front and back
Lyttle was inevitably pitching an upbeat view of longer term prospect for the online-only retailers:
Today, we have 13 fashion destinations compared to 7, 2 years ago. With these destinations, there are 83 customer-facing websites and apps which will continue to grow. Choice for our customer is unrivaled. Our offer has trebled in the last 2 years, and our customer has more newness than ever before, with almost 1,000 lines launched daily. And our reach continues to grow with 16 million social media followers and 20 million customers from around the world shopping across our brands.
Work is taking place on tech investment to overhaul the operational infrastructure, he said:
On the front end, we have expanded our HR platform with upgrades across our Nasty Gal and Boohoo brands with our partner, Salesforce, and we have also launched Debenhams onto a new headless modular platform architecture, which differs to our existing multi-brand platform technology. Implementing a product inventory management system, PIM, has been a huge step, moving the business forward by standardizing and centralizing all of our product information. With 5 million skews across our brands, we are seen as a trailblazer on how to leverage the benefits of a modern PIM across the industry.
We've also been investing in back-office technology, implementing further digitalization to support the scaling of our platform. Developing our micro-services continues into the next 12 months to allow for platform changes across the finance, as well as enabling our growth warehouse in 2023. The implementation of our new PO service and integration with our third-party logistics carriers, has unlocked the visibility of our goods in transit across our supply chain.
Launching our supplier hub was a huge achievement, taking all our supplier onboarding into the 21st century, removing the manual onboarding processes, and implementing a digital platform that our suppliers can interact with us, and has also allowed for our supply chain to be streamlined, controlled, and auditable.
Boohoo’s fortunes of late mirror those of another online-only fashion retailer, ASOS, which last month saw its pre-tax profits collapse by 87%. In stark contrast, fast fashion retailer Primark, with no transactional e-commerce business at all, continues to thrive and grow. So, is the online-only model no longer the winner it was?
Inevitably the re-opening of physical stores hasn’t helped. Both Boohoo and ASOS saw their fortunes soar when physical stores were closed. As shop doors inched open, the confident prediction being made was that a customer base which had been under effective house arrest for the best part of two years would be gagging to spend on more discretionary items. There was no point in anyone buying a posh frock or a smart suit when there was nowhere to go to wear them.
That doesn’t appear to have worked out in practice. That’s not to say that the online-only model has been broken. It just emphasises how tricky it is to make it work in practice. Consumers have enjoyed the convenience of digital shopping for clothes, but the re-opening of real world stores, with the chance to touch, feel and try on purchases is a pent-up desire that’s now been untapped again.
Despite the fall in profits, Boohoo's revenue increased £1.745 billion to £1.982 billion, but the group has a lot of work to do to restore confidence in its operating model. The tech agenda items that Lyttle outlined this week are the right ones, but they come with a large price tag attached. Whether the market will give the group the time it needs to sort out its stall remains to be seen.