James Pow, senior retail adviser at business advisory firm Quantuma, analyses the departure of Asos CEO Nick Beighton and the reasons for the profit drop the company is expected to see.
The departure of Nick Beighton from Asos as chief executive should not have come as a complete surprise. There are multiple reasons for his departure, culminating in the profit drop the company is expecting to see throughout the remainder of this year and into 2022.
Asos had become a darling of the online sector, selling well over 850 brands globally and the share price had performed extremely well in the last year. However, the retailer had warned of slowing revenue growth and attracting increased costs related initially to Brexit, but with growing issues in the global supply chain becoming increasingly evident. All this was against a positive background of reported revenues accelerating to circa £1.3 billion for the four months to 30 June. This was well up on the £1.1 billion of like for like revenues of last year.
The immediate impact of the pandemic on its supply chain, freight and associated indirect labour costs have started and will continue to dampen profits. The company reported that it still expected to meet annual profit expectations and not surprisingly the shares closed 18% wiping circa £750 million from its market valuation and thrusting it to its lowest stock level in almost a year.
Reading behind this somewhat contradictory statement on expected annual profit, the group stated that the costs of shipping from China had risen ten-fold along with increased airfreight associated costs and further premiums now being incurred with fewer planes in the sky. It went on to state that Brexit had added two weeks to its existing supply chain between the UK and Europe. The company acknowledged that this was negatively affecting consumer anticipated delivery and one would ascertain that their existing systems were struggling to respond to these mounting changes on demand.
What is concerning and illustrates in some part the downgrading in the share price, is that this was not factored in earlier in the company’s risk assessments as most other companies would have done in their strategic response, particularly with strong balance sheets.
Nick Beighton initially said that customer prices for Asos had not risen and that the company had “invested heavily” in keeping prices low and was committed to continuing to do so. The chief executive said the company would be “mindful of the continued impacts of the pandemic on our customers in the short term” adding that the changes brought about by COVID-19 would still benefit online retailers in the long run.
There is a degree of contradiction in Beighton’s remarks, suggesting strategically that Asos would maintain lower prices to its customers while announcing such increasing costs on its retail model. All of this while declaring the expectation of meeting the annual profit outturn.
The recent quarterly drop in the margin of 1.5% due to higher freight costs and unfavourable foreign exchange rate movements is another factor and reason for the Asos share price drop and the CEO’s departure.
The Asos share price had performed well over the last year. However, the share dropped after the company released its trading statement. Management cited the continued uncertainty brought about by the pandemic, inclement weather and supply chain issues as contributors to their weak market demand. This clearly raised fears of the sustainability of their share price.
Like other businesses, management urged caution on the outlook for the rest of 2021 in light of the rising cases of COVID-19. Travel restrictions, delayed and cancelled holidays were a factor in making planned wardrobe purchases difficult. Total group revenue did grow by 21% to £1.3 billion, mainly driven by the strong performance of 36% in the UK domestic market. Impressive growth in the USA of 20% market share also assisted in driving the active customer base from 24.9 million to 26.1 million at the end of February 2021.
Asos did have cause to celebrate following the announcement of its partnership with
US-based multi-channel retailer Nordstrom, based on the West Coast. Nordstrom is embarking on a minority interest in the company’s brands including Topshop, Topman, Miss Selfridge and HIIT and previously sold Topshop and Topman clothes in the US when the brands were owned and run by Arcadia.
In securing the collaboration, Nick Beighton had performed well. The deal demonstrates the future need of businesses to team up where over-lying synergies exist in their consumer profiles. This is a strategically important requirement that intelligent businesses will embrace as they seek to both retain and increase their customer numbers.
Asos revenue growth has been exemplary in the past, notably benefiting from the pandemic as High Street retailers were closed. This led to a windfall and strong demand for e-commerce platforms.
However, changes to customer habits were cited by management in Asos’ earnings statement as a factor; the inclement weather assertions drove customers to winter wear from spring/summer wear. This all points to pressure on their current systems in dealing with these fluxing impacts from the supply chain, the pandemic, Brexit and resultantly the management of the cost base.
The recent quarterly drop in the margin of 1.5% due to higher freight costs and unfavourable foreign exchange rate movements is another factor and reason for the Asos share price drop and the CEO’s departure.
With the easing of COVID-19 restrictions and the opening of retail, I would expect that the demand for online retail may soften somewhat. In my view, the company has experienced timing mismanagement of expectations - both in its statements and trading updates, worsened by the contractions alluded to earlier.In realising this, the Asos board were left with no other option than to part company with its chief executive in a bid to appease disgruntled shareholders and the financial analysts who had reacted so alarmingly to the trading releases. Moving forward, Asos will appoint a new chief executive, hoping to resolve their current fall from grace under the new leadership.
Finance Monthly speaks to Jo Butler, Chief People Officer at ASOS, about the new measures and what else businesses can do to support people during menopause.
What initially prompted ASOS to introduce a policy for staff experiencing menopause?
"Our mission at ASOS is to give people the confidence to be whoever they want to be. Part of this is recognising that sometimes people will need our support when they’re going through big life changes, transitions or challenges.
"We wanted to ensure that our people knew we were here for them as a progressive employer, no matter what and every step of the way.
"Our menopause policy was therefore launched as part of a broader suite of support, including for pregnancy loss, fertility and other life events, including but not limited to gender reassignment, cancer treatment and escaping domestic violence."
Despite menopause being a natural part of many people’s lives, it's still a big taboo, especially in the workplace. Do you think people going through menopause will have the confidence to request the flexible working and other support that ASOS is now offering them?
“It is something we will need to keep working on, but by openly discussing issues such as the menopause, acknowledging the challenges and experiences people may feel and creating an environment where people feel they can ask for the support they need within a clear framework, we hope to make good progress.
"It’s really important for us that our policies were written with everyone in mind, not just the majority. This is why our new suite of life event policies are gender neutral. The aim of calling this out is not only to directly support our trans and non-binary ASOSers but also to educate and remind our cisgender ASOSers that these issues are universal. For menopause specifically, we also recognise this affects people across the age spectrum”.
Your menopause policy will undoubtedly support and empower many individuals. What else can businesses, large and small, do to support people during menopause?
"We take our role as an inclusive business very seriously and continue to celebrate and promote diversity, equity and inclusion both for our customers and our employees. At a fundamental level all organisations - large and small - can start by creating an open environment where people feel empowered to talk about the issues that matter to them.
Jo Butler, Chief People Officer at ASOS - Image courtesy of ASOS
"We have a number of workplace equality networks at ASOS - communities which embrace and celebrate all of our wonderful ASOSers and allies. The networks are places to share, to talk, to ask questions, or just to be seen. They provide a safe space for people to talk about their experiences in a confidential environment, feed into the creation of policies and provide a voice to help guide and shape our approach to these issues.
"We also work closely with a number of external experts in this space, including Inclusive Companies, to help us on our journey to being the most diverse ASOS we can be. Through harnessing best practice and innovation, we want to empower all our people to bring their authentic selves to work, every day, and to drive inclusion for all."
Finance Monthly delves into the potential impact of an ‘Amazon tax’ and the alternative solutions that can help the struggling British bricks-and-mortar retailers.
With a series of high-profile collapses and CVAs, including the recent turbulences that House of Fraser is faced with, Britain has seen its fair share of high-street horror stories in 2018. Stores like Toys R Us UK, Maplin and Mothercare are all facing extinction, whilst online retailers such as Amazon are stronger than ever, cashing in $2.5bn per quarter and paying less and less corporation tax with Amazon’s UK tax bill falling about 40% in 2017, and it paying just £4.6 million ($5.6 million). In times like these, the UK retail industry has naturally called on the Government to review its outdated corporation tax system and take action to help the struggling high street. Chancellor Philip Hammond has in turn announced that he is considering a special retail tax on online business, dubbed the ‘Amazon tax’, in order to establish a “level-playing field” for online retailers and high-street shops. But is a new tax really the solution that will balance the market out? Will it be the solution that traditional trade needs?
Is Amazon’s Existence the Biggest Problem?
Consumer habits are changing rapidly with the continued growth of online shopping, but the truth is that the extraordinary success of web traders is only one of the aspects to consider when looking for the reasons behind the decline in traditional retail. And even though a hike in the tax that Amazon pays may seem like a necessary and logical step, it will be nothing more than a minor distraction from the bigger issue and something that will mainly benefit the Treasury.
It is worth noting that the UK store chains that have collapsed recently did so due to not having the right products at the right prices, not staying up-to-date with consumer trends, not targeting the right customers or not investing enough in their businesses. Surely, online-only merchants have transformed the trade landscape and the UK tax system needs to be adjusted in order to reflect the current retail dynamics – especially when Amazon’s tax bill for 2017 was only £4.6 million on £2 billion of sales. But is the fact that the web giant is paying such a low amount of tax the reason for the collapse of a number of bricks-and-mortar retailers? I think not.
Moreover, as Bloomberg points out, an internet shopping tax could end up backfiring and hurting the bricks-and-mortar retailers it is intended to help. According to the British Retail Consortium, in 2017, more than 17% of sales were made online. Over half of them were with businesses that also have shops. Thus, retailers such as Next Plc, which has both online and offline businesses, could face “a double tax whammy”.
The Real Problem
Driving restrictions around city centres, increased parking charges by local councils and state demands such as minimum wage legislation and Sunday trading laws have had a negative impact on bricks-and-mortar retail. Then there is the main challenge in the face of sky-high business rates which have been the bane of countless entrepreneurs trying to establish a high-street presence. In an article for The Telegraph, Ruth Davidson wrote that the UK retail sector, which makes up 5% of the country’s economy, is paying “25% of all business rates, over £7 billion per year”. One might argue that in order to help bricks-and-mortar retailers and keep British town centres bustling with thriving commerce, politicians could perhaps work towards reducing the financial burden they’re faced with, before punishing web giants for offering an easy and convenient way to shop in this digital era. In order to keep up with their online competitors, traditional stores need to focus on technology innovation and redesigning the experience that the modern-day customer expects. But most importantly, they need the budget to do so and a reduction in business rates for high-street stores could be one way to provide them with some extra cash to invest in technology.
Another thing to consider, as Andrea Felsted suggests, could be raising business rates for offices and warehouses and cutting them for shops. That would “address the disparity between shopfront-heavy retailers and online-only businesses, which rely on distribution centres to serve their customers”.
A potential Amazon tax for all web-only retailers will not help bricks-and-mortar retail to innovate. Surely, it will level the playing field, but apart from that, all we can expect will be a slowdown in online shopping without doing anything to solve the current problems that traditional traders are struggling with.
