According to IBM’s recent Business Value Global Consumer study, online shopping increased by 100 percent year-over-year in 2014.
However, despite Asos rapid expansion rate over the past few years into new markets such as China, Russia and Australia and ongoing success in its home country, the British-based online fashion retailer managed to shock the industry earlier this month, when it issued its second profit warning in less than three months and revealed that its full-year profits would miss forecasts by 30 percent.
The online fashion player was forced to cut prices severely and offer widespread discounting abroad to offset the increased strength the pound. Asos's Chief Executive Officer, Nick Robertson declared that the company would turn its attention to refocusing its marketing strategy, after the online pure-player turned to heavy promotional discounting to encourage sales in its overseas markets.
“Asos should be careful not to fall into the trap of excessive discounting,” warns Ashma Kunde, apparel and footwear analyst at Euromonitor International. “Not only does it hit margins, but it also damages brand credibility.” After witnessing its international market sales growth slow down to 17 percent during its first quarter, the online fashion retailer vowed to invest in zonal pricing and delivery solutions to boost its brand value and offer to all customers. “The introduction of zonal pricing will help mitigate the effect of currency fluctuations, hopefully reducing the necessity for discounting in international markets.”
Zonal pricing has yet to become an issue for Berlin-based online fashion retailer Zalando. Although the 6 year old online fashion retailer currently has 15 local language websites, with over 13 million active customers, the company is only active within the European Union. Last year the Berlin-based company reported a 52 percent increase in sales, growing 1.762 billion euros, which is more than its British counterpart, who was just short of one billion.
Zonal pricing has yet to become an issue for Zalando
However, unlike Asos, Zalando reported a negative margin of 6.5 percent last year, as the German fashion e-tailer struggles to become a profitable company. Zalando revealed that it had reached break-even in the DACH region (Germany, Austria and Switzerland) in 2013, but in order to achieve its goal of reaching break even at group level, the online retailer is investing in improving its distributing facilities, logistics, fashion offering and user experience, whilst scaling back its international expansion to focus on its current markets.
Unlike Zalando, Asos on the other hand has managed to created a strong selling story over the past 14 years in combination with its IPO, which has been part of the key to its success, “despite the jitters caused by Asos's profit warnings,” says Kunde. “[Asos's] core business model and philosophy remains sound and benefits from focusing on the highly digitally active group of “twenty something fashionistas.” In its home market of the UK, the online fashion retailer continues to hold its stronghold on e-tail fashion. “The UK was the star performer in its latest results, with sales rising an impressive 43 percent,” notes Malcolm Pinkerton, research director at Planet Retail.
UK was the star performer of Asos' latest results
“Part of the UK growth was undoubtedly driven by discounting as Asos had to lower prices across the board,” adds Lucht. Growth outside of Asos home market, however is another tale. Although demand for the online fashion retailer is holding up well, especially in European markets such as France, Asos has “found trading much tougher in China and Russia, while demand in Australia has slowed,” says Pinkerton. The fashion e-tailer's currency issue has led to a difference in its performance in its active regions.
Anusha Couttigane, retail analyst at Conlumino highlights the differences between Asos performance in its territories. “Whilst France and Germany are far more developed operations, Germany clearly comes with fierce competition from Zalando. Italy and Spain continue to struggle economically...with an astronomical rise in the spending power of Russian consumers, there is potential for Asos to do well there, but it has only just launched its platform in Russia, so it must first recover its investment.” Asos is also struggling to “establish itself as a leader in Asia Pacific, a region which has propelled itself to the forefront of apparel and footwear internet retailing,” adds Kunde.
If Zalando feels competition from Asos in its home market, it hides it well as the German e-tailer continues to do well in its DACH region. Although the area consists of more 'mature' markets, Zalando continues to benefit from its high level of brand awareness, thanks to its marketing campaigns which include TV advertisements and pop-up stores. “Given the retailer's strong sales growth over the past few years, the company has left a mark on the performance of its German competitors,” highlights Reinecke.
feels competition from Asos, it hides it well
However, with over half its sales coming from international markets according to Rubin Ritter, one of the members of its management board, news that Zalando is turning its prime focus on existing markets may appear to be an adverse step. “With Zalando scaling back its internationalisation strategy, a move outside of the EU seems unlikely for the time being,” points out Reinecke. “For a successful foray into Asia and the US, the retailer would need to highlight its unique selling points in comparison to its competitors. The retailer would therefore need to convince customers of its service and product assortment, rather than its brand value alone.”
With Ritter confirming that the online retailer has yet to fix date by which it attend profitability, the question remains whether Zalando can be profitable or not. The online fashion retailer has grown at a much faster pace that Asos over the past five years, but now needs to focus on developing solutions to promote sales, improve margins and drive profitability in its existing countries rather than internationalisation. Couttigane also points out that any expansion outside the EU many create tension between Zalando and its “sister investment's, such as Zalora, which already have a key focus on international markets.”
On the other hand, “companies like Asos have had much longer to get the ball rolling globally, without the worry of its threat to sister companies,” adds Couttigane. While Asos may have caught the industry by surprise with its profit warnings over the past three months, there is no doubting that the online fashion pure-player “remains a business with significant global opportunity.”
“It might take a few margin hits along the way, but with its excellent customer proposition, innovative and strong online retailing abilities, Asos is very well positioned to become a truly sizeable force as a global online fashion retailer,” states Pinkerton. “Asos's exceptionally strong own label range, comprehensive branded offer and overall brand awareness, gives it far more potential to exploit the international opportunity.”
Asos's firm position in the eyes of its target audience has also helped the online retailer secure a series of label partnerships, as more and more brands see the e-tailer “as an important way of improving their fashion credentials and exposure to this critical demographic.” “For example, Abercrombie & Fitch's decision to sell its clothing through Asos is reflective of its desire to regain its 'cool credentials' with millennial consumers.” In comparison to Zalando, Asos can been seen as the cooler, more connected, “more developed, edgier platform,” says Couttigane.
Asos can be seen as the cooler, more connected platform
Nevertheless, “given the age of [Zalando,] and the age of e-commerce industry into which it feeds, it is doing well...despite its shortcomings as a profitable enterprise, it is nevertheless the European leader in its field. If Zalando wants to be perceived as a strong, independent leader in the world of e-commerce it needs to be able to take confident strides without basing too much of its strategy on the experience of others. Investors won't bite if Zalando behaves hesitantly; it doesn't inspire confidence. Zalando needs to have a growth plan that is guided, not dictated, by the experience of its rivals.”
Kinnevik AB, the investment company which control Zalando, new CEO, Lorenzo Grabau believes that margin losses the retailer has reported are part of the grander scheme when its comes to creating a large, successful business. In an interview with Reuters, he compares Zalando to Amazon. “When you study the Amazon history between 1997 and 2003 and look at Zalando in terms of profitability, it's kind of the same,” he notes. “It took Asos 14-15 years to get to a company which is 60-70 percent the size of Zalando. Zalando got there in five years.” Lucht agrees that the German fashion retailer is indeed on its was to becoming profitable, and “well on its way to reaching 2.5 billion euros.”
“By being quick off the mark to launch online, Zalando has played a pivotal role in the shapes of the German, and indeed the European fashion market,” concludes Clare Nutter, associate analyst, e-commerce at Planet Retail.
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