Ali Hall and Julie Lavington set up Sosandar, a UK online retailer of women’s fashion, in 2016. Within a few years, annual sales had grown to £42mn.
But their latest growth initiative is not a refreshed digital marketing campaign or the recruitment of new social media influencers. It is shops: the two founders said in December they plan to open up to eight stores later this year in affluent towns.
The rationale is clear: despite a boom in internet shopping in what was already one of the world’s most developed online markets, most clothes are still sold in shops.
“Why would you not go after that 60 per cent and only play in the 40 per cent,” says Hall, referring to the offline-online split in the UK’s apparel market.
The renewed interest in physical shops is a remarkable reversal from 2020 and 2021, when repeated shutdowns of non-essential stores to prevent the spread of Covid-19 boosted ecommerce sales and sent shares in online-only fashion retailers such as Asos, Boohoo, Sosandar and Zalando soaring.
But since the pandemic ended, shoppers in the UK have fallen back in love with in-store shopping while online players have had to grapple with stiff logistical challenges, mounting competition from ultra-cheap Asian rivals and soaring costs.
“What we’ve seen post-Covid, we’ve seen customers want to be able to shop everywhere,” adds Lavington. “They want to go to stores, they want to shop online.
“It’s become really obvious and we might have got to this conclusion earlier if it hadn’t been for Covid.”
The change in sentiment is evident in the stock market. Asos shares peaked at over £57 in 2021 but now change hands for around £3.80. Boohoo is below its 2014 IPO price.
Even luxury players have not escaped. Farfetch, which floated in New York in 2018, narrowly avoided insolvency in December by selling itself to South Korea’s Coupang. Private equity group Apax Partners sold London-based Matchesfashion for £52mn, having bought it at a reported $1bn valuation in 2017, while Swiss luxury goods group Richemont, the owner of Yoox Net-a-Porter, posted a €700mn loss from discontinued operations in the six months to September 30.
British retailers that are predominantly store based, however, have bounced back; shares in Frasers Group, which owns Sports Direct and Flannels, have almost doubled since early 2021. Marks and Spencer, which for years epitomised the struggles of the British high street, rejoined the FTSE 100 index last year as sales and profits bounced back strongly.
“What we’re seeing is a rebalancing of the online and in-store channels,” says Tamara Sender Ceron, a fashion retail analyst at Mintel.
That has left all retailers with questions about which channel will be more profitable and where to prioritise investment. Even Next, a UK mid-market operator that has been more successful than most at combining stores with online operations, admits it is hard to predict where things will settle.
“Our view is that we don’t know,” says its long-serving chief executive Lord Simon Wolfson. “But we don’t want to precipitate a retreat from [physical] retail necessarily, because, you know, it does appear to be stable for now.”
Over the past two decades online-only retailers have redefined the way people shop for clothes through wider choice, slick digital marketing and swift deliveries powered by increasingly automated logistics.
Players such as Asos, Boohoo, Zalando and Farfetch were well-positioned to thrive during the pandemic as physical stores were forced to close around the world.
Asos at one point more than tripled its half-year profits, to £106mn. Boohoo shares’ rocketed to a record £4.13 as orders flew in. Zalando posted “the strongest growth ever since going public in 2014,” chief financial officer David Schröder boasted, as quarterly revenue jumped 46.8 per cent to €2.2bn in 2021.
But as these companies reach maturity, they face a series of challenges that raises questions about the scalability and longevity of their business models.
As physical shops reopened, online orders in Europe’s main markets slowed down for likely the first time in modern retail history, according to Forrester Research. It expects overall online sales in major markets to remain flat in 2023.
Customers returned to shops in greater numbers than expected, in what has been described as “revenge shopping” after predictions that the significant shift to online would become permanent. Many were taken by surprise; the chief executive of Canadian ecommerce giant Shopify was one of many to admit misjudging the growth of ecommerce as he announced redundancies in 2022.
“There’s not necessarily a reduction in demand online, but we’re definitely seeing, and particularly in the last year, that people have returned to shopping more in stores,” says Sender Ceron.
The resumption of office-based work and dressing for social events meant people wanted to try on clothes in stores before making a purchase, while online-only retailers have struggled to provide the tactile experience that consumers want.
During the pandemic, physical retailers also refined the process of allowing customers to collect and return online orders in stores. Even value fashion retailer Primark, which has consistently said online retailing is uneconomic at its lower price points, has begun experimenting with so-called click-and-collect.
Sender Ceron believes that Generation Z and millennials’ shopping habits were transformed by the pandemic. “They’re hot between channels, so it’s not as clear cut as online and in store anymore . . . They’re using smartphones to compare prices and check stock availability while they’re actually in store.”
The substantial fixed costs of operating stores have in the past been a millstone for traditional retailers. But many areas in the UK have experienced steep falls in store rents in recent years while business rates — a property tax linked to rents — were recalibrated last year, resulting in reductions for many.
At the same time, online retailers have been hit with higher prices for everything from freight to marketing. “Online is a much more expensive place to trade than it’s ever been,” says John Edgar, chief executive of department store group Fenwick. “That’s the Google costs, the logistic costs, and those costs vary with sales.”
Online retailers have had to cut their overheads, including headcount, often for the first time in their existence. Some have also introduced fees for users who send purchases back, prompting a backlash — Mintel recently found that 51 per cent of female fashion shoppers chose a retailer that did not charge for returns.
The ability to return items is integral to the online model, but imposes a “significant” logistical and financial burden on retailers, says Edgar. “It’s an issue for everyone who does fashion, and we’re not excluded from that.”
H&M and Zara were the first fast-fashion retailers, selling trend-led clothing at affordable prices. But the companies that disrupted them in the 2000s, such as Asos and Boohoo, now face a new challenge from Asian operators targeting millennial and Generation Z customers in Europe and the US with ultra-cheap designs.
Companies like Shein and Temu ship most of their products directly from low-cost manufacturers in China to shoppers in the west, taking advantage of import tax exemptions on low-value international parcels in the US. Another potential threat is Turkey-based Trendyol, an apparel ecommerce platform whose backers include Chinese internet giant Alibaba.
Temu overtook Amazon as the most-downloaded shopping app in the US just months after launching, according to the Business of Fashion-McKinsey State of Fashion 2024 report. Shein reached $22.7bn in annual sales in 2022, and is gearing up for a public listing in the US.
Mintel’s Sender Ceron says the Asian duo are “worlds apart”, describing them as “a huge threat to Asos and Boohoo and fashion pure-plays but also to H&M and Zara just because of their ultra-low prices, their turnaround times, and use of social media.”
Fon Wassachon Udomsilpa, European internet analyst at RBC Capital Markets, says Boohoo is the closest to Shein and Temu, adding that the UK company’s product will have to be more differentiated and the service more attractive in future if it is to compete.
But that is difficult in a sector where low barriers to entry have led to intense competition, leaving many players spending heavily on marketing and relying largely on price to stand out.
The squeeze on the incomes of 25- to 40-year-olds as inflation has ticked up around the world is also a factor, according to analysts at Stifel citing YouGov findings — with Asos, Boohoo, Zara and H&M the most affected.
Bargain-hunters and sustainability-minded consumers have also taken to buying second-hand clothes on apps such as Depop and Vinted, something Sender Ceron describes as “huge and a trend that has accelerated in the last year.”
On top of the external pressures, online retailers have also scored some painful own-goals as their businesses grew bigger and more complex. At Asos, things started to go awry in 2018, says Udomsilpa at RBC.
At the end of that year, it posted a surprise profit warning, partly blaming significant discounting by rivals over Black Friday. Operational problems at warehouses in the US and Germany followed, and in 2022 it found itself with large amounts of unsold stock which it ended up writing off.
It began its 2022 financial year predicting a pre-tax profit of up to £140mn, but after two profit warnings ended up posting a £32mn loss. That ballooned to almost £300mn the following year as one-off charges piled up. Asos declined to comment.
“Execution is the main issue [with Asos] for us,” says Udomsilpa, referring to its past performance.
Analysts at Jefferies believe that the Asos management team is now incentivised “to drive profit, rather than growth” after it overhauled some bonus targets and launched a revival plan.
Rival Boohoo, which declined to comment on performance, also posted a pre-tax half-year loss of £26.4mn for the six months to August 31 and warned it expected sales to remain sluggish as revenues fell, sending the shares down to their lowest level since 2015.
It has also faced repeated questions about the treatment of workers in its supply chain, to which it has responded by implementing all the recommendations made by Alison Levitt, a senior lawyer, following a review.
Even Germany’s Zalando, which has generally fared better thanks to a broader product range and a slightly older customer base, has struggled recently. It cut its sales forecasts for 2023 and admitted demand has remained weak. William Woods, an analyst at Bernstein, is sceptical of its growth prospects in 2024, saying the consensus among analysts was “too aggressive”.
Investors have responded to these woes in predictable fashion. In the UK, just under 5 per cent of shares in Boohoo and Asos are on loan to speculators who have “shorted” them in expectation of further declines.
“The focus has shifted from just growth, growth, growth,” says Udomsilpa of the change in investor sentiment, adding that previously if a company kept upgrading sales growth forecasts while cutting margin guidance, “the share price went up anyway because growth was everything.”
“Given that growth is no longer attractive, at least in the short-term, the market has shifted its focus to profitability.”
Analysts at Jefferies believe the weak trends across the ecommerce clothing sector are “a result of the ongoing retrenchment of online penetration” that has left even Shein’s growth slowing in 2023, according to its Retail Trends Barometer.
But few believe that online retail has passed its peak. Forrester Research expects online retail sales growth to rebound to pre-pandemic levels in 2024. Its analysts forecast that combined online retail sales in Germany, the UK, France, Italy, and Spain will increase from €372bn in 2023 to €579bn in 2028, equivalent to a 9.2 per cent increase each year.
At Next, Wolfson wrote last year that the structural shift to online was “the least dramatic” event when compared to shocks such as the pandemic and the squeeze on living costs, but that it had “the most profound effect” on the business.
Udomsilpa says there is “a place for online players, and the online penetration will keep going up as the demographic changes and people have access to smartphones and internet.”
But she warns that the market cannot support the number of players it currently has. “There’s not room for all of them and there will eventually be consolidation.”
Major store-based retailers that poured investment into boosting online capability during the pandemic are not about to row back on those commitments. M&S generated 31 per cent of its non-food sales online in the six months to September and wants to reach 50 per cent by 2028. Frasers has acquired stakes in online retail businesses, including Asos and Boohoo.
Even value retailers are burnishing their online capabilities. Primark has recently said it will expand its click-and-collect services in UK stores to include more ranges, while Poundland already has a small online business following the acquisition of Poundshop.com in 2022.
“Our own narrative around digital is changing,” says Andy Bond, executive chair of Pepco Group, which owns Poundland and also operates nearly 3,500 clothing-focused Pepco discount stores across Europe.
“In years to come, we will have an online business,” he predicts. “But it’s a case of pace and timing.”
This article has been amended to reflect that Richemont posted a €700mn loss from discontinued operations, not €700bn
