ASOS (LSE: ASC) has fallen out of favour with the market over the past year as the company has issued numerous profit warnings. However, as the company tries to impress the market by discounting products to drive sales, the company is alienating its suppliers, which could be really bad news for the company.
It’s no secret that ASOS has been struggling. A strong pound, a fire at the company’s main distribution warehouse and increasing competition are the three main factors that have dented the company’s sales and profitability over the past 12 months.
Still, ASOS has been able to grow sales over this period by discounting its products heavily. Discounts of 20% to 25% are common according to suppliers.
To some extent, this discounting has worked. The company’s total revenues expanded by 30% in constant currency during the year to 31 August. But this growth came at the expense of ASOS’s gross margin, which fell by 640 basis points during the three months to 31 August.
Unfortunately, it seems as if things are only going to get harder for ASOS. Indeed, it has come to light recently that as a result of the company’s discounting, suppliers are now considering retracting their items from the company’s website.
ASOS has not always had a trouble-free relationship with its suppliers. In particular, some UK retailers have prevented the company from selling their products overseas. This latest spat, however, does appear to be more of an issue, as some suppliers have accused ASOS of “damaging their brand” due to discounts offered. One supplier was even quoted as saying that NEXT’s (LSE: NXT) new online and catalogue service, Label, was emerging as a viable alternative to ASOS’s current offering.
Still, no retailers have pulled away from ASOS yet. Nevertheless, last year the company’s aggressive discounting over the Christmas period was a major concern to suppliers. A repeat of heavy pre-Christmas discounting could be the last straw. So, things could change over the next few months.
Next’s new online fashion venture is a threat to ASOS’s dominance, although the venture is not trying to become the next ASOS.
Label was launched earlier this year, fronted by supermodel Jourdan Dunn and stocks brands such as Diesel, Superdry, Hobbs and Nike amongst others. Further, Label is no ordinary fashion website. It’s been designed to complement Next’s existing online offering, not boost it. Indeed, when discussing the potential for Label, Next’s management stated that:
“We are concerned that some might be tempted to exaggerate the potential of this new business, and we should stress that it will be naturally constrained by the fact that we intend to only sell premium brands and will not discount in order to recruit new customers…”
This is great news for suppliers who feel that they’ve been let down by ASOS. What’s more, Next already has a successful online and catalogue business, which it can use to boost Label’s exposure, operational efficiency and customer fulfilment.
Only time will tell
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