In the wake of tough trading conditions for traditional clothing retailers such as Next, M&S and Debenhams, investors have placed high expectations on the success of their internet based counterparts. However, is the competitive environment getting to internet retailers as well?
In December ASOS issued a profit warning, which saw a knock on effect on the whole retail sector. Boohoo moved to reassure investors that trading was on track; with record Black Friday sales following an equally strong announcement in September that raised guidance after a good first half trading.
ASOS results showed good revenue growth of 14%, however investors were concerned by the short-term outlook for consumer spending. The company guided for lower expectations for full year revenue growth, due to greater competition in the sub sector. This saw ASOS and other competitor share prices tumble on the day. The trading statement also saw a significant fall in gross margins, although this remains high compared to traditional high street clothing retailers.
Online clothing retailers came to prominence due to their fast growth rate with the rise of social media and short run product lines responding to changes in style trends, with a quick turnaround from design to manufacture, hence the nickname ‘fast fashion’.
Revenue growth of online fashion retailers outpaced traditional counterparts, however we consider barriers to new competition remain low. The ability to produce higher gross margins is a key attraction of an internet start-up compared to launching a traditional high street shop. They also do not have the same fixed cost and marketing expenses to run operations. This has resulted in greater choice for the consumer.
There is also a growing trend where both investors and consumers are placing greater consideration on ethical credentials of the companies they invest in. In November the Government’s Commons Committee investigated the impact of clothes production with particular focus on low cost clothing. This has given rise to questions by the public over the demand on natural resources and labour to produce clothing at such a low cost. Interestingly, this could be an area where the high street could compete with independents selling second hand clothing and high street names such as H&M Group continue to grow their products made from recycled materials.
Although there are headwinds specific to the fast fashion industry, economic data remains encouraging. Last year, online clothing and footwear grew at 20.7% year on year, but online sales were only 21.8% of total sales in the retail sub-sector. This suggests to us that despite short term difficulties, the opportunity within the market remains high, given the low proportion of sales compared to the high street (ONS: November 2018).