I received two emails from ASOS this morning. One to my professional inbox detailing new CEO José Antonio Ramos Calamonte’s turnaround plan, titled “Driving Change, Now”, and one to my personal inbox, titled, “Up to 50% off our BIGGEST labels 🚨😱”.
Not being particularly fluent in the language of emoji, I’m not really sure what 🚨 means (what can I say? I’m not exactly ASOS target market these days) but if you’d told me 12 months ago that ASOS would swing to a loss and post growth of just 1% in its coming financial year, my reaction would probably have looked something like 😱.
But this morning that’s exactly what the young fashion giant, and former darling of the London Stock Exchange, did post for the year the year to 31 August 2022. Sales in the period had squeaked up 1% to £3.94 billion while it reported a loss of £31.9 million. The sales growth was dragged down by the rest of world performance where sales were down 9% (largely due to pandemic-hangover delivery disruption). The UK was “resilient” with sales up 7% while the US was up 10% and Europe up 2%.
Not that any of these numbers were much of a 😱 today because the results had been telegraphed in a trading update last month and not even ASOS – a former rock-solid performer – could have been immune to the economic turbulence in the UK and beyond, changing consumers priorities and the ongoing global supply chain turmoil. It is far from the only fashion retailer to have been hit by these challenges, as well as soaring returns rates, which have dogged etailers in particular (though Ramos Calamonte has said he will not be looking to charge for online returns as his old employer Inditex has done with Zara).
But there are some issues that have been somewhat self-inflicted at ASOS and there are many things that the business can do to shore itself up and position itself more positively for the future, and Ramos Calamonte, the former Inditex executive who took over the top seat at ASOS in June of this year, laid those things out this morning.
So what is he going to do? Well my jolly 50% off emails may dry up as he’s pledged to take a “differentiated approach” to stock mark-downs, which doesn’t just mean he’ll be switching up the emojis, but he’ll be taking promo activity off-site where possible and will be focusing on more full price sales. Rather than continue deep discounting, the business has estimated that it’s going to have to write off stock to the tune of £100m to £130m in the coming financial year to free up warehouse space and wipe the slate clean.
He’s not really happy with how marketing has been performing in general. According to Ramos Calamonte, there has been insufficient focus on marketing in core markets and too much emphasis on short-term performance marketing (which sucks up 80% of the marketing budget) and not enough on long-term brand marketing, which is interesting.
The new CEO appears to understand full well that even though ASOS has a high profile, increased competition means that it can’t take for granted that it will forever remain front of mind for its target market of fashion-obsessed 20-somethings and it must continue to re-inforce its reputation as a true fashion authority wherever and whenever it can. A new visual identity and brand handwriting for Topshop and Topman are indicative of this refreshed thinking around brand.
It should also get on the front-foot when it comes to sustainable practice and the communication of it. A recent rap over the knuckles from the CMA (Competions and Markets Authority) over greenwashing was frustrating to see as ASOS has always held itself to a higher standard on matters of CSR than many of its rivals, so it really should have done better here.
“[ASOS] must refrain from using vague language to market items as environmentally friendly, or weak criteria to decide if products are sustainable.” says Chris Daly, CEO of the Chartered Institute of Marketing.
“We know that consumers are increasingly sceptical of brands’ sustainability efforts, with our research finding that 63% believe many brands only get involved with sustainability for commercial – not ethical – reasons. Building consumer trust in these challenging times is a prerequisite for sustained success, so it’s essential that ASOS’ next steps are in the right direction,” Daly adds.
Elsewhere Ramos Calamonte’s action plan centres on four key areas, which he sets out as follows: renewing its commercial model and improving inventory management; simplifying and reducing its cost profile; ensuring a robust and flexible balance sheet; and reinforcing the leadership team and refreshing the culture. In parallel to that he will also be working on creating long-term value for its shareholders.
So, exactly how will the new chief tackle those four areas, which will hopefully lead to a better outcome for shareholders? Here’s what he says.
1 Renewing its commercial model and improving inventory management.
Following the completion of the commercial reorganisation in FY22, changes in ASOS’ approach to merchandising and buying will be “accelerated in support of a more competitive proposition and tighter stock cover”. This, says the new CEO, will result in: a shorter buying cycle to enable a more relevant and better curated customer offer. It will also take a more flexible approach to stock, leverage its ASOS Partner Fulfils capability (whereby partners fulfil their own orders) and look at near-shoring more product using a “Test and React” model, which sounds remarkably similar to rival Boohoo’s “Test and Repeat” model (which relies on it producing much of its product in the UK). As previously mentioned it will also push stock clearance off-site where possible, resulting in fewer markdowns and a higher rate of full-price sell-through.
2 Simplifying and reducing its cost profile:
After years of high growth, “the operating model has become inefficient”, reckons Ramos Calamonte, therefore ASOS will take action to improve order economics and ensure a sustainable level of profitability in all markets, while focusing efforts on key markets. He has promised to coordinate this effort “with a clear focus on optimising our cost base, improving supply chain efficiencies, and eliminating excess costs through increased controls”.
3 Robust, flexible balance sheet:
Earlier this week, ASOS had to respond to media reports that it was renegotiating its credit facility and that its lenders had appointed advisers to keep them appraised of developments. This matter has now been sorted, it seems, with the renegotiation of core banking covenants, with cash and committed facilities of over £650m at year end. “Our future investment will be aligned with capacity requirements to ensure a more efficient allocation of capital, while planned strategic investment in technology will be maintained in support of an improved customer experience,” says Ramos Calamonte.
4 Reinforcing the leadership team.
Ramos Calamonte will be simplifying decision-making processes to “encourage a culture of innovation and creativity across the business”, while reinforcing the senior leadership team with strategic key hires. One recent key hire was a former Inditex colleague, Elena Martínez Ortiz, who has joined as design director for womenswear. It will be interesting to see who else he brings on board to re-invigorate proceedings (a good brand marketer perhaps?).
“Today, I have set out a clear change agenda to strengthen ASOS over the next 12 months and reorient our business towards the future. This includes a number of decisive, short-term operational measures to simplify the business, alongside steps to unlock longer-term sustainable growth by improving our speed to market, reinforcing our focus on fashion, strengthening our top team and leveraging data and digital developments to better engage customers,” said Ramos Calamonte.
“On the basis of the actions I have set out today, the team and I will work resolutely to emerge from these turbulent times as a more resilient and agile business – all the time guided by our purpose, to give our customers the confidence to be whoever they want to be,” he added.
So, will all of this deliver the much needed long-term value for its shareholders, after shares slumped to a 12-year low of late? Well, clearly it’s too early to say, but ASOS shares rallied by 12.25% today alone taking them back to 550p. There’s a long way to go – this time last year shares were trading at 2,715p – but that does at least indicate that the market gave the CEO’s first major strategic announcement a 👍, rather than a 😱, and you don’t need to be fluent in emoji to know that that’s a good thing.