Online pureplays: show me the money
This week’s Retail Note analyses the recent slew of profit warnings and downgrades among the online pureplay retailers.
6 minutes to read
Key Messages
• Widening losses at Ocado on the back of heavy investment
• Profit warning from Virgin Wines
• Declining sales and profit downgrades at N Brown
• Missguided only saved by emergency funding
• Pre-Xmas profit warnings from ASOS, Boohoo and AO World
• Many store-based operators issue profit upgrades
• These include Tesco, Sainsbury’s, M&S, Next, JD, B&M, Dunelm
• Online neither a silver bullet, nor immune to wider retail industry pressures.
Online pureplay ASOS unwittingly started a trend back in October, issuing a profits warning in tandem with the shock announcement of the immediate departure of CEO Nick Beighton. Not to be outdone, fellow online fashion pureplay Boohoo issued a profits warning of its own in the run-up to Christmas. Just before Christmas, fellow online fashion pureplay Missguided was only saved through emergency funding from Alteri. Erstwhile mail order stalwart now online pure-play N Brown (JD Williams, Simply Be, Jacamo) reported a sales decline in its post Xmas trading and warned that profits would be at the bottom of expectations.
Nor have online fashion pureplays had a monopoly on profit warnings and downgrades. Online electricals pureplay AO World issued not one but two warnings in October and November last year. Online pureplay Virgin Wines issued its own warning a couple of weeks ago. Not for the first time by any means, online grocery pureplay Ocado reported widening losses at its annual results this week.
Compare the newsflow of the online pureplay “disruptors” with recent trading updates from the old guard. Most of the store-based / multi-channel operators reported strong trading over Christmas and rather than profit warnings, many actually issued profit upgrades. This list included the likes of Tesco, Sainsbury’s, Next, Marks & Spencer (for the first time in years), JD Sports, Superdry, Halfords, Pets at Home, Hotel Chocolat, The Works, B&M and Dunelm, to name but a few.
Online pureplays all warning on profits, multi-channel operators all upgrading profit projections - what can it mean?
Multichannel outperforms pureplay?
Clearly , this isn’t the beginning of the end for online pureplays but it is something of a levelling of the playing field as lockdowns increasingly become a distant memory. But more than anything else, recent trends again highlight the limitations of many of the broad-brush assumptions around online.
"Compare the negative newsflow of the online pureplay “disruptors” with recent trading updates from the old guard. Most of the store-based / multi-channel operators reported strong trading over Christmas and rather than profit warnings, many actually issued profit upgrades."
The backstories behind the various profit warnings of the online pureplays are varied rather than wholly consistent – there is not necessarily one common thread, each operator had their own narrative. ASOS flagged increased freight costs, Brexit duty, outbound delivery costs and higher wages. Boohoo blamed a number of factors for the downgrade, with “significantly higher returns rates” hitting net sales and impacting margins in the UK, while a fall in customer demand and issues with air freight reportedly affected European and US sales respectively. Boohoo flagged that returns were 12.5 percentage points higher in the period than in the previous year and seven percentage points higher than pre-pandemic levels due to the “exceptionally high dress mix”.
AO World largely blamed Germany for its underperformance. UK sales were “broadly stable” compared with the same period last year whereas its German business suffered a 24% decline. It attributed this to a number of factors, including competition in the online market, an increase in digital marketing costs and supply chain constraints.
At Ocado, the story remains the same as it has been virtually since the business was founded – profitability continues to be sacrificed in favour of investment in technology and infrastructure. At last week’s analyst presentation, the business unveiled a host of upgrades to its Smart Platform. Ocado Re:Imagined is a suite of new hardware and software technologies that collectively represent the biggest leap forward for the business since it started selling its Ocado Smart Platform (OSP) to third parties in 2014.
In short, all the online pureplays have their own story to tell.
"Online is never the silver bullet many purport it to be. It is merely a channel of distribution, not an infallible solution. Online is not incubated from wider pressures in retailing, online pureplays are just as exposed to economic/operational/competitive challenges as their store-based/multi-channel peers."
Online narrative is flawed
One of the lazy catch-alls of COVID is that it has accelerated change (five years in just five months, apparently). To my mind, many factors have actually regressed rather than advanced. Media coverage on the retail sector seems to reverted to type at best, gone back five years at worst (‘death of the high street’ etc etc).
Sadly, the narrative on online retailing has also gone backwards over the last couple of years. Before COVID, we were slowly learning the realities of a multi-channel world. Although an infinite voyage of discovery, we were slowing coming to the realization that shopping channels did not operate in splendid isolation, but were actually co-dependent. By the same token, online penetration statistics were becoming increasingly redundant and meaningless. But during the pandemic, this thinking has essentially gone out of the window, online and store-based retailing are again regarded as binary forces and online penetration statistics are once again supposedly gospel. Which is altogether very disappointing.
The ’travails’ of the online pureplays is not the direct result of a return to store-based retailing. Yes, online sales are definitely receding, but from artificial highs achieved during the pandemic. None of the online pureplays have fallen into the trap of Peloton, which has seemingly predicated future demand based on highly abnormal market conditions that could not continue indefinitely. Its business model appears to be based on unsustainable peaks of demand. The online pureplay retailers would have enjoyed something of a demand spike during the pandemic, but none were fool enough to assume that these patterns would continue indefinitely.
The real implications
The slew of profit downgrades at the pureplays highlights two key issues. Firstly, online is never the silver bullet many purport it to be. It is merely a channel of distribution, not an infallible solution. Online is not incubated from wider pressures in retailing, online pureplays are just as exposed to economic/operational/competitive challenges as their store-based/multi-channel peers. Secondly, online pureplays have a vastly different base of expectation (and the City really needs to heed point 1). The likes of ASOS and Boohoo are not unprofitable by any means, but will perhaps struggle to live up to each and every City expectation, particularly as they mature.
Of course, this is by no means ‘the beginning of the end’ for the online pureplays. It would probably be wrong to interpret recent events even as the multi-channel operators fighting back, At the same time, it is probably a bit more than just a temporary blip. All things considered, it is probably more of a ‘coming of age reality check’ than anything else. And we all experience those from time to time…