Asos found out the hard way that resorting to promotions rarely has a happy ending

Asos issued a surprise profit warning this morning, despite the fact its retail sales grew by 25 per cent.


Sales in the UK were particularly strong, up 43 per cent in the three months to the end of May. That was ahead of sales both in the previous quarter (when they were up 32 per cent) and a year ago (when the rise was 39 per cent).

It seems Asos’ high flying sales have come at a cost – to maintain the growth expected by both analysts and investors it has had to discount heavily, hitting its profit margin.

Asos usually has about 3 per cent of its stock on offer. Last quarter that figure rose to 8 per cent.

The decision to resort to promotions came about because of the increasing strength of sterling, which impacts how much shoppers abroad have to pay for Asos’s products.

Asos suddenly found itself in a position where in markets like Australia its products were 25 per cent more expensive, purely down to currency fluctuations. It was supposed to be implementing zonal pricing, which would let it adjust the cost of items in each market where it operates and target promotions.

However, having originally said it would roll out the technology needed in April, chief executive Nick Robertson admits that date is still at least 3 weeks away.

In the meantime, shoppers in the UK are charged the same as those in Russia and China. That leaves UK shoppers getting a great deal but those in international markets still paying a pretty high price, even with the discounting.

Clearly the strengthening of sterling is something Asos can’t do anything about. However, its response to increase promotions sets a dangerous precedent. Asos’ fans are young and budget-driven, yet they expect a lot of value and high fashion for their buck.

If they start to expect almost 10 per cent of Asos’s clothes to be on sale and then find they aren’t, they could well hold off on making purchases with the expectation that they will soon be found at a discount. Or go elsewhere.

Resorting to promotions to drive up sales is a strategy many retailers have tried – from Marks & Spencer and Debenhams to New Look and Gap. Yet those who have performed the best in recent months – think Next and John Lewis – have done so by holding their nerve and only discounting during set periods.

Robertson admits the increase in promotions only led to short-term spikes in sales around the discount activity, not a sustained recovery. It was the wrong strategy.

Asos remains a robust business. Its ability to appeal to young, fashion conscious consumers increasingly shopping online and on mobile has been the root of its success. It remains profitable and continues to innovate in both ecommerce and digital marketing.

Yet it must beware the promotional trap. Here’s hoping it has learned its lesson.

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