ASOS wobbles as marketing missteps bite

ASOS plc, the British fashion e-commerce company, will write off more than £100m of stock and slash costs after profits plunged 105% in the wake of the cost-of-living crisis, supply chain challenges and marketing missteps. 

Why it matters

Case studies of brands under pressure are often more useful than those about success. As in this story, you often don’t realise you’ve been under-investing in brand (call it an economic moat) until you really need it. 

As we wrote in the latest Guide to navigating inflation and the threat of recession, strong brands shield companies by helping to sustain pricing strength, and therefore margins. 

What’s happening

In its recent earnings call, ASOS’s new chief executive, José Antonio Ramos Calamonte, said the business had become “excessively capital intensive, too complex and overstretched globally” with over-inflated costs and a lack of scale in key markets such as the US, Germany and France. 

Sales in the second half of its financial year had been lower than expected as ASOS’s shoppers tightened their belts amid worsening economic conditions. 

Under investing in brand comes back to bite

In addition to challenging economic conditions and inventory management challenges, ASOS’s failure to meaningfully invest in building long-term brand awareness versus performance marketing is now undermining the brand.

Asos had historically under-invested in marketing, Calamonte said, and had put more than 80% of its spend on performance marketing while “leaving insufficient spend focused on driving longer-term brand awareness” or developing new products.

“As a result of this, customer acquisition has slowed in FY22, whilst the cost to acquire a new customer has increased,” he said.

While the brand had intended to increase investment in the second half of 2022, supply chain issues then caused headwinds for the business. As such, that marketing investment was reduced to minimize impact on profitability, a move which saw customer acquisition decline. 

Over reliance on discounting

ASOS has also become increasingly reliant on the use of discounts and promotions to attract customers. This has contributed to the erosion of gross margin over time, compounded by a lack of ‘newness’ for shoppers. 

Despite that, the company is exploring options to open its first physical store in the UK to sell discounted clothing in an effort to get rid of its excess inventory. ASOS may also start sending inventory to discount retailers such as TK Maxx or sale websites. In future, the company will buy inventory closer to the time it will go on sale to ensure it has the right stock.

"We are considering our options", Calamonte said.

Guardian, The Scottish Sun, Retail Gazette, Marketing Week