ASOS finds growing an expensive business

The internet based clothing retailer ASOS’ latest series of profit statements suggest that it has been hit by lower margins. The company is still growing at over 20% a year so its problems are relative, however one of its big issues is the size of capital expenditure in its logistics infrastructure.

As is increasingly the case with internet retailers, ASOS’ market is global rather than national, with 60% of sales made outside its home market of the UK. Yet a key part of its offer to the customer is prompt delivery of a huge range of stock followed by the option of rapid return of goods. Doing this within a traditional national market would be hard enough but doing it on a global scale is an enormous task.

Whilst ASOS is not small, with sales of £769m (US$1,292m/€948m) and a market capitalisation of several billion pounds, it does not have the vast resources, or possibly the inclination, to embark on the sort of investment programme seen at Amazon. Consequently it needs to outsource.

The company does operate its own central inventory and fulfilment centre in Britain with certain functions outsourced to Norbert Dentressangle and is now complemented by a fulfilment for non-UK business run from an outsourced facility near the main UK hub, run by Clipper Logistics. However ASOS is also in the process of creating an infrastructure across the world which is capable of serving its global customer base more responsively and cheaply. This includes the construction of what it calls an “Eurohub” in Berlin. This has been outsourced to the Dutch logistics company DOCDATA, using its warehouse outside Berlin as a fulfilment centre. In addition it has expanded its presence in the US with a new fulfilment and returns capability in Columbus, Ohio run by Innotrac Corporation.

More problematic has been ASOS’ facility in China. Here it has selected Kerry Logistics to both operate the returns centre in Shanghai as well as value-added services and customs brokerage. Yet China has not been a happy experience for ASOS with problems around sourcing locally produced items largely caused by customs regulations.

Looking at the break-down in the company’s capital expenditure, although logistics fixed asset investment is significant it is overshadowed by IT, which is more than half of expenditure. Whilst the level of capital spend is not huge at £68m for 2014, it does have a significant impact on profit margins. This illustrates that the priority for smaller internet retailers is to focus on core IT forcing them to outsource much of their logistics operations. This is clearly a major opportunity for logistics service providers with the right core competences.