Beaten online retailers need a new fashion model
Selling cheap tops and shoes to 20-somethings is tough business. Without physical outlets, customers buy multiple items to get the perfect shape, size, and color. Retailers like £820m ASOS and £710m Boohoo absorb the cost of free deliveries and free returns. The latter is particularly tough. Along with the physical collection, there’s the washing, processing, and then a potential discount to get a returned item resold quickly. With households tightening their financial belt, customers send back more goods. This increases retailer administration costs and fraudulent sales.
Established retailers have already ditched free returns. Britain’s Next introduced a £1 fee in 2018 for certain returned online items. Inditex followed suit in May with a £1.95 fee for all online returns in Britain. The main idea is to make customers more disciplined in their buying habits. But retailers can also argue that with fewer vans driving around picking up unwanted clothes, they’re becoming more sustainable.
However, the change is likely to hurt. In good economic times, free returns services can inflate sales – customers are more likely to keep items and forfeit a refund if they don’t feel the pinch elsewhere. But with the UK, ASOS’ home market, mired in a cost of living crisis, the opposite is now true. Based on the company’s valuation multiple multiplied by 3.3, the £300m cut from ASOS’ market value on Thursday implies a nearly £100m drop in EBITDA. That’s 40% of earnings before interest, taxes, depreciation and amortization this year, according to analyst forecasts compiled by Refinitiv. Faced with such a lose-lose situation, the idea of charging customers for returning clothes doesn’t seem so silly.