Consumer Slump Will Hit Online Retailers Too (#GotBitcoin?)
An unexpected profit warning in Europe suggests internet stores may be less resilient than expected in consumer downturns. Consumer Slump Will Hit Online Retailers Too
Online retailers haven’t so far been properly tested by a consumer-spending downturn. Early signs from Europe suggest they won’t be as resilient as tech bulls might hope.
Roughly $3 billion has been wiped from the value of shares of ASOS and Zalando , two major European online fashion retailers, this week after the former flagged a slowdown on Monday. ASOS was hit by dismal demand in November, just like regular malls and bricks-and-mortar stores. The London-based company, which specializes in cheap but trendy clothes for 20-somethings, blamed weak consumer sentiment and “economic uncertainty.”
This is an eye opener for investors who have few clues how e-commerce will fare in the next consumer recession. During the 2008 financial crisis, most grew rapidly thanks to the shift to internet shopping. But as online markets mature—U.K. online sales are growing at half the rate they were two years ago—e-commerce companies will lose that structural boost.
Thin margins make online retailers particularly vulnerable in a slump. ASOS expects an operating margin of just 2% this year—half what it previously expected and much lower than even the most stressed high-street retailers. One reason is the need for heavy investment in automated warehouses and distribution centres. ASOS has been building a major hub in Atlanta to serve the U.S. market, for example.
Internet retailers don’t pay for prime storefronts, but they do face major logistics costs that bricks-and-mortar players don’t. One third of all clothing ordered online is returned, compared with around 8% for items bought from the shop floor. And processing a return costs $3 when it is handed to a shop, but $6 when it is shipped back to a distribution center, data from consulting firm AlixPartners show. ASOS said it has to foot the bill for free delivery to maintain an edge over traditional shops, even though orders are getting smaller.
Investors have been cooling on European internet retailers. Shares in Britain’s Boohoo.com and Germany’s Zalando were in the red for this year even before this week’s rout. ASOS shares now trade at a 50% premium to those of Zara-owner Inditex on a prospective earnings basis, compared with 180% just eight months ago. Investors still think online-only players are a better bet—but much less so than they once did.
For now, consumer confidence remains strong in the U.S., and shares in online retail giant Amazon are up 26% this year, even as the tech-heavy Nasdaq index has fallen. This week’s lesson from Europe is that e-commerce doesn’t necessarily offer protection from plunging consumer sentiment. Investors should take note before it is the U.S. economy’s turn to cool.Go back