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Anonymous

Former Sales and Marketing Director at Zalando

ASOS, Zalando, & EU Fast Fashion

Former Head of Buying at New Look 

The Evolution of Buying and Merchandising Functions in Mid-Market Fashion Retail

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:21} Maria, can you share some background to your role and responsibilities during your time at ASOS?

{audio:0:00:27} I was on the executive board at ASOS and my title was Executive Project and Trading Director, and I was responsible for procurement and presentation of all the products. That was from initial design, sourcing, buying and negotiating the prices, merchandising, which entails how much we can buy when it comes in, through to presentation on the site meaning imagery and copy. It wasn't a big team when I started but grew to about 800.

{audio:0:01:14} How did ASOS structure their buying and merchandising teams compared to traditional retailers?

{audio:0:01:22} It was not that different at the time. When I joined in 2011, they had £300 million turnover. They were a first mover online and the focus then was to get product on the site. They had gone for a brand grab so there were many buyers. In traditional retail environments, you have one merchandiser for every buyer, whereas at ASOS we had merchandisers working with up to five buyers. It lacked any science behind it and because of their growth trajectory they could sell anything they bought, but as you get bigger, things get harder and you make more mistakes because there is more at stake.

{audio:0:02:23} We grew the merchandising team to do that science and ensure we bought the right amount of products at the right time, instead of simply constantly building up stock. We started to add some efficiency to it which was probably the first stage. We also increased our design resources which was clearly about our own buy label, that grew substantially during my tenure. The number of categories we were buying meant our design resources had to grow in line with that, as did our quality assurance. It wasn't that different from traditional high street retailers; it was simply evolving and catching up. The other big change we made whilst I was there was to create a sourcing team to become more efficient at sourcing own buy products.

{audio:0:03:25} What are the challenges ASOS faces today?

{audio:0:03:37} Their product offering is less defined and I feel that they have lost their edge. When I was there, we were very prescriptive about the type of brands we brought on board, and at that time if you were on ASOS, it had to be cool. As they have grown, they added more mainstream brands and now service a broader demographic than they perhaps used to.

{audio:0:04:29} So less about their organizational structure and more about companies merging or converging to similar assortments?

{audio:0:04:38} They have some growing pains because they are now a more complex business. When I joined, they were only fulfilling out of Barnsley in the UK. They now have another UK warehouse and an overseas warehouse, which makes it more complicated. I was there when the first warehouse in Berlin opened, and it was difficult to organize. It is not only about their product assortment; they are going through some growing pains and navigating something which few businesses have managed to do previously.

{audio:0:05:10} How did sourcing practices at ASOS differ from traditional retailers?

{audio:0:05:23} ASOS bought close to their market to reduce lead times, making them more agile and reactive to consumer trends. The requirement to buy on shorter lead times meant they were sourcing closer to home than the big high street retailers, which is still true today because they continue to introduce new lines regularly. Therefore, they bought less volume than someone with 300 stores. Shorter lead times and lower volumes doesn't lend itself well to places like the Far East, which have longer lead times and generally bigger volumes as well. The big difference was the mix of stock being brought from the Far East, and ASOS were probably half that of Arcadia who bought product categories not manufactured in Europe. ASOS sourced a lot from Europe and Turkey, but footwear, outerwear and denim came from the Far East, although they eventually moved to Mauritius for those.

{audio:0:06:50} Can we talk through that process of ASOS launching a new short lead time product like a new dress? How do they work with suppliers? Is the fabric with the supplier or do they have to ship it to them? What is the first step in that process?

{audio:0:07:09} It depends on the product. Some suppliers hold stock but it depends on the color. A black jersey will be quick, whereas an embroidered or woven fabric in a specific color will have a much longer lead time. If you're buying out of Europe, the transportation time alone will be much faster, allowing for more agility. In most instances ASOS had arrangements with fabric mills that we could get it to the suppliers quickly.

{audio:0:07:47} It reminds me of Zara's supply chain; how would you compare the two?

{audio:0:07:56} Zara have a more vertical operation as they own some manufacturing capabilities. They would have raw materials right through to production of the garment, whereas ASOS do not own any factories and work with suppliers who produce components. Suppliers would often source those components themselves which is different from the Zara operation model.

{audio:0:08:32} You mentioned they don't buy as deep as traditional retailers; what is the difference in how many units they purchase, relative to the older traditional retailers?

{audio:0:08:42} Again, it will depend on the retailer. At the time, 1,000 units would be a decent sized buy for ASOS, whereas Topshop could be anything between 4,000 to 10,000 units on a line. The key difference is, if you're trying to get a line you want represented in your chain of stores, you have to buy it in all sizes for all stores, and you need to buy minimum quantities, just to arrange it. With online you only have one place to put it and you can buy it to the demand you think it will command. Stores always have wastage due to fringe sizes they have to have in every store to have an inclusive offer, but not all stores will sell through. That wastage element obviously leads to higher mark downs.

{audio:0:09:44} How close can online retailers get to producing to the correct demand level relative to offline players?

{audio:0:09:54} If I knew that I would be retired, but they can do it more closely. Merchandisers continuously analyze size ratios because they change and it depends on specific styles which have different size biases. It is easier to get it right if you only have one point of distribution as opposed to having 200 and you need size availability in all of them.

{audio:0:10:23} How do you look at the inventory risk for online retailers relative to offline?

{audio:0:10:31} Similarly, you might have a drop-dead item in terms of a trend statement but high fashion items often come with high risk, because they will either be a winner or totally fail. When a retailer chooses to put that in the window of every store, they have to buy a minimum quantity, whereas ASOS can give that line exposure to demonstrate their cutting-edge fashion, without purchasing huge volumes.

{audio:0:11:05} Does that give them a fashion advantage in the consumer's mind?

{audio:0:11:10} Definitely. When I joined ASOS they were buying too much volume of high-risk items, which we changed. We still bought leading-edge fashion, but in tight quantities because we wanted to sell out of it. If you get a leading-edge fashion item wrong, you have to offer large discounts to get rid of it, so we would always be quite measured about that.

{audio:0:11:39} How can Zara or H&M sustain their position if ASOS and Boohoo can be so much quicker and take more fashion risk?

{audio:0:11:52} Zara have an incredible model with a global reach. ASOS and Boohoo are striving to break into those markets, but Zara are trend led which allows them a broader demographic. Boohoo and ASOS target a younger demographic and their fashion has a less broad appeal.

{audio:0:12:26} So it’s a challenge for ASOS to continue to grow beyond £5 billion?

{audio:0:12:33} Is there any reason ASOS cannot jump onto broader trends like Zara?

{audio:0:12:38} Back in 2011, ASOS targeted fashion for 16 to 34 years old, and in 2012 the mission changed to be the number one fashion destination for a twenty something. By being more specific about who we targeted, that created the kick start for ASOS's growth, because not only was the product targeted at that demographic, so was all of our content. The way our tone of voice and how we spoke to the customer was targeted at that demographic. ASOS still do that really well compared to some of their competitors like Zalando, who target a broader age demographic. It is therefore harder for them to speak to their customers. While it is a good thing, it also holds them back.

{audio:0:13:52} Zalando use third-party brands to speak to their customers, where ASOS curate their own message more with their own brand?

{audio:0:14:05} ASOS have definitely cracked the own brand model better than Zalando has. We worked hard on that and they have continued to expand on it. When I joined, the womenswear and menswear offers were quite different, almost like they were parts of different businesses. The womenswear offer was biased towards own label and lacked a developed branded offer. They targeted premium diffusion design ranges which was not aligned to their core customer. Menswear had a brilliant branded offer, but was less developed in the own label, and we tried to get a better balance across the two.

{audio:0:15:02} There was also some categories they over indexed in. Womenswear own label was dominated by the going out dress, whereas on menswear it was jeans and t-shirts. We broadened out both genres by introducing more casual wear and separates in womenswear and more formal wear on menswear like tailoring, formal shirts, accessories and underwear. We went after making the ASOS own label a very credible brand that stood in its own right. Quality and price went hand in hand in that and our mission was to make this an affordable, fashionable, accessible, good quality, good value brand. That was very successful for us and was a key pillar in ASOS's strategy. Zalando have moved away from own label and are more focused on the branded offer.

{audio:0:16:10} Is there any difference in the quality of ASOS's own brand versus Boohoo?

{audio:0:16:19} ASOS is better and when I was there, we targeted Topshop rather than Boohoo. We actively used to benchmark Topshop and undercut them. We wanted to offer their price and quality, but at a more affordable price. At the time, Topshop wasn't stocked on ASOS.

{audio:0:16:43} Is the supply base different in terms of the materials and suppliers you use?

{audio:0:16:51} Topshop sourced mostly from the Far East, with few exceptions.

{audio:0:16:59} How could you compete on price when sourcing closer to home which is typically more expensive?

{audio:0:17:05} We would pay more for the actual cost price, but the beauty of buying closer to the market is you're buying closer to consumer demand. Although our intake margin might be lower than Topshop, not spending the discount meant we achieved better margins. What we put into the cost price, we saved in the discount.

{audio:0:17:32} The average intake or landing margin for retail is 70%?

{audio:0:17:38} It was less than that in ASOS.

{audio:0:17:41} Say 60%, then you discount 10% to get to a 50% earned margin?

{audio:0:17:47} Your margin is less because you're buying close to home, 60% margin, but then you're only discounting 10% versus the other retailers who discount 25%

{audio:0:17:58} Exactly, the lower depth of discount compensated for the higher cost price.

{audio:0:18:03} When purchasing 2,000 units of a dress, what is the typical merchandising process at ASOS and how would it differ to other retailers?

{audio:0:18:29} If you bought 2,000 units of a dress, you have already done the merchandising bit, which is about assessing the demand for the product. That will drive the quantity you buy. You will look at historical data to see many how many were sold, and align it to customer growth. If you have 20% year on year customer growth – which back then was feasible – chances are you will sell 20% more of every line. My volumes would be going up naturally, but I would also be looking at historically, a good line for us, a mediocre line, but layering into that. Is it particularly on trend? Was it on trend last year? Is that trend getting more or less important? Those are things you would take into consideration when deciding what quantity to buy. That is no different to what traditional retailers do. The only difference is having that flexibility if you are not forced to buy minimal quantities because you need it ranged in many stores.

{audio:0:19:43} How did you look at the level of newness? Zara launch 1,500 new items per week; how did you look to optimize that at ASOS?

{audio:0:20:02} Every year we would be buying more items in per week, but when I left it was around 3,000 a week. The key for that was when you're dealing with that level of SKUs, you have to have a fast and efficient stock turn. We were buying more SKUs but our stock levels were not going up at the same rate because we were turning the stock really quickly. We would get a new line in, sell it out, get rid, get the new line, then the next new line. That is how we optimized our SKUs. We bought on shorter line lives so that we were selling out faster. There has been a big investment by ASOS in distribution centers which has been necessary. There was big capacity increase to accommodate the increase in number of SKUs, but you cannot simply keep exponentially adding more warehouse space, you have to turn that stock quickly. We would turn it within six weeks, which was half what it was when I joined.

{audio:0:21:19} Does that minimize any inventory risk if you buy very short amounts?

{audio:0:21:29} We would do what I call flat buy, where you would still try to buy more of what you thought would sell best, and there were some lines that you would go back and repeat; you would be geared up so you could get back into it. If something was particularly good you would go back to the supplier and repeat, if you get into it quickly. We used to do that but we would try to get the demand right to start, because peak demand is when it first hits the site. You want your optimal availability when it hits the site, maximize the demand, then sell it out. You also have returns coming back which almost act as a replenishment. That is why we bought on quite short line life, so get it in, maximize the demand, the returns will come back, keep it going longer, then get out of it and bring the next new thing in.

{audio:0:22:20} Can you use the returns as replenishment for incremental demand?

{audio:0:22:27} What is the return rate in the UK? I've heard 60% in fashion, is it really that high?

{audio:0:22:33} Yes, it was. When I left, it was in the mid 40s, but again it depends on the category. It is always higher in womenswear than men’s because women have a propensity to buy and return more things, being more experimental in their wardrobe. Some items are fit critical. A dress is much harder to fit than a top, because you have to fit both top and bottom. You would also have occasion wear dresses which always have higher returns because consumers buy a few. You have to think about the home as being their fitting room. If you were out shopping you would probably take a few dresses into the fitting room to see which one you like best. With occasion wear dresses, exactly the same is going on; your bedroom is your fitting room. You might buy two sizes to see which one fits.

{audio:0:23:31} Price is also a big driver for returns. The higher the price, the more it has to be perfect, and if it's not, the more likely they will return it. The return rate varied but the average was about 45%. Over lockdown, ASOS reported reduced return rates and that was all about category. They were selling less occasion wear and going out dresses, and more lounge wear which is less fit critical and lower priced.

{audio:0:24:02} On the newness point, did you have a target for a mix of always-in-stock products or did you simply replenish the assortment each year?

{audio:0:24:16} You always have an element of core essentials such as skinny jeans and t-shirts. They played quite a mix in ASOS compared to the other retailers I have worked with. There was an element we would keep in stock all the time but the model worked on newness.

{audio:0:24:46} How do you compare optimizing inventory turns online versus offline?

{audio:0:25:02} Yes; ASOS seem to be optimized to turn inventory much quicker, have less fashion risk and buy closer to market. Does that give them a structural advantage to turn inventory quicker and therefore offer lower prices compared to offline retailers?

{audio:0:25:22} They are definitely able to turn stock quicker because it is one stock pool, but that has changed because they no longer have one stock pool, they have at least three. They now have a UK, a European and a US stock pool, so that will impact their ability to turn stock faster. With one stock pool, all your demand comes out of that one pool, so you can turn it faster, whereas with 200 stores, you have 200 stock pools and you hope to have it in the right place. If the customer wants that dress in a size 12, it has to be in the store she happens to visit, otherwise you won't sell it, and therefore that automatically slows things down.

{audio:0:26:07} How do you look at the longer-term advantages online retailers have over offline retailers or even omnichannel which have multiple inventory pools?

{audio:0:26:17} There are some clear advantages for the pure players, but omnichannel retailers who get it right also have some advantages. Having a store presence has a halo effect online, and vice versa; when you go online it can also drive consumers into stores. Often consumers will do their research online, then go into a physical store to make the purchase. The retailers who can finesse that omnichannel model will probably be the longer-term big winners. It is interesting, post lockdown, to understand what the longer-term consumer behavior will be. Clearly whilst we were locked down, the digital players had an advantage.

{audio:0:27:20} Stores were shut and we saw massive increases in traffic. When stores reopened, all retailers expected the digital penetration to remain high, but stores have bounced back much better than we thought they would. That has impacted digital traffic and revenues, but I think we are in a state of flux and it has not settled down yet. There is still a honeymoon period for stores because we were locked out of them for so long. That remains a challenge for all of us at the moment, trying to understand what the long-term impact will be. There is no doubt digital is still far bigger and has greater penetration than it did pre-lockdown, but where will it settle? There is room for both stores and digital, but the key is getting them to work together, and we are all still trying to work that one out.

{audio:0:28:27} When you looked at pricing at ASOS, did you have a full price sell through target or maximum mark down?

{audio:0:28:42} At the beginning of any season, we would always budget to hit a specific full price percentage of sales, which was usually around the 70% mark. That would dictate how much we invest in stock. It did not impact pricing because of the way we priced. We knew where we wanted to be positioned in the market so that always dictated the price of our garments. We kept a very close eye on Topshop and Topman who were market leaders at the time. I felt they were getting quite expensive and that ASOS had an opportunity to take some market share, so we purposely undercut them and went one price point lower. If they were £25, we were £20. We purposely took market share from them and definitely hurt them.

{audio:0:29:48} How sustainable is that position for ASOS?

{audio:0:29:51} At the time, the ASOS own label was trying to get established. It was dominant in going out dresses but lacked a jeans business in womenswear. We needed to give customers a reason to try us. We had the aesthetic and design, but we needed to get them to purchase because they could not go into a shop to touch or feel the ASOS products. Our approach was to ensure the quality and value was there so that they would came back and repeat purchase. We would benchmark them and ensure we were very competitive. We managed to get closer to Topshop and ASOS is still slightly lower than Topshop, but the differential is less.

{audio:0:30:53} How have Boohoo changed the game with their price point?

{audio:0:30:57} Boohoo is a different animal whose quality is not comparable to ASOS or Topshop.

{audio:0:31:15} Are they simply a different target customer?

{audio:0:31:17} They are literally throwaway fashion, so Instagram it, then chuck it.

{audio:0:31:26} We've been saying it's not sustainable for years but are things changing?

{audio:0:31:30} My personal view is that we are not seeing it yet but, over time, it will catch up. The pandemic has brought sustainability much higher up the agenda. We are all thinking, what have we done to this planet? It has made people more socially aware and responsible. People are pulling together as communities more so it has knocked on people's conscience. We still have very young customers who are more interested in what they look like and having the latest outfit, but that will change over time. My 13-year-old daughter will not shop a Boohoo or Pretty Little Thing for that very reason. It might be my influence but none of her friends shop there; they are all looking for alternatives.

{audio:0:32:43} Boohoo have had stuff in the press about their supply chain; what makes Boohoo products lower quality than ASOS?

{audio:0:32:57} They use a lower grade fabric but a lot of their stuff is made out of Leicester. There isn't the sophistication of manufacturing in the UK so they are limited to simple garments. There is little complication to the construction of these garments, so they are cheap to make.

{audio:0:33:28} What is so complicated about making the garments?

{audio:0:33:30} In terms of seaming, jerseys are easy to make up, but there is no capability to make jeans in the UK because it involves a more complex manufacturing process.

{audio:0:33:53} That is obviously harder to scale as customers get older and there are other categories which cannot be manufactured in the UK.

{audio:0:34:01} Yes, that is definitely the case.

{audio:0:34:05} Did you have a maximum mark down you would implement? If you made a fashion risk and decided this has to go, would you discount it as the demand required?

{audio:0:34:18} Exactly that. I have a budget mark down, and I would always try and spend less, but if you're having a bad season, at the end of the day you've got to liquidate your stock. Holding onto something will not up the value. If it is not wanted when it is first brought to market, you have to deal with it. Holding on in the hope it will get better doesn't happen. I would always try and deal with those issues relatively quickly and not hang on to it. You would mark it down until it hits a price where people will buy it.

{audio:0:34:50} Do you mark it down after a month?

{audio:0:34:55} You will know when to take action within a week or two. Usually, your best week is the first week it comes to market because it is new. It might not be a worst seller, but simply not hit the quantities you thought it would. You might simply give it a tickle, a small price reduction to get it moving. When you have a worst seller – what we call a dog – you will halve the price or less because, at the end of the day, the price will stimulate the demand to sell out.

{audio:0:35:43} Does the ASOS model of purchasing smaller amounts, being quicker to market and closer to the demand, give them an advantage to not mark down as much as physical retailers?

{audio:0:36:02} It is not necessarily the online piece, but rather the sourcing piece which gives them the advantage. Online gives you faster reactions because if you are store based, you have to get the stock in and distributed to your stores, which could take a week for a reaction. With online, you have a reaction within hours, so you know much faster whether you have a winner or not. That gives you an advantage but buying close to the market is not about being online; that is about your sourcing model.

{audio:0:36:41} Zara have 58% gross margin relative to H&M at just over 50% so can we assume Zara marks down far less than H&M?

{audio:0:36:57} Yes, because their sourcing model allows them to be more reactive.

{audio:0:37:00} It seems Boohoo has replicated the Zara sourcing strategy, but have done it online which gives them a faster feedback loop than Zara?

{audio:0:37:13} Yes, but they use subcontracted suppliers where Zara use a combination of both. They will use the same suppliers as ASOS and Boohoo where they outsource to a manufacturer, but they also have their own vertical operation where they even produce their own fabric.

{audio:0:37:36} What is the biggest risk in ASOS's sourcing and fashion led model?

{audio:0:37:43} I am quite surprised by how much ASOS are currently discounting. It seems they are offering 20% off everything weekly, even if only for a day. That indicates that either they are not doing the sales or they have an inventory problem, or a combination of both. That might be due to them being less targeted on a unique product offering. They are much broader and more mainstream. It is difficult to tell from the outside looking in, but it feels as though something is not working for them, which is translating into a lot of discounts.

{audio:0:38:27} Gross margin declined from 52% eight years ago to 45%, which they claim is due to Brexit and duties.

{audio:0:38:38} That won't be helping and you will see this in many retailers for this financial year; the cost from the supply chain has been astronomical, freight has gone up six-fold. Every retailer will experience that, so that is genuine. Brexit will impact them in duties and taxes.

{audio:0:39:10} Does a 6% decline insinuate that they no longer have product market fit with their specific target customer?

{audio:0:39:23} They have lost their edge in becoming so mainstream, but there is also the complication of having more than one pool of stock, so they have to get that distribution right. They have to learn about those markets which will add pressure and difficulty for them.

{audio:0:39:46} Especially when they are also shipping to the US from the UK.

Former Product and Trading Director at ASOS

ASOS, Boohoo, & Online Fashion Retail Business Models

Former Director at Boozt

Boozt, Zalando, & Nordic Online Fashion

Boozt Assortment and Strategic Positioning

ASOS

ASOS is a UK-listed online fashion retail platform with over 26m customers across the UK, EU, and the US. The company was founded in 2000 and generates ~£4bn in sales with ~45% private label and exclusive brand collaborations and 60% from branded suppliers.

The company mainly operates a traditional online wholesale model but has recently launched a 3P-marketplace to widen the selection. ASOS sources 60% of the assortment on longer lead times from APAC and 40% from the UK or Europe. The company targets ~70% full price sales with a lower intake margin than offline competitors but also a lower promotional rate which leads to a gross margin of 45-50%.

Over the last 5 years, ASC has grown the customer base from 12m to over 26m customers that order ~3.5x per year on average. The average order value is ~£40 including returns and the company is targeting a medium term EBIT margin of 4%. ASC’s CEO recently stepped down and the original cofounder is a non-exec holding ~3% of shares outstanding.