To what extent are ASOS's free delivery and return policies sustainable?

ASOS, a renowned online fashion and beauty retailer headquartered in the United Kingdom, has established itself as a prominent player in the global market. With a diverse range of over 75,000 branded and own-label products, ASOS caters to customers across 240 countries on every continent. Their commitment to providing an effortless online shopping experience and exceptional customer service has earned them accolades and a loyal customer base, particularly among individuals aged 20 to 30. Since its inception in 2000, ASOS has steadily climbed the ranks and now holds the sixth position globally in the apparel industry, as reported by Comscore.

 

The company's overarching objective is to position itself as the premier fashion destination for young adults in the world. With this goal in mind, ASOS has witnessed significant growth in sales, particularly in international retail. In 2014, their international retail sales surged by an impressive 27% to reach £975.5 million, showcasing their success in expanding their presence globally. Notably, ASOS has experienced a remarkable compound annual growth rate (CAGR) of 56% over the past six years, further emphasizing their sustained expansion.

 

The company's revenue streams have been predominantly fueled by their continued efforts to expand their global footprint and strengthen international retail operations. In fact, a substantial 61% of the total revenue generated by ASOS can be attributed to their successful global expansion strategies and international retail sales.

 

Given ASOS's impressive growth trajectory and their commitment to becoming the fashion industry leader for young adults, it is crucial to evaluate the sustainability of their free delivery and return policies. This inquiry aims to examine the extent to which these policies can be maintained in the long run, considering their financial implications, logistical challenges, and the ever-evolving demands of the global market. By analyzing the sustainability of ASOS's free delivery and return policies, we can gain valuable insights into the company's ability to continue its growth and maintain its competitive edge in the dynamic world of online fashion retail.

 

ASOS sets itself apart in the market with its distinctive feature of "effortless online shopping," offering customers the convenience of free delivery and returns to all 240 countries. However, providing this service comes at a significant cost to ASOS. In 2014 alone, the expenses related to distribution amounted to £147,303,000, representing a substantial 28% increase compared to the previous year. It is noteworthy that ASOS has implemented minimum purchase requirements to mitigate some of these costs. Nevertheless, distribution expenses rank as the company's second-highest expenditure, trailing only administrative expenses. This substantial financial burden directly impacts the company's post-tax profit, which stands at a modest million.

 

As we delve into the sustainability of ASOS's free delivery and return policies, it becomes crucial to assess the viability of absorbing these considerable distribution costs while maintaining profitability. Evaluating the long-term feasibility of this approach necessitates a comprehensive analysis of the impact on ASOS's financial performance, customer satisfaction, and competitive positioning within the global market. Through an examination of these factors, we can gain valuable insights into the extent to which ASOS's free delivery and return policies are sustainable and their implications for the company's overall success and growth.
 

In the midst of a complex trading landscape and the operational complexities associated with their operations in China, ASOS experienced a notable decline in profitability, as evidenced by a 14% decrease in profit before tax from August 2013 to August 2014. This decline can be attributed to various factors, including the unfortunate fire incident that occurred at their Barnsley warehouse, the impact of a stronger pound, and the challenges posed by internal projects. Consequently, 2014 did not unfold as anticipated for ASOS, leading to a significant financial risk marked by profit losses.

 

Compounding this risk is the substantial portion of distribution costs, which surpasses a quarter of ASOS's gross profit. The combination of recent setbacks and the substantial expenses associated with distribution render ASOS financially precarious. Given these circumstances, it becomes imperative to investigate:

This investigation aims to assess the sustainability of ASOS's free delivery and return policies. It draws insights from multiple sources, including the ASOS 2014 annual report and accounts, as well as six articles that provide diverse perspectives. These sources include customer opinions on the change of shipping policy in Fashionista, an analysis of ASOS by Muz Ashraf, an examination of online retail opportunities by Saabira Chuadhuri, a Financial Times article addressing the impact of a strong pound on ASOS, and expert analyses of ASOS featured in the Guardian.

 

To conduct a comprehensive evaluation, several business tools will be employed. These include the SWOT analysis, which assesses ASOS's strengths, weaknesses, opportunities, and threats. Additionally, Liquidity, Profitability, and Efficiency Ratios will be analyzed to gain insights into ASOS's financial performance and operational efficiency. Furthermore, a thorough examination of customer and competition dynamics will be conducted, allowing for a comprehensive understanding of the market landscape.

 

By utilizing these tools and synthesizing information from various reputable sources, this commentary will provide an in-depth assessment of the extent to which ASOS's free delivery and return policies can be deemed sustainable.

ASOS encounters several significant challenges that pose a potential risk to its overall business stability. Among these threats are the adverse effects of a strong currency on international sales, the substantial shipping expenses with the potential for further escalation, and intense competition within the e-commerce industry where customer loyalty is limited. Given that the company's annual profits are heavily constrained by the considerable distribution costs, ASOS is particularly susceptible to these challenges. This raises the crucial question of whether ASOS can viably sustain the burden of such extensive distribution expenses. To gauge the feasibility of this, an assessment of the business's liquidity, efficiency, and profitability becomes imperative.

The Current Ratio and the Acid-Test Ratio serve as indicators of a business's liquidity, shedding light on ASOS's ability to meet its current financial obligations, including debts. These ratios are calculated as follows:

 

\(\text{Current Ratio} = \frac{Current\ Assets}{Current\ Liabilities}\)

 

\(\text{Acid-Test (Quick) Ratio} = \frac{Current\ Assets\ minus\ stock}{Current\ Liabilities}\)

 

ASOS' current ratio is -

 

\(\frac{260,663,000}{185,539,000}= 1.40:1\)

 

ASOS' acid test ratio is -

 

\(\frac{260,663,000-161,480,000}{185,539,000}=0.53:1\)

 

The analysis of liquidity ratios reveals that ASOS does not currently exhibit optimal liquidity. While the company appears to possess sufficient cash to potentially meet its immediate financial obligations, it is important to note that this assumption relies on the complete sale of its stock. Without the successful sale of their inventory, ASOS would be unable to fulfill these obligations. Nevertheless, it is crucial to recognize that a low acid test ratio is not necessarily indicative of imminent danger for a company like ASOS, operating within the retail industry. ASOS's business model revolves around the sale of inventory, and as such, inventory dependency is inherent to their operations.

 

However, it is worth considering that an increase in delivery costs could potentially pose a threat to the sustainability of ASOS's business model. Such an increase in costs may indirectly disrupt the delicate balance further, leading to potential liquidity challenges. This could hinder ASOS's ability to sustain their current distribution policy, thereby impacting the overall viability of their free delivery and return policies.

The Return on Capital Employed (ROCE) serves as a valuable measure to assess the efficiency of resource utilization within a business. This ratio provides insights into the profitability generated per unit of capital employed.

 

This is the ROCE formula:

 

\(ROCE = \frac{net\ profit\ before\ interest\ and\ tax}{capital\ employed} × 100\)

 

ASOS' ROCE is?:

 

\(\frac{46,646,000}{194,424,000} × 100 = 23.99%\)

 

The ROCE reflects a commendable level of efficiency. However, it is essential to note that this may be influenced by ASOS's substantial cash reserves of £74,340,000. As a result, ASOS appears to be in a favorable position capable of supporting the considerable distribution costs associated with their operations.

The Gross Profit Margin serves as a crucial profitability metric that provides insights into ASOS's current financial performance. It can be calculated using the following formula:

 

\(\text{Gross Profit Margin }= \frac{gross\ profit}{sales\ revenue}× 100\)

 

\(\text{Net Profit Margin} =\frac{Profit\ Before\ Interest\ and\ Taxes}{sales\ revenue} × 100\)

Despite witnessing positive growth in sales and gross profit in absolute terms, ASOS has experienced a decline in net profit margins. The decrease, amounting to 14.4%, can be attributed to several factors, including the challenging trading environment and the costs associated with investments in infrastructure, particularly in the Chinese operation. These costs encompass warehousing and staff expenditures. However, despite these challenges, ASOS's overall financial performance remains robust, indicating the sustainability of its delivery and return policies.

 

Notably, distribution costs witnessed a notable increase of 15.1% in spite of a significant rise in total orders, which escalated by 31% in 2014. The cost escalation can be primarily attributed to a shift in the composition of shipments, with a greater proportion accounted for by lower-cost deliveries to the UK and the EU. Additionally, negotiations with carriers regarding freight rates played a role in the increased distribution costs.

 

In light of these insights, it can be concluded that ASOS's delivery and return policies demonstrate sustainability, as the company's financial performance remains strong, despite the challenges faced. The increase in distribution costs, while notable, can be attributed to specific factors and does not jeopardize the overall viability of ASOS's policies.

In addition to evaluating ASOS's financial position to assess the sustainability of its free delivery and return services, it is crucial to analyze the e-commerce apparel retail market. The perspectives of customers, such as Chantal Fernandez and Nora Crotty, highlight the appeal of ASOS's "ease" factor, where one can order affordable and fashionable items without facing financial repercussions for returns. Free delivery and returns are considered among the most advantageous aspects of shopping online at ASOS. The introduction of minimum purchase requirements for these services has already sparked discontent among customers.

 

In fact, customers in the e-commerce sector have come to expect prompt and cost-free deliveries. Fernandez argues that ASOS could potentially lose out to competitors like Shopbop, Amazon, or Bloomingdale's, which offer similar products with free delivery or lower shipping minimums. This risk is amplified by the ease of establishing an e-commerce business and the transparency of costs on the internet. With minimal switching costs between suppliers, customer loyalty in the e-commerce realm is limited. Consequently, any abrupt cessation or alteration of ASOS's distribution policies could result in the loss of numerous customers.

 

Therefore, ASOS finds itself compelled to maintain its existing distribution policies, despite the associated high costs. This predicament is echoed by analyst Andrew Wade, who asserts that the company will need to continue offering discounts, free delivery, and returns to sustain sales momentum. The market dynamics and customer expectations necessitate that ASOS maintain its current distribution policies to retain its customer base and remain competitive.

ASOS's free delivery and return policies do not appear to pose a significant threat to the financial stability of the business. Despite the substantial impact of distribution costs on ASOS's profitability, the analysis of ROCE and Gross Profit Margin indicates that the company's operations remain sustainable. Despite the challenges faced in 2014, ASOS has managed to overcome these obstacles.

 

ASOS revolutionized online shopping with its streamlined and complimentary delivery process, leading to heightened competition and increased customer expectations in the e-commerce industry. ASOS's main competitors already offer free shipping with lower minimum requirements, compelling ASOS to maintain its current distribution policies. Any changes to these policies could potentially result in reduced orders and dissatisfied customers. As ASOS aspires to become the leading fashion destination for individuals in their 20s worldwide, it is imperative for the company to continue providing free delivery and returns. At present, ASOS's distribution policies remain sustainable.

Supporting Documents:

Ashraf, Muz, and Harvard Business School, Muz Ashraf and Harvard Business School to Open Forum, "ASOS: Competing in the Challenging E-commerce Space," February 8, 2015. Accessed September 30, 2015. 

https://openforum.hbs.org/challenge/understand-digital- transformation-of-business/why-digital/asos-competing-in-the-challenging-e-commerce- space.

 

ASOS Annual Report and Accounts 2014. December 16, 2014. Accessed October 6, 2015.

http://www.asosplc.com/-/media/Files/A/ASOS/results- archive/ASOS_Report_2014%20FINAL.pdf.

 

Chaudhuri, Saabira. "Leading Countries in Online Retail Have Big Opportunities, Study Finds." Corporate Intelligence, June 8, 2015. Accessed September 30, 2015.

http://blogs.wsj.com/corporate-intelligence/2015/06/08/leading-countries-in-online-retail- have-big-opportunities-study-finds/.

 

Danny Selig. "ASOS: what the analysts say." the guardian (UK), April 1, 2015. Accessed September 30, 2015.

http://www.theguardian.com/business/2015/apr/01/asos-what-the-analysts-say.

 

Fernandez, Chantal. "ASOS RAISES ITS FREE SHIPPING MINIMUM AGAIN." Fashionista (blog). Entry posted December 19, 2014. Accessed September 30, 2015.

http://fashionista.com/2014/12/asos-shipping-fee-again.

 

Other Sources:

Crotty, Nora. "ASOS'S NEW SHIPPING POLICY IS HERE TO RUIN YOUR WEEKEND." Fashionista (blog). Entry posted May 22, 2014. Accessed September 30, 2015.

http://fashionista.com/2014/05/asos-shipping-fee.

 

Shubber, Kadhim. "Strong pound hits Asos's international sales." Financial Times (UK), December 9, 2014. Accessed September 30, 2015.

http://www.ft.com/intl/cms/s/0/97aa8f44-7f75-11e4- 86ce-00144feabdc0.html#axzz3nEpZmXvL.