The fall of fast fashion

Asos has posted disappointing results. For high streets, that can only be good news.

A decade of cheap debt came to an end in 2022, and with it the fortunes of many fast-moving technology companies: Facebook‘s parent company, Meta, lost 65 per cent of its market value last year, while Tesla fell 69 per cent. Two weeks after it achieved the dubious accolade of being named the UK’s worst-performing stock in 2022 (shares fell 78 per cent), today the fast-fashion favourite Asos posted a trading statement showing a four per cent drop in sales in the four months to the end of December. Asos is not alone: shares in Boohoo, which owns the brands Nasty Gal and PrettyLittleThing.com, fell 70 per cent in 2022. Even Shein, the privately owned Chinese fast-fashion giant, has reportedly been valued by some investors at tens of billions below its $100bn peak.

During the pandemic, fast-fashion brands did ferocious business. In April 2021 Asos posted results showing profits had increased 253 per cent in six months, with UK sales growing almost 40 per cent. Sales at Boohoo climbed 41 per cent over a similar period.

Some have suggested that the decline may indicate our national obsession with fast fashion, worth a sizeable chunk of the £45bn-a-year clothing industry, is finally over. The retail analyst Jonathan De Mello, however, says it also reflects a positive change for the high street. “Physical retail is improving,” he says. “We had peak online during the Covid period… people couldn’t get out to the shops. Now, that’s completely reversed.”

The latest retail figures from the Office for National Statistics, which cover November 2022, show that while retail sales volumes were down 0.4 per cent during the month, “non-store” retail, which is mainly composed of online sales, was down 2.8 per cent. And although high-street retailers’ shares dropped during 2022, they remained more in line with the overall market. Next (which posted a 4.8 per cent rise in sales over the Christmas period this week) fell by 27.8 per cent, while Associated British Foods, which owns Primark, dropped 22.7 per cent.

Andy Saxton, fashion insight director at Kantar, says “much of the growth that we saw online [during the pandemic] was always going to be a temporary factor”. However, he adds: “What’s surprised people is how quickly people have switched back to previous behaviours. [The high street] is still a vital part of how people shop, and that will remain the case for the foreseeable future.” While the ration of online to high-street retail was about 30:70 before the pandemic, he says, now it’s more like 40:60.

In the coming year, the UK’s online fashion retailers will face threats from three sides. Firstly, inflation, which dipped to 10.7 per cent in November from a 40-year peak of 11.1 per cent the month before, and is causing people to tighten their belts. There is evidence that customers are returning more clothes to reduce their overall spending. “Return rates were down to something like 30 per cent during Covid,” says De Mello. “Now they’re up at about 50 or 60 per cent.” A line in the Asos annual report adds that inflation’s “effect on consumer behaviour became most apparent via the impact on return rates, as these increased from May 2022”.

Secondly, online retailers have surprisingly high overheads. Their warehouses run lighting, IT networks, ventilation, heating and transport equipment. That exposes them to volatile energy prices, which will become a still more serious challenge when the Energy Bill Relief Scheme comes to an end in April. This week the government announced a reduced rate of support for businesses, cutting its Energy Bills Discount Scheme from £18bn to £5bn. Discounts will still apply, but these will mainly be focused on industries regarded as “energy intensive”, such as manufacturing.

Thirdly, the cost of warehousing will add to the sting. The Asos annual report, published in November, shows warehousing costs rose to £427m, or 10.8 per cent of sales, in the year to August – a 20 per cent rise from £356.4m, or 9.1 per cent of sales, the year before. This will be compounded in April as business rates are revalued and warehouse operators’ rates rise by a predicted 27 per cent, compared with a 20 per cent rise for high street retailers. Bricks-and-mortar retailers have historically complained about an imbalance with their online rivals, which paid lower rates. The announcement of the revaluation by Jeremy Hunt, the Chancellor, was aimed at tackling that imbalance. This means, however, that online retailers are “subject to a double whammy in the sense of higher wage costs for logistics and online delivery fulfilment,” says De Mello. “With physical retail, you don’t have that as much.”

The tentative recovery of the high street shows where online retailers made their biggest mistake during the pandemic. “They drew a straight line and thought that that level of demand would continue,” says De Mello. The real surprise, adds Saxton, is that the fall has come as a surprise at all. “It was always going to be the case that established high-street retailers were going to claw some of their share of the market back as people returned to stores,” he says. “Talk of the death of the high street was always greatly exaggerated.”