There are plenty of residential streets in Britain where you are as likely to spot an Ocado van as a blackbird. The online retail group switched allegiance from Waitrose to Marks & Spencers — both purveyors of groceries to the middle classes — a few months after the UK went into lockdown. That helped M&S lift food sales 2.2 per cent in the third quarter: a sharp contrast to the 25 per cent plunge in sales of its clothing and homeware.
Data from Asos, whose ecommerce sales of clothes and other goods attract a more youthful audience, tells the tale more starkly. The UK-listed group has lifted profits each year, trebling operating income over the past five years. While fashion rivals simply try to survive, Asos should generate ebitda margins above 7 per cent this year and next, according to Capital IQ, the most since 2013.
Still, online commerce comes with a big caveat. Few grocers have worked out how to fulfil customer orders for less than the amount charged. Clothing is more easily handled online, thanks to higher gross margins and greater automation.
But even non-perishable items require huge spending on logistics in order to shunt goods around the country. Asos’ new warehouse in Staffordshire will cost it £90m, the company said Friday, adding 2,000 staff to the payroll. Then there are returns, which weigh heavily on margins.
Skipping last year, when Covid-19 and restructuring prompted frugality, Asos’ capital spending run rate has run at about 5 per cent of sales. It is however lumpy, hitting double that in 2018 and dropping to 3.5 per cent last year. Roughly half that investment, on a blended basis, goes on warehousing and associated logistics.
M&S, among those tightening the purse strings last year, signalled a cut in capex, saving around £195m of cash flow. Alas the lesson of ecommerce globally — be it Amazon in the US or Alibaba in China — is one of hefty and persistent investment to maintain high growth rates. As such, ASOS’s post-Covid resurgence in spending should be welcomed.
Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.
