ASOS SWOT and Finance Analysis

2807 words (11 pages) Essay in Business

23/09/19 Business Reference this

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ASOS Plc

 

Introduction

The global online retail business ASOS Plc (As Seen on Screen) was founded in June 2000 by entrepreneurs Nick Robertson and Quentin Griffthins. Aimed at 20 – 30 year olds, Robertson and Griffthins envisioned selling outfits worn by celebrities at affordable prices. The online retailer sells its own label products, as well as stocking 850 other brands including high street and other online retailers. Since their launch, new lines have been introduced, such as their 2008 Kids wear collection and the 2016 wedding collection as well as a variety of sizing ranges. ASOS have been able to launch international online stores in France, Germany and the US, as well as in Australia, Spain, Russia, China and Birmingham. Targeting over 200 countries, with over 4000 employees and 13 million users per month, ASOS is currently the UK’s largest online fashion retailer.

Marketing, Customers and Market Share

One of ASOS’s key marketing techniques is its use of a free returns policy. This gives the company a differentiation strategy, meaning that ASOS can charge higher prices as well as putting pressure on rivals such as BooHoo and Nasty Gal to improve strategies. 31% of British 15- 25 year olds agree that social media inspires their clothing choices, whilst 80% of millennials shop online. ASOS has created a vast social media presence, boasting 11.8 million followers collectively, using these platforms and digital cookies in order to advertise. ASOS has created a team of millennials who have a collective Instagram following of over 625,000. These ‘influencers’ use social media to promote ASOS products, allowing followers to purchase products straight from their posts. Nearly 10% of ASOS’s 2010 sales attributed to email marketing with student promotions and ASOS’s A-List offers. ASOS’s primary platform is its app, which had 10 million downloads in 2016. ASOS’s monthly magazine can be read either online paperback and boasts 820,000 subscribers. ASOS uses current celebrities to feature, such as ‘Stranger Things’ actress Millie Bobby Brown, appealing to ASOS’s young target market. At the 2016 and 2018 Olympic and Paralympic games, 677 British athletes and staff wore ASOS-designed products, pushing this idea of modern day celebrities representing the brand. The ASOS Marketing team focuses on social purpose, partnering with Beat, as well as the ‘Click and Collect’ scheme which aims to reduce its carbon footprint. Finally, ASOS’s communication team is a key part of its marketing and customer services which employs 2475 people to work in its ‘customer care teams’ around the world. ASOS’s market share was 7.5% in 2017 in the UK, whilst it was significantly lower in the rest of Europe at 1.6%. ASOS aims to increase this market share through further investment.

 

 

 

 

 

 

 

UK Opportunity

EU Opportunity

 

PESTLE, Porter’s Five Forces and SWOT Analysis

Political

As ASOS targets a younger market, political changes affecting the finances such as the dismissal or reduction of student maintenance grants would lead to a reduction in disposable income. This would limit their purchasing power for price elastic goods such as clothing, therefore reducing the profitability for ASOS.

An increase in VAT would increase the price of clothes due to increased costs, which would affect ASOS as its USP is its affordable clothing.

Economic

In 2014, ASOS increased the number of employees by 16%. If minimum wages were to rise, ASOS’s costs would increase dramatically. This may result in redundancies which could damage the reputation of ASOS.

The threat of recession is prevalent for retailers such as ASOS who sell price elastic goods as lower disposable incomes means consumers may not buy non-essential products such as clothing.

Social

In 2008, 49% of women used ecommerce to purchase clothing compared to 75% in 2015, whilst 57% of men used ecommerce in 2008 compared to 77% in 2015. This change in social trends presents an opportunity for ASOS.

However, social trends are constantly changing and it can be hard to predict what will happen in the future. This presents a threat for companies such as ASOS as we cannot be sure if ecommerce will continue to be successful, although customer research can reduce the risk of strategic drift. 

Technological

Technological improvements mean that ecommerce companies such as ASOS can continue to expand, making it easier and faster for consumers to find and buy products, allowing ecommerce businesses to market their products more easily through social media and other online platforms.

However, operating through multi-channel distribution like rivals such as Topshop would further increase ASOS’s profitability. Although ecommerce is booming, only 18% of retail sales are made on the internet, meaning that there is a huge market for in-store shopping.

Legal

EU directives such as the ‘EU packaging and Waste directive’ are introduced in order to reduce the amount of waste companies incur. Changes to these laws will mean that ASOS may need to adjust their strategies in order to reduce waste.

Environmental

ASOS has introduced schemes to reduce its negative affect on the environment such as ‘click and collect’ as well as using 100% recyclable packaging. The click and collect scheme aims to reduce the companies carbon footprint and has proven to be successful. 

Porter’s Five Forces Model

Threat of new entrants

As technology continues to improve, an increasing number of retailers may operate online. With new entrants, pressure is put on existing companies to reduce costs and prices and differentiate their products.

ASOS can tackle the threat of new entrants in the market through economies of scale. ASOS can also reduce the threat of new entrants by investing in research and development, preventing strategic drift.

Buyer Power

In times of recession or changes in economic policies affecting disposable income, ASOS will have fewer customers as it is selling price elastic goods. This means that buyers have more power to negotiate. ASOS can reduce the power of buyers by increasing its brand loyalty. Moreover, through innovation ASOS can reduce the ability of bargaining power of customers as they will not be able to negotiate products which are not as established.

Supplier power

As the number of suppliers is reduced, purchasers have less room to negotiate prices. This means that companies such as ASOS experience increased costs. This threat can be reduced by building relationships with multiple suppliers, so if one supplier increases its prices, ASOS will have an alternative option. Alternatively, ASOS could experiment with various materials so that if the price of one increases, there are other options.

Rivalry

ASOS can reduce the threat of rivalry through differentiation, meaning rivalry will be automatically reduced and it can increase the selling price. Alternatively, ASOS can collaborate with rivals in order to increase the market size. If ASOS was to collaborate with a high-street store with a smaller online presence such as Urban Outfitters, they would benefit from the reduction in competition. 

Threat of substitutes

ASOS can reduce the threat of substitution through increasing the cost of switching for customers. ASOS offers free next day delivery for £7.99 per year, therefore increasing customer loyalty for a year. ASOS offers frequent customers discounts and vouchers, encouraging purchasing. 

SWOT Analysis

Strengths

ASOS sells over 850 popular brands with over 4000 employees as a part of the organisation, covering over 200 countries. ASOS is currently planning further international expansion with further sales growth within the UK.

Weaknesses

ASOS’s free returns strategy costs £10 million annually, whilst 30% of purchases are returned to ASOS. As this element of free returns is a USP of ASOS’s business plan, it is difficult to change the strategy and could potentially become increasingly problematic.

Opportunities

The improvements in technology means that ASOS may be able to benefit from an increase in sales as it will become increasingly easy to shop. ASOS is planning further expansion into China, increasing sales, so it will be able to further grow the business.

Threats

In 2016, poor working conditions were reported and in 2017, ASOS employees reported that they work without regular breaks. This raises issues such as worker exploitation, which could damage the reputation of the company. Larger retail companies existing in both online and physical form may have a higher brand recognition and be able to increase their market share through footfall, as well as online sales.

Finance and Ratio Analysis

In 2004, ASOS made a profit with sales almost doubling in the first half of the year. In the previous financial year, ASOS increased its revenue for the year by 52% (£339.7 million), with international sales increasing by 142%. Despite increased costs due to the investment programme, ASOS was able to increase profit growth by 28% and sales growth by 26% in the last financial year. The US had the largest sales growth in 2017 with a 46% increase in sales, followed by an increase of 45% in the EU.

 

Financial objectives

-          Generate medium to long term sales growth at 20-25% in order to provide cash to invest in the business

-          Keeping a 4% EBIT margin

-          Expand further into new countries such as China

-          Grow UK market

Financial performance risks

ASOS increased its employee count by 34% between 2016 and 2017, increasing costs. Warehouse costs increased to 8.8% of revenue whilst taxation increased from 19.3% in 2016 to 19.9% in 2017 as a result of deferred tax from the previous year. However, ASOS was able to reduce their marketing costs to 4.5% of sales due to digital marketing efficiency and higher returns on advertising. Operating costs were maintained at 4%.

Ratio Analysis

Financial ratios and diagnostics are used by companies for company analysis and benchmarking, as well as for potential investors.

Profitability ratios:

Gross profit (period ending 28/02)

2017:

= £440.1 million

Gross profit margin  

Gross profit margin 2017:

= 48.28%

2018: (period ending 28/02)

= £569.4 million

Gross profit margin 2018:

= 49.17%

Percentage change in gross profit between 2017 and 2018:

= 29.34%

Analysis:

If ASOS was to attempt to improve their gross profit, it could increase prices or reduce discounting. However, ASOS’s competitive advantage centres around its affordable products which are aimed at a younger target market who are attracted to the company through the use of discounts such as student offers.

Operating profit (period ending 28/02)

2017:

= £27.1 million

operating profit margin

2017:

= 2.973%

2018:

= £29.1 million

2018:

= 2.51%

Percentage change in operating profit between 2017 and 2018:

= 7.38%

Analysis:

If ASOS was to try to improve its operating profit, it could increase its sales revenue, reduce labour and operations costs or reduce the cost of goods sold. ASOS could reduce its labour and operations costs by reducing the size of its workforce. ASOS employs a vast workforce which contributes to a large proportion of its costs.

Liquidity ratios: (period ending 28/02)

Current ratio

2017:

= 1.02:1

2018:

= 0.94:1

Analysis:

The reduction in current ratio may represent a reduction in the ability of ASOS to pay off its short-term liabilities. They could improve their current ratio through controlling their stock more effectively, considering systems such as ‘just in time’ stock management, slowing down their debtor days, or improving their receivable days.

Acid test ratio

2017: (period ending 28/02)

154.3 + 0 + 24.9

418.7

= 0.43:1

2018: (period ending 28/02)

37.7 + 0 + 25.2

476

= 0.13:1

Analysis:

The reduction in acid test ratio shows that ASOS may not have enough liquid assets to pay its current liabilities. In order to improve this, ASOS should consider trying to increase their sales and inventory turnover, which will increase cash. Alternatively, ASOS could consider holding less stock or varying their stock management control.

 

Return on capital employed (period ending 28/02)

2017:

= 10.94%

2018:

= 7.78%

Analysis:

ASOS’s ROCE could be improved by selling machinery as this would lower the company’s total assets. However, by doing this, ASOS may slow down production which may be detrimental to an ecommerce business as consumers do not want to wait too long for their products. Alternatively, ASOS could pay off their debt, therefore reducing liabilities.

Activity ratio:

Asset turnover ratio

2017:

= 1.36

2018:

= 1.36

Analysis:

Every £1 worth of asset generates £1.36 worth of revenue. In order to improve ASOS’s asset turnover ratio, they could improve efficiency, sell assets or increase sales.

Conclusion  

ASOS Plc is an extremely successful company, with plans to further increase their profitability. Although there are areas of weaknesses such as the high costs of delivery and labour, ASOS’s investment programme has been designed to cope with this increase. However, it is essential that ASOS continues to invest in research and development as the threat of strategic drift is prevalent. Moreover, investment in research and development  can ensure that the threat of new entrants into the market is reduced and therefore maintain its market share. ASOS’s current strategy of offering affordable clothing to a younger target market has so far proved to be very successful and with their future plans to expand we can expect the company to further improve its market share and profitability.

References 

Asosplc.com

https://www.asosplc.com/~/media/Files/A/Asos-V2/reports-and-presentations/27-10-2017-ar.pdf

Office for National Statistics

https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi

Asos (ASOS) Balance Sheet – Investing.com UK

https://uk.investing.com/equities/asos-plc-balance-sheet

Asos (ASOS) Income Statement – Investing.com UK

https://uk.investing.com/equities/asos-plc-income-statement
About Us | ASOS

https://www.asos.com/about/

 Women’s Clothes | Shop for Women’s Fashion | ASOS

https://www.asos.com/women/

The History of ASOS

https://www.thefactshop.com/blog/fashion-facts/asos-history

 

 

 

 

 

 

 

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