Supply chain investment to drive further growth for ASOS?

ASOS is one of the eCommerce success stories, growing from nowhere to e-tail giant in a little over ten years. But lately it has seen its share price fall as it announced its short term profits will be lower than expected. 

The retailer put this down to its increased investment, primarily in the supply chain. So what has the company invested in and will it pay off?

ASOS Chief Finance Officer Nick Beighton told investors the company had increased investment to at least £68m in capital expenditure in the current year (previous guidance £55m.) Mots of this spend is in the supply chain.

Beighton says: “The extension of the Barnsley DC is to be finished by early 2015. This will increase stockholding capability by 100% and increase floorspace by around 30%. This will equate to a sales processing capacity in Barnsley of approximately £1.5bn.”

The company turns over around £1 billion now, and says this investment will expand sales capacity to £2.5bn per annum. but with dual running costs over the period which will ease from H2 2014/15.

“We have moved returns processing to a new facility in North Yorkshire to further accommodate change at the Barnsley facility. We are also using a temporary bulk storage facility in South Yorkshire.”

The company is also investing in facilities in the United States, China, and most notably Germany, where a European distribution centre is expected to open this year.

Online retailing does not have store overheads but is expensive in other respects, with a lot of emphasis on supply chain, particularly returns processing as well as the costs that often come with rapid growth. Perhaps this is why ASOS is moving fast to mechanise its warehouse operations, with a view to bringing down operating costs.

Beighton continues: “The Barnsley site will be fully mechanised and will give us a substantial leap to lower our labour costs per unit, reaching the 50p per unit target and hopefully far lower.

“To achieve this step change in capability we will face some disruption with double running costs.”

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Supply chain is a key cost centre for online retailing. ASOS reported in its 2013 annual results that has its warehousing and distribution costs were circa 20% of sales. In comparison payroll/staff was around 10% and marketing around the 5% mark.

A mechanised despatch sorter now live in Barnsley. The LS-4000 sorter was designed, manufactured and installed by Beumer Group company, Crisplant, and put into operation in October 2013.

At the time of the installation ASOS senior development manager David Swinbank says: “This initial investment in automation ensures that ASOS can improve the accuracy of the dispatch process and provide significant gains in operational efficiency. It also allows for future capacity expansion in line with our growth expectations.

“It has also enabled us to streamline the sorting process. The ability to offer a high level of delivery service to our customers is a significant differentiator in the highly competitive online fashion market.”

The retailer has extended next day delivery cut off time in the UK to 9pm.

ASOS has also commissioned Dematic to provide a miniload-based carton storage solution along with a batch pick and automated sortation solution for processing customer orders at the expanded Barnsley DC. This is expected to go live by the end of financial year 2015.

Last year ASOS awarded Norbert Dentressangle a three year contract to manage the Barnsley DC, which employs over 1,200 people. Norbert said at the time that it “has a proven track record in taking on and improving complex, high volume e-fulfillment operations”.

ASOS CEO Nick Robertson says: “The £1bn sales target was seen as ambitious four years ago, now it is seen as a stepping stone. The international opportunity is bigger than that. The trend we’ve seen is that shoppers want to use fewer, not more, online retailers, which is opposite to the High Street. This means successful online retailers will tend towards bigger scale.”

This philosophy is driving ASOS towards greater investment and bigger scale as it seeks to be one of the few bigger players in online fashion retail.

Most recently Emile Naus, partner and technical director at LCP Consulting, says there is a strong case in favour of of the ASOS investment.

Emile was most recently head of logistics strategy for Marks and Spencer, and sees the investment paying back on two different levels.

“Automated systems, particularly automated picking systems will create operational efficiencies, allowing the retailer to get big benefits out of a large catalogue.

“Also, taking out handling steps makes the process more efficient, which should allow ASOS to push back the cut off time for deliveries. If you don’t automate and push this back, you can get an exponential increase in cost.”

ASOS CFO Nick Beighton earlier mentioned the labour costs per unit target of 50p – Emile says it is very difficult to compare this with competitors as different companies include different costs in their calculations.

Emile explains: “If I do the comparison with numbers we were using at M&S, a 50p variable cost in the warehouse, including factors like packaging is perfectly do-able. I wouldn’t say it would be best in class but its not a million miles off.

“I would expect the labour cost in the warehouse to be substantially less than 50p. If you including packaging costs, which is a substantial cost, then it is pretty much benchmark.”

The ASOS investment is also aimed at increasing scale, with CEO Nick Robertson believing this could be key, particularly with online shoppers said to prefer shopping at fewer outlets, in contrast with High Street habits.

Emile sees the internet favouring both large scale players and smaller niche retailers.

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“We will see a concentration of very big players. ASOS is very much in this group. However, the internet also allows much smaller players to get into the market with a niche product range and get a reasonable exposure. In the past that would have been difficult because of the overhead of having stores,” says Emile.

“The companies who will struggle are perhaps those in the middle, who haven’t got the scale to compete with the bigger players or the very specific focus to react quickly to a niche customer.”

In broader terms, Emile adds that returns processing is a critical factor for online retail. Assuming a rate of 30% returns, and ASOS sending out £1bn worth of products, that means they get £300,000 worth back.

“There is a competitive advantage to processing returns quickly, particularly for a business like ASOS where there is a really short lifecycle.

“There may be a product life of 6-8 weeks. By the time you send it out, the customer could take two weeks to send it back. If you then take two weeks to process the product half the lifecycle has gone.

“The key here is understanding that returns is a value not a cost. It has traditionally been something a retailer takes care of when it is not busy, but retailers cannot afford to do that.”