DEEP DIVE Identifying E-Commerce Winners: The

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1) This report ranks the 20 biggest online retailers in DEEP DIVE Western Europe on five metrics: absolute online sales in 2015, recent revenue growth, revenue growth in Identifying core market, change in market share and change in profitability. E-Commerce Winners: 2) US giant Amazon, German apparel pure play Zalando The Fung Global Retail & and UK multi-channel, multi-sector retailer John Lewis Technology Internet Partnership lead our ranking, in first, second and third places, respectively. Retailers Ranking for 3) Our ranking indicates that Internet pure plays are Western Europe outperforming multi-channel retailers online. This finding is confirmed not only by individual retailers’ performances, but also by our analysis of the average performance of the 20 biggest online retailers by type. 4) Too often, multi-channel retailers appear to be playing catch-up with online-only retailers. We think the lead that pure plays enjoy in mobile-commerce penetration DEBORAH WEINSWIG Managing Director, is the latest example of this. Pure plays are winning, Fung Global Retail & Technology [email protected] and some multi-channel retailers will need to adopt US: 646.839.7017 fresh thinking in order to seriously rival their online- HK: 852.6119.1779 CN: 86.186.1420.3016 only peers.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 3

INTRODUCING THE FUNG GLOBAL RETAIL & TECHNOLOGY INTERNET RETAILERS RANKING FOR WESTERN EUROPE ...... 3

HOW WE RANKED THE RETAILERS ...... 4 AND THE WINNER IS…AMAZON! ...... 5

ONLINE PURE PLAYS OUTPERFORM MULTI-CHANNEL RETAILERS ...... 9

M-COMMERCE TO DRIVE FUTURE GROWTH ...... 10

COMPANY PROFILES: ZALANDO AND ASOS ...... 12

ZALANDO ...... 12 ASOS ...... 15

KEY TAKEAWAYS: FRESH THINKING NEEDED FOR MULTI-CHANNEL ...... 17

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EXECUTIVE SUMMARY This report introduces the Fung Global Retail & Technology Internet Retailers Ranking for Europe, a proprietary ranking of the 20 biggest online retailers in Western Europe. Our ranking is based on five metrics: absolute online sales in 2015, and recent revenue growth, revenue growth in core market, change in market share and change in profitability. US giant Amazon, German apparel pure play Zalando and UK multi-channel, multi-sector retailer John Lewis Partnership lead our ranking, in first, second and third places, respectively. The top two, Amazon and Zalando, are online-only retailers, and the lower half of our ranking contains only multi- channel retailers. Taken together, these details indicate that Internet pure plays are outperforming multi-channel retailers online. This finding is Amazon, Zalando and John Lewis confirmed not only by individual retailers’ performances, but also by our Partnership are the top three analysis of the average performance of the 20 biggest online retailers by companies in our proprietary type. ranking of the 20 biggest online retailers in Western Europe. Our analysis of available company-level information indicates that Internet pure plays also tend to outperform multi-channel retailers in terms of online traffic generated through mobile devices. Based on that, we estimate that pure plays have a head start in the fast-expanding e-commerce segment. This report profiles two significant examples of European online-only retailers: one of the “winners” in our top 20 ranking, Zalando, and its competitor in apparel, British retailer ASOS.

Source: Zalando

INTRODUCING THE FUNG GLOBAL RETAIL & TECHNOLOGY INTERNET RETAILERS RANKING FOR WESTERN EUROPE This report ranks the 20 biggest online retailers in Western Europe on a series of metrics, to identify those major retailers that are outperforming online. A central theme in this report is the performance of Internet pure plays, which generate sales through e-commerce only, versus multi-channel retailers, which sell through both brick-and-mortar and online stores.

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How We Ranked the Retailers We relied on a combination of five We relied on a combination of five metrics to assess the 20 biggest online metrics to assess the 20 biggest retailers in Western Europe, as measured by their total 2015 online online retailers in Western Europe. revenues in Western Europe, according to Euromonitor International. The measures we used were designed to factor in scale, but also, more importantly, to recognize momentum (such as change in online sales and change in profitability). We ranked the companies based on the following: • Their e-commerce sales in Western Europe in 2015. • The growth of their e-commerce sales in Western Europe from 2012 through 2015. We used data in euros at constant exchange rates to remove currency effects for those companies that report in non-euro currencies. • The growth of their e-commerce sales in their core European market from 2012 through 2015. For instance, the UK is the core market for ASOS and Germany is the core market for Zalando. We used data in euros at constant exchange rates to remove currency effects for those companies that report in non-euro currencies. • The change in their share of all Internet retail sales in their core European market from 2012 through 2015, as measured by Euromonitor. • The change in earnings before interest and tax (EBIT) at the total company level from fiscal year 2012/2013 through fiscal year 2015/2016. For each company, we used data from its fiscal years that were closest to calendar years 2012 and 2015. We recognize that, for multi-channel retailers, this profitability reflects more than just their online business, but note that these firms rarely split out EBIT for their Internet operations. Our overall ranking is aggregated from these companies’ measures on each of these five metrics. Our 20 companies are those with the greatest Internet retail sales in Western Europe according to Euromonitor, after some exclusions: we excluded eBay as it is purely a marketplace and we excluded Shop Direct, E Leclerc, vente-privee.com and Dell due to the absence of EBIT data for these privately owned companies.

Source: ShutterStock

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And the Winner Is…Amazon! US giant Amazon was the top-ranked retailer in our list—a result which will not surprise many. Amazon was followed by German apparel pure play Zalando and UK multi-channel, multi-sector retailer John Lewis.

Amazon was by far the largest e- • Amazon was by far the largest e-commerce player in Europe in 2015 in commerce player in Europe in 2015 terms of revenue, and it showed impressive momentum, too. From in terms of revenue, and it showed 2012 through 2015, it grew its market share significantly in Germany, its biggest market in Europe, from 36% of all online sales to 43%, impressive momentum, too. according to Euromonitor. • Zalando showed strong improvement in profitability, with its EBIT margin moving from (7.2)% in 2012 to 3.0% in 2015, according to S&P Capital IQ. Zalando began as an Internet startup in 2008, and has quickly grown to become one of the leading Internet retailers in Europe. • John Lewis is a department-store and grocery retailer that operates online through Johnlewis.com (the department-store site) and Waitrose.com (the grocery site). John Lewis showed strong sales growth in the UK, its only European market, from 2012 through 2015. Based on Euromonitor data, the retailer saw its online sales grow at a compound annual growth rate (CAGR) of 23.4% during the period.

Figure 1. Internet Retailers Ranking for Western Europe: The Top Three

Amazon Zalando John Lewis

• Largest retailer by • Gain in Proﬁtability • Sales Growth in Core online sales in Europe Market

• Share Gain in Core • Strong European • Share Gain in Core Market Sales Growth Market

Source: Fung Global Retail & Technology Based on our ranking metrics, Auchan, Marks & Spencer (M&S), Tesco and Otto Group (which tied with Tesco) are lagging the likes of Amazon, Zalando and John Lewis. Below, we discuss some of the reasons these retailers appear at the bottom of our ranking. • Auchan showed slow online sales growth, which translated into a decline in its online share in France, its core market. It grew its online sales in France at a 7.1% CAGR from 2012 through 2015, we calculate, based on Euromonitor data. But the average CAGR for the 20 companies we looked at was 14.7% over the period. Auchan trades online mainly through Auchan.fr and Auchandirect.fr. • M&S’s UK online sales grew at a 7.6% CAGR from 2012 through 2015, Auchan showed slow online sales also below the 14.7% average CAGR for all the companies in the top 20. growth, which translated into a According to Euromonitor, M&S’s online share declined from 1.7% in decline in its online share in France, 2012 to 1.4% in 2015. The company was impacted by the relaunch of its its core market. website in February 2014; the new site required all existing customers

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to reregister, which hit online sales significantly in the short term. However, the new website better prepares M&S for digital growth in the future. Additionally, M&S has reported falling comparable sales (in total, not just online) in its UK Clothing and Home segment for 19 of the last 20 quarters. The performance of the segment weighed on its online sales, which mainly fall into this category. • Tesco lost online share in the UK, its core market, from 2012 through 2015, when its share fell from 8.7% to 7.4%, according to Euromonitor. Additionally, the retailer’s EBIT margin declined from 5.2% to 1.4% over the same period, according to S&P Capital IQ. In the UK grocery sector, Tesco remains the market leader by far, including in online grocery, but it has lost ground to its competitors in recent years. According to S&P Capital IQ, the company’s fiscal 2016 revenue was 14.4% lower than its fiscal 2013 revenue was (those were the company’s closest fiscal years to calendar years 2012 and 2015). Revenue has been impacted in part by divestment of some non-UK, or noncore, interests. The company’s overall performance weighed on its online sales during the period. • Otto Group: among the 20 companies in our ranking, Otto Group showed the lowest internet sales growth in Western Europe and in Germany, its core market, and the sharpest decline in core market share. The group is still completing its transition from a catalog-based retailer to a modern e-commerce business.

Figure 2. Internet Retailers Ranking for Western Europe: Lagging Retailers

Auchan M&S Tesco Oo Group

• Slower growth in core • Slower growth in core • Decline in margins • Decline in Margins market market

• Share decline in core • Share decline in core • Share decline in core • Share Decline in Core market market market Market

• Decline in margins • Decline in margins • Slow Growth in Core Market

Source: Fung Global Retail & Technology

The table below shows our overall ranking of the top 20 companies, and the metrics we used to compile it.

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Figure 3. Internet Retailers Ranking for Western Europe: Ranking and Data Retailer Core Internet Change in Change in Change in Change in European Sales in W. Internet Sales Internet Sales Share of All Operating Market Eur., 2015 in W. Eur., in Core Internet Retail Margin, (€ Bil.) 2012–2015 European Sales in Core FY2012/2013– (CAGR)* Mkt., 2012– European FY2015/2016 2015 (CAGR)* Mkt., 2012– (%)** 2015 (%) 1 Amazon Germany 38.5 20.9 22.1 7.1 1.0

2 Zalando Germany 2.3 25.7 21.9 0.5 10.2

3 John Lewis UK 2.1 23.4 23.4 0.6 (1.0)

=4 Yoox Net-A-Porter UK 1.0 23.0(a) 24.4 0.2(e) (0.2)(g) Group =4 Cdiscount/Groupe France 2.4 21.9 21.9 1.9 (2.3) Casino 6 Next UK 2.2 15.7 15.8 0.0 2.3

7 Apple UK 6.4 17.3 20.7 0.4 (4.8)

8 Metro Group Germany 1.6 17.0 17.2 0.1 0.5

9 ASOS UK 1.0 34.3 30.3 0.3 (2.0)

10 Ocado UK 1.4 15.3 15.3 0.0 0.8

11 Dixons Carphone UK 3.9 8.8(b) 9.4(b) (0.1) 0.0(h)

12 Migros Switzerland 1.0 67.0(c) 8.4(d) (0.3)(f) (0.5)(i)

13 J Sainsbury UK 1.7 10.4 10.4 (0.3) (0.8)

14 Royal Ahold Netherlands 1.1 17.1 16.7(d) (0.6)(f) (0.8)

15 Home Retail Group UK 1.0 9.4 10.1 (0.2) (0.6)

16 Asda/Walmart UK 1.3 9.6 9.6 (0.4) (0.9)

=17 Otto Group Germany 5.7 1.6 2.9 (4.4) (0.6)

=17 Tesco UK 4.9 9.3 9.2 (1.3) (3.8)

19 M&S UK 0.9 7.5 7.6 (0.3) (0.3) 20 Auchan France 1.2 7.5 7.1 (0.6) (0.5) *Calculated from data at fixed exchange rates to remove currency effects for companies reporting in non-euro currencies **The closest fiscal years to calendar years 2012 and 2015 were used. (a)Calculated using Yoox Group and Richemont data for the period before 2015 (b)Year-over-year percent growth for 2015 (c)Migros acquired a majority stake in online electronics retailer Digitec Galaxus in 2015 (d)Year-over-year percent growth for 2014 (e)Based on data for Yoox Net-A-Porter for 2015 and Richemont before 2015 (f)Share change in core market, 2013–2014 (g)Based on EBIT margin of Yoox Group for the period before 2015 (h)EBIT margin change from fiscal year 2015 to fiscal year 2016 (i)EBIT margin change from fiscal year 2012 to fiscal year 2014 Source: Company reports/S&P Capital IQ/Euromonitor International/Internet Retailer/Fung Global Retail & Technology

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Figure 4, below, provides our ranking matrix, which shows the position of each company according to how it measured on each of the five indicators.

Figure 4. Internet Retailers Ranking for Western Europe: Ranking Matrix Overall Internet Sales in Change in Internet Change in Change in Share Change in Ranking W. Eur., 2015 Sales in W. Eur., Internet Sales in of All Internet Operating Margin, (€ Bil.) 2012–2015 (CAGR) Core European Retail Sales in FY2012/2013– Mkt., 2012– Core European FY2015/2016 (%) 2015 (CAGR) Mkt., 2012–2015 (%) 1 Amazon Amazon Migros ASOS Amazon Zalando 2 Zalando Apple ASOS Yoox Net-A- Cdiscount/ Next Porter Group Groupe Casino 3 John Lewis Otto Group Zalando John Lewis John Lewis Amazon =4 Yoox Net-A- Tesco John Lewis Amazon Zalando Ocado Porter Group =4 Cdiscount/ Dixons Carphone Yoox Net-A-Porter Cdiscount/ Apple Metro Group Groupe Group Groupe Casino Casino 6 Next Cdiscount/ Cdiscount/ Zalando ASOS Dixons Carphone Groupe Casino Groupe Casino 7 Apple Zalando Amazon Apple Yoox Net-A-Porter Yoox Net-A-Porter Group Group 8 Metro Next Apple Metro Group Metro Group M&S Group 9 ASOS John Lewis Royal Ahold Royal Ahold Next Migros 10 Ocado J Sainsbury Metro Group Next Ocado Auchan 11 Dixons Metro Group Next Ocado Dixons Carphone Otto Group Carphone 12 Migros Ocado Ocado J Sainsbury Home Retail Home Retail Group Group 13 J Sainsbury Asda/Walmart J Sainsbury Home Retail Migros J Sainsbury Group 14 Royal Ahold Auchan Asda/Walmart Asda/Walmart J Sainsbury Royal Ahold 15 Home Retail Royal Ahold Home Retail Group Dixons M&S Asda/Walmart Group Carphone 16 Asda/ Yoox Tesco Tesco Asda/Walmart John Lewis Walmart Net-A-Porter Group =17 Otto Group ASOS Dixons Carphone Migros Royal Ahold ASOS =17 Tesco Migros M&S M&S Auchan Cdiscount/ Groupe Casino 19 M&S Home Auchan Auchan Tesco Tesco Retail Group 20 Auchan M&S Otto Group Otto Group Otto Group Apple

Source: Fung Global Retail & Technology

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ONLINE PURE PLAYS OUTPERFORM MULTI-CHANNEL RETAILERS Our ranking includes 14 multi-channel retailers and six Internet pure plays. Amazon, Zalando, Cdiscount, Yoox Net-A-Porter, ASOS and Ocado are the pure plays that feature in our ranking. Although multi-channel retailers outnumber pure plays in our top 20 list, a number of measures indicate that pure plays are outperforming their multi- channel rivals: Online-only retailers have • Two of the top three retailers in our ranking—Amazon and Zalando— outperformed both the multi- are Internet pure plays. channel retailers in our list and the average of all 20 companies in our • There are no Internet pure plays in the bottom 10 in our ranking. ranking. • Online-only retailers have outperformed both the multi-channel retailers in our list and the average of all 20 companies in terms of average performance on each of the five indicators, as shown below.

Figure 5. Internet Retailers Ranking for Western Europe: Average of Indicators, by Type of Retailer Type of Retailer Internet Sales in W. Change in Change in Change in Share Change in Eur., 2015 (€ Bil.) Internet Sales in Internet Sales in of All Internet Operating W. Eur., 2012– Core European Retail Sales in Margin, 2015 (CAGR) Mkt., 2012– Core European FY2012/2013– 2015 (CAGR) Mkt., 2012–2015 FY2015/2016 (%) (%) Pure Play 7.8 23.5 22.7 1.7 1.3 Multi-Channel 2.5 15.8 12.0 (0.5) (0.8) All Companies 4.1 18.1 15.2 0.1 (0.2) Source: Fung Global Retail & Technology

As the table above shows, the average performance of pure plays is significantly better than that of multi-channel retailers across all five metrics. For example, in 2015, the average sales generated in Western Europe by online-only retailers were more than three times higher than those of multi-channel retailers—although the substantial lead enjoyed by Amazon is skewing this metric. Internet-only retailers are also showing greater momentum: from 2012 through 2015, in their respective core markets, pure-play retailers in our top 20 list grew their revenues almost twice as fast as multi-channel retailers grew their own online sales. A look at the most recent full-year data, summarized below, confirms that pure plays’ sales have tended to grow faster than multi-channel retailers’ online sales have. In the table below, we broaden our view to include two significant, fast-growing pure plays that fall outside our ranking: Boohoo.com and AO World.

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Source: Boohoo Of the selected retailers listed in the table below, three pure plays— Zalando, AO World and Boohoo.com—outperformed John Lewis’s nongrocery e-commerce operation, Johnlewis.com. With sales of £195.4 million (€268.6 million) in its fiscal year 2016, British online fashion retailer Boohoo.com is not included in our main ranking, but its expansion is indicative of how smaller pure plays are growing fast. Likewise, AO World’s 2015 revenues were not high enough to put the company in our top-20 list, but its growth data are included below for comparison.

Figure 6. Selected Retailers’ Online Sales Growth, Latest Fiscal Year Retailer Category YoY % Growth

Johnlewis.com Multi-Channel 21.6%

Metro Group Multi-Channel >20.0%

Next Multi-Channel 7.7%

Boohoo.com Pure Play 40.0%

Zalando Pure Play 33.6%

AO World Pure Play 25.7%

ASOS Pure Play 18.0%

Ocado Pure Play 16.7%

Source: Company reports

M-COMMERCE TO DRIVE FUTURE GROWTH Mobile-commerce (m-commerce) revenue growth is an important indicator Although we did not use m- for understanding the performance of online retailers, as the channel is expected to drive e-commerce growth in the next few years. commerce performance as a metric in calculating our ranking, Market research agency eMarketer forecasts that m-commerce sales in the we think that pure plays have UK will grow at a CAGR of 15.2% from 2016 through 2019. By comparison, tended to fare better than multi- the agency expects total e-commerce sales to grow at a lower CAGR, of channel retailers have in m- 9.1%, during the same period. We can reasonably expect to see a similar commerce. trend in the other main European markets.

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Source: ShutterStock Comparable figures on mobile traffic and m-commerce sales by individual retailer are currently hard to find, as many multi-channel retailers do not report this information. Moreover, we think that the ones that do, such as John Lewis, tend to outperform competitors on this metric, and so are eager to highlight their performance. Although we did not use m-commerce performance as a metric in calculating our ranking, we think that pure plays have tended to fare better than multi-channel retailers have in m-commerce. As the table below shows, pure plays tend to generate more online traffic via mobile than multi-channel retailers do. In terms of m-commerce, ASOS, with online traffic through mobile reaching almost 60%, marginally outperforms our overall winner, Zalando. We profile ASOS below, even though it did not reach the top three in our ranking, as we think that the company provides a virtuous illustration of what e- commerce retailers should do to ensure growth. Its performance in mobile is one metric in which it leads.

Figure 7. Selected Retailers’ Online Mobile Traffic, Latest Fiscal Year Retailer Category Traffic

John Lewis Multi-Channel >50.0%

Burberry Multi-Channel 50.0%

Zalando Pure Play 57.1%

ASOS Pure Play >58.0%

Boohoo.com Pure Play 66.0%

Source: Company reports

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COMPANY PROFILES: ZALANDO AND ASOS In this section, we take a closer look at one of our overall “winners,” Zalando, and one of its nearest online apparel competitors, ASOS. These two retailers have features in common that make them notable e- commerce outperformers:

Zalando aims to be the leading • They are both pure plays: As noted above, Internet-only retailers are online fashion retailer in Europe, outperforming their multi-channel competitors in a number of ways. serving a broad segment of • Clear market position: Both online apparel retailers have a clear consumers that range from young positioning in the markets in which they operate. Zalando aims to be to mature. the leading online fashion retailer in Europe, serving a broad segment of consumers that range from young to mature, while ASOS aims to be the leading online fashion retailer for fashion-conscious young consumers. • Commitment to m-commerce: Both Zalando and ASOS generate the majority of their online traffic via mobile phone. The two companies consider m-commerce crucial to their future growth. ZALANDO

Figure 8. Zalando at a Glance, 2015 Summary Zalando is an online fashion retailer operating in European countries

Headquarters Berlin, Germany

Year Founded 2008

Total Revenues* €2,958.2 million

Revenue: YoY % Change 33.6%

Mobile Traffic as % of All Traffic 57.1%

Countries of Operation Germany, Austria, Switzerland, the Netherlands, France, Italy, UK, Poland, Belgium, Sweden, Finland, Denmark, Spain, Norway and Luxembourg

*Includes non–Western European revenues, so this figure may differ from that cited earlier. Source: Company reports/S&P Capital IQ

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Competitive Advantages

Source: Zalando • Scale: Zalando has grown to €3 billion of revenue in seven years. The Zalando has grown to €3 billion company is at present the largest apparel specialist pure play in Europe. of revenue in seven years. The company is at present the • Strong expansion: The company has sustained high growth rates, largest apparel specialist pure achieving revenue growth of 33.6% in its fiscal year 2015. play in Europe. • Positioning: Zalando positions itself as a leading European online fashion retailer. Its core client base consists of consumers ages 20–45, and its offering focuses on a broad fashion assortment and convenience. • Product set: The company offers more than 150,000 fashion items from over 1,500 labels, one of the most extensive apparel ranges in the world. • Supplier relationships: Zalando works closely with its suppliers. For example, it has collaborated with Adidas to provide same-day free delivery from the stock available in Adidas stores; the program was piloted in June 2016 at the Adidas flagship store in Berlin. • Logistics: The company has a very efficient logistics infrastructure, divided between three central fulfillment centers in Germany. To serve its European expansion strategy, the company opened one fulfillment center in Italy in early 2016 and expects to open another one in Southern Germany later in 2016. • Mobile technology: Zalando invests heavily in mobile technology. The company relaunched its app in December 2015, with larger image formats, exclusive content and delivery notifications. In the second quarter of 2016, about 65% of its online traffic was generated from mobile devices. Zalando operates five tech hubs in Germany (in Berlin, Dortmund, Erfurt, Hamburg and Mönchengladbach); one in Dublin, Ireland; and one in Helsinki, Finland.

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Risks and Potential Challenges • Technological risk: As a pure play, Zalando relies on technology for its operations. Failure of parts of its systems would likely cause disruptions and, so, damage the business. • Channel dependence: Zalando relies on desktop and mobile e- commerce. As technology progresses, new forms of e-commerce could gain popularity, and failure to adapt could result in a decline in competitiveness. For example, e-commerce transactions via stand- alone retail websites and apps could be surpassed by commerce via social media platforms or marketplaces that disintermediate parts of Amazon’s expansion in apparel in the supply chain, allowing consumers to bypass traditional retailers. Europe could threaten Zalando’s competitive positioning. • Logistics risk: Problems in the smooth running of its warehousing system or with supplier relationships could damage Zalando’s operations. • Increased competition: Possibly the biggest threat for Zalando is the expansion of other pure plays in its segment of the market. In particular, Amazon’s expansion in apparel in Europe could threaten Zalando’s competitive positioning, given that both companies offer a broad choice of brands at competitive prices and provide excellent fulfillment services. ASOS’s expansion in continental Europe could also threaten Zalando’s leading position.

Figure 9. Zalando: Revenue and Operating Margin

6.1 5.4 4.7

2.8 3.0

1.2 1.8 2.2 3.0 3.7 4.5 5.6

(6.5) (7.2)

2012 2013 2014 2015 2016E 2017E 2018E

Revenue (EUR Bil.) Operang Margin (%)

Source: S&P Capital IQ

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ASOS

Figure 10. ASOS at a Glance, 2015 Summary ASOS is an online fashion retailer that specifically targets fashion-conscious 20- something consumers

Headquarters London, UK

Year Founded 2000

Total Revenues* £1,150.8 million (€1,326 million)

Revenue: YoY % Change 18.0%

Mobile Traffic as % of All Traffic >58.0% Countries of Operation UK, France, Germany, Italy, Spain, Australia, US, Russia and China**

*Includes non–Western European revenues, so this figure may differ from that cited earlier. **ASOS discontinued its Chinese in-country operations in its fiscal year 2016. Source: Company reports/S&P Capital IQ

Competitive Advantages

Source: ASOS • Investment in growth: ASOS reinvests profits in its future sales growth. Areas of investment include price, customer proposition, warehousing ASOS reinvests profits in its future and employee capabilities. ASOS’s capital expenditure was £50.4 million sales growth. Areas of investment (€67.5 million) in 2015, which equated to 4.4% of its revenue. By include price, customer comparison, Zalando’s capital expenditure equated to around 2.4% of proposition, warehousing and its revenue last year. employee capabilities. • Product set: The company’s product range includes its own-brand label and more than 800 third-party brands. ASOS stocks more than 80,000 products, and adds 3,000 new lines every week. About 60%–65% of the product set is unique to ASOS. In the first half of 2016, the company noted that 44.4% of its brand mix was own brand and 55.6% was third-

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party brands. The choice of brands sets ASOS apart from its smaller UK rival, Boohoo.com, which sells only private-label ranges. • Clear positioning: ASOS enjoys distinctive positioning, targeting fashion-conscious 20-something consumers with a broad choice of brands, incorporating leading-edge fashions and affordably priced products. • Customer experience: ASOS aims to offer its customers effortless shopping experiences, with free delivery (for orders of £20 or more) and free returns in most of its core markets, next-day delivery, and customer service in local languages. In 2015, the company continued to invest in fulfillment to enable reliable and fast delivery. • Technology platforms: The company runs localized versions of its apps in its main countries of operation. In the UK and Denmark, the company operates a “New In” app to showcase new product ranges. • Digital content: ASOS publishes daily fashion and lifestyle content through its website and social networks in a bid to connect with its customer base and encourage frequent visits. • International presence: The company runs operations in nine markets and ships to 150 markets. Some 58% of retail sales were to international customers in 2015.

Risks and Potential Challenges

The expansion of Zalando in the UK • Technological risk: Just as Zalando does, ASOS relies on technology for could be a threat, as could the its operations, which means any systems issues might result in growth of Boohoo.com, which also disruptions to its business. aims to serve young, fashion- • Channel dependence: Technological progress could threaten the conscious consumers. profitability of ASOS’s transactional apps and websites if the company fails to adapt. Possible risks include the rise of commerce through social media platforms or marketplaces that disintermediate parts of the supply chain, allowing consumers to bypass the retail middleman. • Logistics risk: A June 2014 fire at ASOS’s main warehouse in Barnsley that disrupted operations is a tangible example of the logistics risk the company faces. ASOS incurred costs of £8.5 million (€10.3 million) due to the fire. • Increased competition: We think that the expansion of other pure plays in ASOS’s segment of the market could represent a significant threat. Amazon, for instance, has recently enhanced its apparel offering in the UK. The expansion of Zalando in the UK could be a threat, as could the growth of Boohoo.com, which also aims to serve young, fashion-conscious consumers.

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Figure 11. ASOS: Revenue and Operating Margin

7.1

5.6

4.8 4.5 4.3 4.5 3.6

0.7 0.9 1.1 1.3 1.6 2.0 2.4

2012 2013 2014 2015 2016E 2017E 2018E

Revenue (EUR Bil.) Operang Margin (%)

Source: S&P Capital IQ

KEY TAKEAWAYS: FRESH THINKING NEEDED FOR MULTI-CHANNEL Our research has found that Internet-only retailers, with their sharper propositions and greater operational flexibility, tend to enjoy a competitive advantage over multi-channel retailers in the online channel. Two of the top three Internet retailers in our ranking are pure plays, and these types of retailers are outpacing their multi-channel rivals on metrics such as mobile Too often, brick-and-mortar penetration rates. retailers appear to be playing Too often, multi-channel retailers appear to be playing catch-up with catchup with online-only retailers. online-only retailers. We think the lead that pure plays enjoy in m- We think the lead that pure plays commerce penetration is the latest example of this. enjoy in m-commerce penetration is the latest example of this. As pure plays grow in scale, it could become even more challenging for well- established multi-channel retailers to compete with them online. Many traditional brick-and-mortar retailers have pointed to the convenience provided by a multi-channel offering and, in particular, by click-and-collect services. However, the data on revenue growth suggest that this is not enough to stop shoppers from turning to pure plays. As a result, multi-channel retailers may be prompted to consider alternative strategies that help jump-start their online growth or that otherwise respond to the relative underperformance of their segment. Pure plays are winning, and some multi-channel retailers will need to adopt fresh thinking to seriously rival their online-only peers.

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Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

John Mercer Senior Analyst Filippo Battaini Research Associate

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