ASOS(LSE: ASC) has fallen out of favour with the market over the past year as the company has issued numerous profit warnings. However, as the company tries to impress the market by discounting products to drive sales, the company is alienating its suppliers, which could be really bad news for the company.
Its no secret that ASOS has been struggling. A strong pound, a fire at the companys main distribution warehouse and increasing competition are the three main factors that have dented the companys sales and profitability over the past 12 months.
Still, ASOS has been able to grow sales over this period by discounting its products heavily. Discounts of 20% to 25% are common according to suppliers.
To some extent, this discounting has worked. The companys total revenues expanded by 30% in constant currency during the year to 31 August. But this growth came at the expense of ASOSs gross margin, which fell by 640 basis points during the three months to 31 August.
Unfortunately, it seems as if things are only going to get harder for ASOS. Indeed, it has come to light recently that as a result of the companys discounting, suppliers are now considering retracting their items from the companys website.
ASOS has not always had a trouble-free relationship with its suppliers. In particular, some UK retailers have prevented the company from selling their products overseas. This latest spat, however, does appear to be more of an issue, as some suppliers have accused ASOS of damaging their brand due to discounts offered.One supplier was even quoted as saying thatNEXTs(LSE: NXT)new online and catalogue service,Label, was emerging as a viable alternative to ASOSs current offering.
Still, no retailers have pulled away from ASOS yet. Nevertheless, last year the companys aggressive discounting over the Christmas period was a major concern to suppliers. A repeat of heavy pre-Christmas discounting could be the last straw. So, things could change over the next few months.
Nexts new online fashion venture is a threat to ASOSs dominance, although the venture is not trying to become the next ASOS.
Label was launched earlier this year,fronted by supermodel Jourdan Dunn and stocks brands such as Diesel, Superdry, Hobbs and Nike amongst others. Further,Labelis no ordinary fashion website. Its been designed to complement Nexts existing online offering, not boost it. Indeed, when discussing the potential for Label, Nexts management stated that:
We are concerned that some might be tempted to exaggerate the potential of this new business, and weshould stress that it will be naturally constrained by the fact that we intend to only sell premium brands and will not discount in order to recruit new customers
This is great news for suppliers who feel that theyve been let down by ASOS. Whats more, Next already has a successful online and catalogue business, which it can use to boost Labels exposure, operational efficiency and customer fulfilment.
Only time will tell
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The Motley Fool owns shares in ASOS.