Battered online businesses need a new fashion model

Online fashion retailers need a radical change in operating model. Shares in Asos, Boohoo and Zalando have plunged by as much as two-thirds this year as inflation drives customers to return more clothes. Eliminating free returns, as Inditex has already done, is a sure way to reduce costs. It’s also the beginning of the end of the changing room business plan.

Selling cheap T-shirts and shoes to 20-somethings is a fickle business. With no physical outlets, customers buy multiple items to arrive at the perfect shape, size, and color.

Retailers like £820m ($960m) Asos and £710m ($830m) Boohoo absorb the cost of free deliveries and returns. The latter is especially bulky. In addition to physical collection, there is washing, processing, and then a possible discount to get a returned item quickly sold again. With households tightening their financial belts, customers are returning more items. This increases administrative costs for retailers and reduces sales.

Established retailers have already eliminated free returns. Britain’s Next introduced a £1 (€1.2) charge in 2018 for certain returned online items. Inditex followed suit in May with a fee of 1.95 pounds (2.3 euros) for all online returns in Britain. The main idea is to make customers more disciplined in their buying habits. But retailers can also argue that, with fewer vans to collect unwanted garments, they are becoming more sustainable.

However, the change is likely to hurt them. In good economic times, free return services can inflate sales, as customers are more likely to keep items and forgo a refund if they aren’t struggling elsewhere. But with the UK, Asos’s home market, mired in a cost of living crisis, the opposite is true.

Based on the company’s 3.3x valuation multiple, the £300m (€350m) cut from Asos’ market value on Thursday represents a hit of nearly £100m (120m). ebitda. That’s 40% of this year’s earnings before interest, taxes, depreciation and amortization, according to analyst forecasts compiled by Refinitiv. Faced with this situation of loss whatever they do, the idea of ​​charging customers to return clothes does not seem so silly.