Major players in the retail supply chain are getting nervous about the future—and fortunes—of e-commerce fashion giants Boohoo and Asos.
Trade credit insurers play a key role in the supply chain, helping to ensure that suppliers get paid for goods shipped to retailers. But now, Allianz Trade, Astradius and potentially others have pulled back on their coverage to Boohoo and Asos after the British fast-fashion e-tailers issued dismal financial reports in May. Alliance Trade is said to have recently cut its coverage level—reportedly by 50 percent on average, according to The Sunday Times—for Boohoo suppliers, and has supposedly withdrawn cover for Asos suppliers. Astradius is believed to still be covering Asos suppliers, although it has also cut its coverage levels, according to British media.
Related Stories
Asos said first-half revenue fell 8.2 percent to $2.32 billion from $2.53 billion a year ago. The pre-tax loss was $367.2 million versus $19.9. million a year ago. Asos CEO José Antonio Ramos Calamonte said the company has made changes to become profitable in the second half. The Asos board believes the company has “sufficient resources” to keep going for next 12 months. A recently amended revolving credit facility gives Asos a little breathing room.
Boohoo believes it can get back to the black in the second half after posting full-year losses that swelled to $113.2 million against a profit before taxes of $9.7 million) a year ago. Revenue for the year ended Feb. 28 fell 10.8 percent to $2.21 billion from $2.48 billion a year ago. Boohoo CEO John Lyttle said higher distribution costs and return rates were partly to blame for the losses.
Despite the optimism, both companies face significant pressures and can’t afford veering off track.
Boohoo is said to have demanded vendor supplier discounts twice this year. Last year the e-tailer pushed out payment terms from 30 days to two months. It also implemented a supplier fee last year to deal with a new plastic packaging rule. Asos had also asked suppliers for a discount in 2022 and in 2019.
The trouble is making trade credit insurers more cautious about the retail sector as they look to preserve their own bottom line. Ted Baker, electrical retailer AO World and online beauty retailer THG, formerly known as Hut Group, saw insurance coverage cut last year.
Insurance coverage comes into play when a retailer goes belly-up during the period of time between the supplier agreeing to take an order to the payment coming due. And the sector has already seen the struggles and resulting bankruptcies at Joules and Hunter Boot. This week, Unbound Group said it’s bringing in administrators for the firm’s main operating subsidiary after it failed to find a buyer for its British footwear brand Hotter Shoes.
In many ways, pulling back on trade credit insurance often results in a tightening of the proverbial noose for affected retailers. Cutting coverage does not in any way mean that a bankruptcy is in the cards. But cutting coverage does serve as a warning that there could be more trouble ahead.
Affected retailers should keep a closer tab on cash flow, and improve communication with their vendors. Many suppliers might refuse to take new orders from challenged merchants. Others might choose to continue to supply some goods, but demand payment upfront. That’s when retailers need to have a good understanding of cash flow if they want to keep their core operations intact. They’ll also need excellent data analytics to ensure they price goods right, and take markdowns sooner than later. The latter helps to ensure cash flow coming in, and gets rid of outdated merchandise sooner to prevent having to discount a second and third time.
