Fast Fashion can be Sustainable!

3^rd August 2020, Berenberg hosted a Fireside Chat with ASOS’ CEO, Nick Beighton with c140 investors.

The focus of the call was on ESG and Sustainability in the Fast Fashion world, given the recent scrutiny on the industry. It is clear that sustainability is at heart of the company’s culture and that ASOS has been on the forefront when it comes to scrutinising carefully its suppliers and third party brands that it partners. When it came to COVID19, the company encouraged its factories to close in order to protect workers. It was therefore not a time to judge ASOS on its top-line performance. Interestingly, Nick views the turmoil that occurred in Leicester as a catalyst for change, the company only sources less than 2% of its own brand products from the UK – using bodies such as Fast Forward to ensure intense scrutiny of working practices. Therefore while the landed intake cost of UK sourcing may be higher than sourcing overseas, net profitability and cash conversion can be stronger. ASOS is ready to drive the change in the industry and is willing to back this up with purchase orders and this is a significant market share opportunity. Overall, I believe the call was not an attempt to criticise its competitors but rather an opportunity to lay out how ASOS has run its supply chain differently and in a more sustainable manner… Who knew that ASOS makes its own honey, the company has c40k bees on top of its Berlin DC’s roof! You will find below the key new points discussed in the call and the detailed Q&A transcript – I highly encourage you to also read the Q&A, which shows the amount of measures ASOS has undertaken to achieved the targets it set 5 years ago.

Jenny Holloway, CEO Fashion-Enter commented:

“One of the reasons why I am so personally loyal to Asos is because of Nick Beighton himself. He is one of the most genuine CEO’s I know and he does not say pleasantries for the sake of it. He is amazing on time management and therefore he cuts to the chase. I love that. He says what he means and he follows through. I have had so many “positive” meetings whereby big conversations about big production runs are discussed and absolutely nothing comes of the meeting.  Such a waste of time for everyone.  The buyers at Asos are switched on and the management team supportive but I have to still harp on the fact that all retailers need to understand and work with their supply base to ensure lean production that is cost effective is achieved. We are going to go through an unprecedented period of change in retail.  The consumer will become the designer and the retailer has to have the technical resources behind them to jump that demand – tomorrow – not in a weeks’ time!  Mass consumerisation is around the corner.”

Best quotes from the call:

‘The manufacturing of an average pair of jeans consumes 1,200 liters of water, but the average for ASOS jeans is now c33 liters’

‘Yes, fast fashion can be sustainable’

‘The business case for UK responsible sourcing is massive’

‘Shareholders can play a crucial role in driving the business to be more sustainable’

‘Capital markets are exerting an ESG influence like never before on companies, ASOS benefits from that’

‘ASOS has invested c2ppt of margin into sustainability but also worth highlighting that costs have come down’

‘The recent scrutiny is an opportunity to grab more market share and is something that management at ASOS is addicted to’

‘A Depop type model has great customer acquisition potential and would be a nice addition to ASOS’ customer offer’

‘What happened in Leicester could be the best moment in years “to clean this up”.

‘We recently added Molly Mae (influencer from Love Island)’ .. “she asked to join us”.

‘ASOS aims for 100% more sustainable cotton by 2025, and is now over 80% – the target should be reached a few years earlier’

‘ASOS has reduced its carbon footprint by 30% in the last 5 years .. new “ambitious targets” will be coming soon’

‘ASOS has c40k bees on top of its Berlin DC’

Key takeaways from the call:

1. Fashion with Integrity (FWI) – Fast fashion CAN be sustainable: The CEO absolutely believes fast fashion can and should be sustainable. Fast fashion is about speed to market, which can actually reduce waste in the supply chain, and not about producing disposable but rather affordable clothing. ASOS’ FWI programme, which was launched in 2010, is focused on transforming its impact on people, animals and the environment and using its influence as a force for good (30% of ASOS demain is recycled, ASOS reduced its carbon emissions by 30% over the past 5 years, using EV’s to deliver in the last mile, shifted DCs closer to consumer, 10% of ASOS garments are recycled, designers trained to produce circular collections). Mr Beighton is also passionate about the circular economy, and 5 years ago ASOS decided its legacy would not be about selling the most dresses, but about selling them better and sustainably. It therefore designed its Fashion with the Integrity programme, which focuses on the 4 P’s: People, Product, Packaging, Planet.

2. Catalyst for change: ASOS sources less than 2% of own brand product from the UK, using bodies such as Fast Forward to ensure intense scrutiny of working practices – the CEO has actively campaigned for the UK government to clean up the industry in the UK. The CEO has been proactive over the last three years in lobbying the UK government to improve working conditions in UK factories to enable ASOS to increase its local sourcing. He believes the current investigations into payroll fraud, classification fraud, phoenixing and furlough fraud could provide the necessary catalyst for change in the industry. This will come either through intervention from capital markets, legislation and/or increased scrutiny from company Board’s. While consumers may not vote with their wallet now, they certainly will at some point in the future.

3.  Business case for change is substantial: UK sourcing can reduce lead times down to 2-4 weeks (from c9 weeks in Bangladesh). This gives inventory an extra turn and also reduces markdown. Therefore while the landed intake cost of UK sourcing may be higher than sourcing overseas, net profitability and cash conversion can be stronger. We covered this on p16 of our note You Reap What You Sew, 8 March 2017. With sterling weakness since the Brexit vote and the potential for further tech efficiencies in the supply chain, the UK has become an increasingly attractive sourcing market if done responsibly. ASOS continues to push for the clean-up of the industry and is willing to back this up with purchase orders.

4. Market share opportunity: The CEO re-iterated that P3 was about protecting the business, employees and suppliers, with ASOS encouraging its factories to close in order to protect workers. It was therefore not a time to judge ASOS on its top-line performance. With its factories re-opened, availability will improve and growth reaccelerate. There will remain some drag from event-led product in the near term, however a key positive in the short term is that category mix and low returns are a tailwind for profitability. In the mid-term, it is clear ASOS has a significant market share opportunity ahead and the firepower to take advantage of the opportunity.

Valuation: Stock is trading <1.0x EV/Sales and trading at a discount to history despite having strongest infrastructure and balance sheet that its ever had in an environment where channel shift is accelerating. Buy.

Q&A session led by analyst:

Q: Can a company that aims to deliver fast fashion ever be truly sustainable?

A: The CEO felt that yes, it definitely can. Fast fashion refers to speed and not just disposable throwaway items. None of ASOS’ product is designed to be disposable. He feels a business can do all elements responsibly and that speed is the advantage from a commercial perspective and can also reduce waste. Mr Beighton is also passionate about the circular economy, and 5 years ago ASOS decided its legacy would not be about selling the most dresses, but about selling them better and sustainably. It therefore designed its Fashion with Integrity programme, which focuses on the 4 P’s: People, Product, Packaging, Planet.

Q: Can you talk about ASOS most important sustainability targets, how involved is the management team is in setting them and how they are monitored?

A: Mr Beighton noted that ASOS treats sustainability like a business plan. Targets are signed off by the full exec and they are the responsibility of everyone. In terms of specific targets, ASOS aims for 100% more sustainable cotton by 2025, and is now over 80% (i.e. cotton with less pesticides, less water consumption, from farms paid sustainably and responsibly). The company is hoping to hit this target several years early. With regard to water consumption, denim is one of heaviest consumers of water. For instance, an average pair of jeans consumes 1,200 liters of water, but for ASOS jeans, the company has managed to bring the consumption down to now c33 liters. 30% of ASOS’ denim is recycled, which is the limit before fabrication breaks down, and it has achieved a 30% carbon reduction in the last 5 years, with the company soon to announce another ambitious target.

Q: Can you talk about ASOS own brand supply chain in terms of where product is sourced from and how sourcing partners are monitored – do you have ASOS employees based overseas monitoring the supply chain?

A: ASOS has 4 overseas destinations involved in local monitoring, quality assurance and production planning (Delhi, Turkey, China and Mauritius), and is looking for another one within the UK. The CEO also noted that ASOS encourages freedom of association (unions), and has set up whistleblowing lines. The company sources c1.5% in UK. The company publishes all of its factories down to tier 3, which enables transparency and scrutiny. Every Tier 1 factory is audited at least once per annum; and high risk factories are audited more regularly.

Q: There’s been a lot of allegations over the last month or so around working practices in Leicester textile factories. You were proactive in lobbying the government back in 2017 to improve working conditions in the UK textile industry so that ASOS could increase the amount of product it sources in the UK. What’s your understanding of what’s going on there?

A: The CEO noted that the business case for UK sourcing is massive. While this is emphasised by the impact of Brexit on import costs, the key is the agility of closer sourcing in fashion. UK sourcing allows for lead times of 2-4 weeks (vs c9 weeks from Bangladesh for example), which can help reduce markdowns. The company lobbied very hard 3 years ago, as it wanted to place more purchase orders in the UK but wouldn’t risk jeopardising its integrity and values. The CEO’s understanding is that payroll fraud, VAT classification fraud, phoenixing and furlough fraud have all been taking place in certain Leicester textile factories, however it would be wrong to tarnish Leicester with one brush – there are factories with which ASOS has worked with for several years that are of a high quality. Mr Beighton also noted that he was in Leicester 3 weeks ago visiting factories, and felt that the feeling on the ground was it would be a galvanising moment for the sector. He believes central and local government are now taking the issue very seriously, and that it could be the best moment in many years to clean this up.

Q: What actions has ASOS taken to ensure the factories it works with are compliant? Can you give some examples of actions taken by ASOS when issues have been found in the past?  

A: 3 years ago in Leicester the CEO co-hosted a conference with the leader of local council. The company was also a founding member of Fast Forward, which all its factories work with. It helps detect subcontracting and payroll fraud. With regard to the former, it performs a logic check on a factory’s production capacity, and with regards to the latter it performs a logic check based on the number of employees, minimum wage and other factors. It is highly unlikely that the factories involved in recent allegations were signed up to Fast Forward which would have uncovered the problems. In respective of specific examples, ASOS found an issue in Turkey around 4 years ago with Syrian refugee labour. It entailed 8 Syrian refugees, of which 4 were under the legal age. However the company had a total of 100 workers, and ASOS was 20% of its business. ASOS gave the factory a clear view about what needed to happen, put the Syrian refugees into housing, and supported one in their medical studies. Cutting and running would not have benefitted the overall system – the CEO noted that its sometimes complicated to do the right thing.

Q. How much do you think consumers care about this? Have you found from sales or surveys that customers are willing to pay more for a better, more sustainable product that lasts longer?

Ultimately, the CEO believes that to drive change and a larger focus on sustainability within a company there are four pillars: i) Capital markets:  Investors will use their power and rise to lean in on management and pressure them to take a long term view on what the sustainability of the business is ; ii) Legislation: comes in second place; iii) Non-Execs: the board and CEOs will drive change within the business and establish a strategy, set targets; iv) Consumers: Nick believes they will demand for an increased focussed in sustainability and for sustainable products but are unlikely to be willing to pay more for it. Consumers look at brands making millions in profit and expect the brand to cover the cost. In the future, it is likely that consumers will tend to buy from brands that offer more sustainable products.

Q. Does this mean we should expect margin pressure for ASOS going forward?

A: Nick explained that over the past 5 years, ASOS has invested c2ppt of margin into sustainability but also highlighted that costs have come down. He doesn’t expect margin pressure going forward, but does believe its means we wont see further price deflation. The focus has been on doing what is right with regards to employee salaries, sourcing ethically and investing in the supply chain/ distribution centers to be closer to the consumer. The CEO highlighted 5 priorities to pivot off back of COVID: an organisation with greater agility, greater digitalisation in back office, leaner firm, more financial robustness, fairer and more sustainable day-to-day business.

Q. Do you view this as a market share opportunity for ASOS then? And while consumers might not yet care en masse, presumably influencers do? Might we see influencers abandoning peers with supply chain issues creating an opportunity for ASOS?

A: This an opportunity to grab more market share and is something that management at ASOS is ‘addicted’ to. Looking back to the last 18 months, Nick recognises it has not been the company’s brightest hours but COVID19 has accelerated the channel shift and presented numerous opportunities and they are ready to seize them – ‘we have just had 10 years of digital disruption within 5 months’. In terms of sustainability, ASOS will be doubling down on communications in this space. It is also actively looking at how to further move the opportunity here including looking at a new sustainable brand at the £10-20 pp sourced from the UK, which will be supported by influencer led strategy. With regards to market share, Nick believes the main opportunity comes from store demand rather than its competitors losing share. They have certainly taken advantage of the turmoil that has gone down in Leicester. Molly Mae (Love Island 2019), ex Boohoo influencer approached ASOS to become an ambassador. He thinks influencers will increasingly care about their own reputation and of the brands they represent but more the mega influencers than the micro influencers.

Q. Moving on from ASOS product, how do you go about policing the ESG credentials of the 100s of other brands that are sold through ASOS?

A: Nick said his focus has been on making sure the ASOS Design brand is as good as it can be. His aim is to raise the bar for the industry by showing fast fashion can be sold in a sustainable manner. A lot of the third party brands are big names where we have great confidence in and evidence of their ESG credentials e.g. H&M, Inditex, adidas, Nike, Patagonia, Vans all do great work here. Where it can be trickier is smaller brands. It launched a third-party brands programme at the start of 2018 with five minimum requirements that brands had to sign up to. Brands had to have: An Ethical Trade Policy; Transparency of ‘Tier 1’ (Cut Make Trim) factories; Compliance with chemical regulations; An Animal Welfare Policy; Modern Slavery Statement. Nick explained that if a brand does not meet the ASOS criteria but has the aspiration to get better, ASOS will work with them to make sure improvements are made within the company. However, he specified that companies that do not fulfil a minimum of criteria will not be able to see their products on ASOS website.

Q. Is ASOS actively adding more sustainable brands or products to the platform?

A: It is part of Nick’s strategy to launch smaller own brands to address different consumer needs and sustainable closing does represent an opportunity in the foreseeable future. We should expect more to come on that front from the company.

Q. There are lots of different bodies and organisations to join in the interests of sustainability. How does ASOS choose which are the right ones?

A: For ASOS it’s about using its influence and that of the bodies it joins. It believes in a transparent and collaborative approach, not just ticking boxes but working for real change and knowing who can help achieve that. That goes for its partners as well as for the organisations and bodies it joins. Some of the organisations it works with are Anti-Slavery International – the oldest NGO in the world – and IndustriALL Global Union – the largest union in the world, and the Resolution Foundation. These are experts in their field and are able to help ASOS improve its processes. They’re able to critique as well as support. Through those relationships, ASOS joined groups such as the ACT initiative, which is working to achieve a living wage and which IndustriALL is part of. It is also part of Sustainable Clothing Action Plan in UK (about supporting transparency, chemical requirements, etc.) and the Higg/SAC (sustainable apparel coalition) globally. In the UK, ASOS co-founded the Fast Forward organisation with other retailers in 2014, to help improve auditing processes across the UK. Not just in Leicester. It is also a strategic partner of the Global Fashion Agenda, which brings together some of the biggest names in the industry and helps ASOS engage with its third-party brands to drive industry-wide transformation.

Q. Clearly how product is made is very topical at the moment, but fashion’s other issue is over-production. In the UK over 300,000 tons of shoes and clothes go to landfill every year. How do you see ASOS’s responsibility in reducing that? How can the industry become more circular? Or do we just need to make and buy less and is that financially a concern for ASOS?

A: Its something for ASOS to think about, but ultimately the CEO’s goal is that consumers spend a greater proportion of their wallet at ASOS because it meets their sustainability credentials. All ASOS design teams have been trained on circular designs and currently 10% of their garments are on recycled fibers already. The goal is to increase that percentage so that a maximum of garments can be recycled rather than producing new materials. The more mono fibers are used, the easier it is to recycle. Key focus has been to design all of ASOS clothing with mono fiber textiles and that products made out of mixed fiber only represents a very small % of ASOS own brand. Consumers are never encouraged to throw away the clothes they buy and it is the reason why it is also key to monitor returns. Nick also touched on an Asos digital wardrobe type of platform, for consumers to re-sell their products. He said he is very keen on exploring that opportunity to reduce the footprint of garments that end up as landfill – a Depop type model has great customer acquisition potential and would be a nice addition to ASOS’ customer offer.

Q. Shifting away from product. Another area of ESG focus in ecommerce is the externalities of online delivery and returns. Is there anything ASOS is doing to reduce its carbon footprint here? How can ASOS encourage its logistics partners to shift towards things like electrification of last mile delivery?

A: In 2015, Nick signed off ASOS’ Carbon 2020 strategy which focused on reducing its operational environmental impact and carbon emissions and deliveries and returns accounting for a large proportion of this. Since then it has reduced operational carbon emissions per order by 30%, the equivalent of avoiding 110,000 tonnes of CO2. In 2018/19 alone it reduced the absolute carbon emissions associated with deliveries by 18% despite a 17% increase in parcels delivered – this has been achieved by engaging with its logistics partners, increasing the number of electric or low-carbon vehicles delivering orders and ensuring delivery routes are efficient. The opening of the Atlanta DC was also pivotal in reducing delivery emissions as it means orders to US customers (now Mexico & Canada as well) can be served from a local facility, reducing the need to air freight deliveries from the UK. The emissions per delivery for US customers more than halved in the first year of Atlanta opening. ASOS is committed to working with its logistics partners to transition to electric vehicles where possible to reduce emissions and help improve air quality, in 2019 it delivered 1 million parcels to customers in London via electric vehicles and it is working to increase this across other major cities, including Berlin shortly. In terms of reducing returns, it is using fit assistant/AI to ensure customers get the right size, first time and don’t need to order and return several items. In the last few months the shift in mix to casual clothing has had the greatest impact on lowering returns rates and it may be that this trend is at least partly structural.

Q. And in terms of packaging, how has ASOS been able to reduce the amount of packaging it uses, particularly non recyclable packaging and what kind of metrics does ASOS track here?

A: All ASOS boxes are 100% recyclable and recycled and its bags contain up to 65% recycled content, which will increase to up to 90% over the coming months, and are all 100% recyclable. Last year it signed up to the Ellen MacArthur Foundation’s New Plastic Economy Global Commitment and in doing so has pledged to improve the sustainability of our packaging in 4 main ways: removing packaging, making it more recyclable in practice (i.e. in reality at curbside), using more recycled material, and moving towards circular models, ie reusable bags. It has also developed a prototype reusable bag that it was keen to start testing at the start of the year; COVID made that a challenge but it’s something ASOS is keen to progress with ASAP.

Q. Finally before I hand over for any closing remarks, in terms of P3 results, how significantly was ASOS held back by supply chain constraints and when should these headwinds ease?

A: Nick believes ASOS was significantly held back. It entered H2 off the back of an excellent H1 recovery. But the focus was on getting to a position where it secured organisation and ensured staff and supply chain workers were safe. All factories closed for 6-8 weeks in UK and RoW.

There P3 is not a period to judge ASOS on topline performance, more to judge values of organisation. Demand was far greater than management expected and it could have fulfilled far more, but took the focus off short term revenues. Factories are now open and stock levels are rebuilding leading to improved availability which is a revenue tailwind. There will still be a headwind from event-led product until lockdown measures end and consumer activity returns to normal. In the meantime, ASOS continues to see strong demand from casualwear, athleisure and beauty which have the benefit of lower returns rates.

Source: CEO Fireside Chat on ESG & SUSTAINABILITY