What’s next for online retailers as investors lose faith? - Retail Gazette (2024)

Ocado is to be booted out of the FTSE 100 after the online grocery group’s share price plummeted more than 85% from the highs of the pandemic.

The exit is representative of a wider sweep against pureplays on the London Stock Market, which are all trading at a fraction of what they once were during their peak in 2021.

Asos, AO World, Boohoo, Moonpig and THG are among the pack that have seen their share price plunge. Just last week activist shareholder Kelso Group revealed it would be voting against the re-election of THG chair Charles Allen at its upcoming AGM – its latest way to vent its frustrations over the online retail group’s weak share price, which it believes is trading at a “significant discount”.

How is the investor retreat impacting online retailers, what changes is it leading to and what next for these businesses?

Falling out of favour

The rulebook for online listed retailers has changed, according to Peel Hunt analyst John Stevenson. Impressing an investor is no longer about simply operating in the growth ecommerce market, now they now want to see profitability from their investments, he explains.

“Over the last couple of years, the retail sector as a whole has fallen out of favour [on the stock market],” says Stevenson.

“You’ve had consumer demand fall down, then you’ve had issues with supply chain and freight costs,” he explains, references spikes in costs suffered both during the pandemic and earlier this year due to disruption caused by attacks on vessels in the Red Sea.

“It’s a very different world and now [the retailers] are being told to generate cash and be profitable,” says Stevenson.

This is in stark contrast to just a few years ago when investors were happy to invest in ecommerce players based on their growth in sales. Even behemoths such as Amazon paid very little attention to profit growth as they concentrated on hoovering up market share.

This shift in sentiment has sent share prices across the listed pureplays tumbling and scrutiny from shareholders has hit an all-time high.

THG is one example of an online firm that’s had a rocky time on the stock market, with the company’s share price down more than 90% since its IPO in 2020 where it was valued over £8bn.

The group’s chief executive Matt Moulding has taken aim at investors and hedge funds in multiple social media posts, with his most recent LinkedIn blog post describing the last few years as “carnage” and adding “it’s been brutal running THG these past two years”.

Similarly, Boohoo and Asos have seen investors walk away as the pair battle floundering sales against the catapulting rise of Chinese fashion giant Shein.

The two listed fashion retailers have become takeover targets, with the likes of Frasers and certain hedge funds taking advantage of the low share price.

AJ Bell analyst Russ Mould points out that a possible Shein floation will likely place further pressure on Asos and Boohoo’s “business models and competitive positions”.

“Shein is already making its presence felt as a private company, as competition in the fast fashion market remains as fierce as ever, although Asos would argue that it operates at different – higher – price points.”

Right-sizing and slashing costs

The pull back from investors has shed light on how aggressively most of these companies have focused on sales growth over profitability in the last five or so years.

THG’s ability to generate consistent losses against billions in revenue has become a point of frustration for investors, with the group delivering £185.4m in operating losses last year – albeit a significant reduction from the nearly £500m loss from the year before.

Following a strategic review last year, the online retail group decided to exit some loss-making categories and focus on higher margin sales, reducing the number of orders that do not hit its target profitability.

It has also cut staffing levels, using natural attrition to make £40m in cost savings, and has reduced both price and marketing investment in European territories. Instead it now fulfils more orders closer to its global distribution hubs, driving further economies of scale, meaning the UK is a far greater focus.

The repositionising has landed well with brokers with investment bank Liberum Capital noting there are “more positive catalysts now than the last two years with many of the hard strategic decisions made and we can see the delivery across the group”.

Stevenson says the opportunity for THG to scale is “massive”, explaining its sports nutrition MyProtein business “is a market leader in its own right” thanks to its wholesale business and partnerships with retailers, such as a ready meal line with Iceland.

He also sees opportunity in its beauty division, which he says sits in one of the least penetrated and fastest growing online markets.

The refocus to home turf has also helped electricals retailer AO World, which returned to profit last year driven by the simplification of its operations and closure of its German and Dutch arms.

Meanwhile, Asos shares have seemed to plateaued as market spectators wait to see if the online fashion giant can pull off phase two of its turnaround.

The etailer spent most of 2022 stripping costs and driving efficiences, such as offloading old unwanted stock and removing 2.2m customers, which it claimed were “unprofitable” shoppers.

Investment bank Investec noted that Asos’ “stubbornly high churn and difficulty recruiting new customers is putting more onus on the company to deliver further improvements in existing customer profitability”.

Spin-offs and jumping ship

THG has faced consistent shareholder pressure over the last few years to spin-off its MyProtein business, with some campaigning for a move to the US.

Shareholder Kelso Group, which has been advocating for the separation of the business, said previously: “We believe that THG’s nutrition division with its main brand of MyProtein should be valued as a global consumer brand, given its near $1bn sales, double-digit EBITDA margins and increased product innovation in the current year.”

Investor pressure continues to be the biggest driver, with many arguing that the division is worth much more than the market capitalisation of THG, which is currently valued at just under £1bn.

While spin-offs of listed companies are not unheard of, its been a long time since the retail sector has experienced one.

The market witnessed the biggest break-up in retail history back in 2005 and 2006, when GUS – Great Universal Stores – demerged its Argos, Burberry and Homebase businesses into seperate entities alongside credit agency Experian.

Ocado has also faced similar questions about the possibility in splitting its tech arm and its joint online grocery venture with M&S into two seperate companies as some investors consider the business a loss-making online supermarket rather than a global technology company.

The group’s shareholders have also enquired about the idea of moving its listing to America as its stock has plunged 90% from a peak of more than £28-per-share in 2020 to less than £3.50-per-share.

However, Stevenson argues that a US listing “doesn’t mean its going to do well”.

He points out that online car marketplace Cazoo took itself to New York after investors denied a £6bn valuation, but called in administrators this month.

What’s next?

The likes of Asos and Boohoo still have a long way to go to achieve profitability and analysts are cautious of the double-digit loss in customers as both are overtaken by the likes of Shein.

Meanwhile, THG, AO World and Ocado are starting to show signs of recovery thanks to repivoting their businesses to focus on profitability.

Stevenson is optimistic that a rebound on the stock market could be on the cards for the online world: “It’s a hugely cyclical market”.

“There are the ebbs and flows not just of how and where consumers shop, but also the importance of being relevant to your customer base,” he says, pointing out that Asos and Boohoo’s fashion offer could once again reasonate well with shoppers.

However, given that several pureplays are trading 90% below their peaks, it may be some time until their stock rides quite as high as it once did.

Mould points out the pandemic was a “particularly unusual time” and suggests the growth rates generated then “will be hard to replicate when consumers are not obliged to stay in their own homes and have to rely on online suppliers”.

“Online retailers can still offer huge value to customers,” explains Mould. “It’s just a matter of what growth rates and margins are sustainable.

“The share prices back then may have unwittingly been priced in growth rates and margins that were going to be very hard to sustain.”

Click here to sign up to Retail Gazette‘s free daily email newsletter