Asos: We focused too much on performance marketing with ‘insufficient’ brand spend

UK-based global online retailer Asos is to rethink its emphasis on performance marketing after admitting that allocating about 80% of its £224 million ($251 million) budget to the discipline was not working.

The decision comes from the top of the ecommerce fashion retailer, with new chief executive José Antonio Ramos Calamonte revealing a turnaround plan that puts more spend behind brand-building, in echoes of last year's move by online travel portal Airbnb.

The shift was announced alongide financial results for the year ending 31 August 2022.

Group revenues grew by only 1% to £3.94 billion ($4.42 billion) and it made a pre-tax loss of £31.9 million ($35.8 million), compared with a profit before tax of £177 million ($199 million) in the previous year.

The slowdown is due to factors including shoppers returning to bricks-and-mortar retailers post-pandemic.

Over the financial year, Asos spent £223.5 million ($251 million) on marketing, increasing its spend by more than 10% from the previous year's £200.9 million ($225.6 million).

The new management told shareholders in a results presentation: “Asos has historically underinvested in marketing relative to peers with (i) allocation across markets not effectively prioritised or managed effectively to ensure a return on investment; and (ii) more than 80% of marketing investment focused on performance marketing, leaving insufficient spend focused on driving longer-term brand awareness.

"As a result of this, customer acquisition has slowed in FY22, whilst the cost to acquire a new customer has increased. We have also become increasingly reliant on the use of markdown and promotions as a tool to attract customers, resulting in reduced newness for customers which has contributed to the erosion of gross margin in recent years."

Asos said it would review its "operating model, marketing investment, capital and resource allocation and its deployment across geographies, customer acquisition channels and digital and data capabilities" to create "long-term sustainable growth for investors" in the next 12 months.

The shift from performance marketing to brand building mirrors a similar decision made by Airbnb last year, when the business said it would make a permanent cut to the amount it invests in marketing after it slashed its outlay by more than half during the Covid downturn, while still generating 95% of the same online traffic as the year before.

Asos said that in today's "tough economic environment, it would continue to "build on its core strengths" – the Asos brand, its "carefully curated range of partner brands", its fashion credibility and "market-leading position in the UK".

At the start of its 2022 financial year, Asos expected marketing costs as a percentage of total costs would rise by 1% from 5.1% to 6.1%. It ended up increasing spend by 0.6% to 5.7%, reflecting "initial investments being made in broad reach and product marketing, which were deployed on a test and learn basis during the year".

Further investment was initially planned for but was postponed as the economy and consumer spending took a hit.

"Spend on performance marketing was also slightly up year on year, as investments were made to capture demand," it said. "However, the impact of this overall increase was limited by allocation of spend to more efficient channels."

A view from the Chartered Institute of Marketing

Commenting on the results, Chris Daly, chief executive of the Chartered Institute of Marketing, expressed disappointment, noting the financial performance came as "little surprise, as supply chain bottlenecks and the ensuing cost-of-living crisis continue to plague the retail industry".

He added: "Now the job for Asos is to spark consumer interest and demand again, and to become indispensable in the minds of its customers.

"The CMA's ongoing investigation into Asos over their potential use of 'misleading eco claims' has also hampered the retailer's progress. Amid growing efforts to clampdown on greenwashing, the retailer must refrain from using vague language to market items as environmentally friendly, or weak criteria to decide if products are sustainable.

"We know that consumers are increasingly sceptical of brands' sustainability efforts, with our research finding that 63% believe many brands only get involved with sustainability for commercial – not ethical – reasons.

"Building consumer trust in these challenging times is a prerequisite for sustained success, so it's essential that Asos' next steps are in the right direction."