Consumer magazine companies have largely missed out on the growth opportunity of e-commerce. It is an enormous miss and a vivid demonstration of the risks and opportunities created by a world in digital disruption
Locked away in a country hotel, famous for its spa treatments, in a leafy, home counties valley, I was on edge.
I was running the annual strategy sessions for the Board of a major magazine publisher and - for reasons unknown to me - this session was going badly. An icy silence had enveloped the CEO. The session focused on braver development opportunities beyond the core business and I was asking them to think about e-commerce. It was June 2002.
We moved on and the day got back on track. Over lunch, the CEO said how well the sessions were going and then there was a pause “but let’s not waste our time on internet commerce; it’s just a distraction. That company will go bust like the others. We will take their advertising money until they’re gone.”
Today ASOS has a market capitalisation of £4.78bn.
“That company” was AsSeenOnScreen plc, which the following year would cut 71% of the letters in its name to become ASOS. Today ASOS has a market capitalisation of £4.78bn.
Contrast this with Time Inc, the New York Stock Exchange listed magazine and desperately-trying-to-be-digital company with brands such as People and Time in its portfolio, which is valued at just $1.27bn - approximately £1bn. Time Inc’s UK operation, the UKs largest magazine publisher (purchased for £1.15bn in 2001) may be sold into private equity hands at a rumoured £150m, if it leaves its pension liabilities behind.
If you take all the UK’s consumer publishing businesses today, their collective value is probably less than a third of that of ASOS.
Back in 2002, the publishing CEO’s damning appraisal of ASOS was understandable, if short-sighted. Turning over £4.1m, with an operating loss of £1.7m, ASOS wasn’t a very exciting business based on the numbers. It made a small profit the following year. Since then revenue growth has been jet-fuelled. In 2016-17 turnover was £1.9bn.
ASOS’ margins are thin at around 4% and have been gently moving downwards. This is certainly not the world of magazines, used to 20%+ margins. E-commerce is often a world of tough price competition. However, speed of top line growth drives value, particularly in a world of low or no growth. With profits before tax of £64m and return on capital employed rising to 25% ASOS is a very impressive business, however rich you consider the valuation.
The magazine publishers who, 15 years ago, were so sniffy about e-commerce, are being badly beaten up by compounding double digit declines in print advertising revenues, fast falling copy sales and a hoped-for digital advertising future being eaten away by the rampant growth of Facebook, Google and Amazon.
To rub salt in the wounds, ASOS is very magazine-like in its habits and approaches. ASOS emails are the daily fashion habit of so many young women; the brand manages its social channels better than most media owners; its influencers are often as influential as any fashion editor; ASOS has its own customer magazine; and, like Amazon, ASOS also earns advertising money from brands in direct competition with magazines fighting for the same budgets.
ASOS is not a one-off in emerging as an e-commerce fashion powerhouse.
Boohoo, launched in 2006, is on the same path. Valued at roughly half of ASOS at £2.3bn, Boohoo’s turnover was lower at £430m in 2016-17 but it achieved a pre-tax profit of £36.2m. With operating margins of 8-10% over the last few years, Boohoo shows that both fast growth and decent margins are possible in e-commerce.
So why didn’t Hearst, with brands such as Cosmopolitan, or Time Inc with the once powerful weekly, Look and the monthly Marie Claire create their own ASOS or Boohoo? Why didn’t they innovate in a sector where the scale of the opportunity was increasingly obvious from the mid-noughties and where they had a potentially significant early-stage competitive advantage in marketing and brand building?
Almost all the publishers have had a go at e-commerce, but their attempts have been almost entirely awful. Conde Nast launched Style.com as an e-commerce platform in 2016 and closed it after 9 months having reportedly invested $100m. Hearst UK worked with the Hut Group in the UK but it was a costly failure; cladmen and giftinggrace.com created by Hearst Corp in the US with JC Penney were other casualties along the way. Bauer launched upmarket fashion sale site, Cocosa.com in 2008 with a similar lack of success. There are other examples, already too hard to remember.
What are the reasons for these tales of woe?
It is obvious that e-commerce is a very different business from lifestyle media. Skills in product design, stock, logistics and data-driven customer management are not learnt in magazine companies but it is too easy to say that lifestyle media businesses cannot develop them. Nick Robertson, founder of ASOS came from media buying. Michael Preysman, founder of US e-commerce hit, Everlane, came from the world of finance. They saw an opportunity, built a team and learnt the new business piece by piece.
I would point to other reasons.
The traditionally fat margins of UK lifestyle magazines and the expectation of never-ending, growing profits held back risk-taking and reinvention. Leaders and management teams have been recruited and incentivised to focus on engineering margin and delivering consistent, growing dividends, not to take risk.
The 2000 digital bust had a particularly damaging impact on these teams. It vindicated the scepticism of the conservatives. The drive to innovate radically disappeared in the years that followed which meant that they had not built the new concepts that would take off with the tipping point defined by the rapid spread of broadband.
Magazine companies, when they finally went after e-commerce, went in big rather than building the businesses quietly from scratch, learning along the way. They were also scared of creating their own brands that might compete with advertisers, conflicting with the most deeply held belief of consumer media – ‘Thou shalt never upset thine advertiser.’ This boxed their e-commerce development into niches or intermediary positions.
Magazine companies have also been guilty of believing their power is greater than it really is. Magazine brands and their websites remain strong brand builders. They are not, however, able to drive the rapid take-off of an e-commerce business single-handed.
E-commerce still makes up only 17% of retail sales, though this has risen by a third in just the last 2 years.
It has become ever harder for magazine companies to take brave development leaps. It is difficult (but not impossible) to drive reinvention while also dealing with the legacy issues surrounding shrinking businesses in a declining market. The Scandinavian newspaper businesses which managed the move to digital classified so well made the brave move early before the pressure of digital disruption really took hold. Magazine companies have left it late and must cut hard with one hand while reinventing with the other.
E-commerce remains a huge opportunity. The scale of the growth of e-commerce feels huge given the growing number of packages that arrive to the door of our household but the channel still makes up only 17% of retail sales, though this has risen by a third in just the last 2 years. We are at the end of the beginning of this transformation in consumer habits and all the risks and opportunities it creates.
Let me end with a cheerful note of hope. Up in Manchester two ex-Time Inc magazine people are showing the magazine industry that it can be done. Ali Hall, former editor of Look magazine and Julie Lavington, the title’s publisher, launched Sosandar in 2016, a new e-commerce fashion brand. The business will soon be listed on the AIM market, following a path well-worn by the likes of ASOS.
It can be done.
Their story is for a future post.