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What went wrong with ASOS’s US business last month?

In short, ASOS hadn’t employed enough workers at its new warehouse in Atlanta to deal with an “unprecedented” spike in demand across the pond
asos parcel
The Atlanta facility is now back online after grinding to a halt last month

With growth beginning to moderate in ASOS PLC’s (LON:ASC) biggest and most mature market – the UK – bosses, and indeed investors, have been turning their attention to expansion abroad.

One of those key overseas markets is the US. As is the case with British pop bands, cracking the US is just as important for UK companies as its sheer size and wealth make it potentially very lucrative.

READ: ASOS repeats FY guidance despite US and Europe troubles

ASOS has had a presence across the pond since 2012, but most of its orders from American customers were processed from the firm’s giant warehouse in Barnsley.

But shipping t-shirts and trainers to far-flung destinations such as Los Angeles and having to deal with returns from those places was costly and time-consuming, so in 2016, ASOS announced it was to build a huge new distribution centre in Atlanta.

The warehouse cost US$40mln to fit out and started to handle US orders in the second half of last year, before going fully online in February.

Too many orders to fulfil

But soon after shifting all of its US distribution to Atlanta, it became clear to bosses that they needed far more than the 700 warehouse workers they had hired.

“The logistical and software solution was not a problem, but 700 people could not cope with the level of demand experienced,” explains City broker Liberum.

“The uplift in demand seen after three days was so great that marketing had to be suspended.”

It’s not often that companies actively try to discourage sales, but analysts reckon the number of orders coming through was 3-4 times more than the company had forecast.

Peel Hunt says: “The net result was that the warehouse ground to a halt, deliveries were switched back to Barnsley and the backlog took four weeks to clear.”

‘Highlights US potential’

While that is a reminder of the demand and execution challenges still facing ASOS, some in the City are looking on the bright side now that Atlanta is back up-and-running.

“Short-term warehouse disruption on change is par for the course, in our view, but the initial demand spike highlights the potential ASOS in the US market,” added Peel Hunt. “We see accelerating growth into H2 and into 2020.”

Chief executive Nick Beighton echoed those thoughts that the surge in demand was “very encouraging” for the future.

But Fiona Cincotta, senior market analyst at City Index, cautioned: “Management is right when the say the demand surge in the US is a silver lining, but that demand won't linger for long if the company keeps failing to deliver.”

ASOS shares were down 9.8% to 2,900p in late-morning trading on Tuesday.

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