Online fast fashion retailers Asos and Boohoo haven’t had the best of years.
War in Ukraine, rising inflation and the cost-of-living crisis led to both the companies issuing profit warnings.
Shares in the pair have nosedived - by 57% in the year so far for Asos and 46% for Boohoo.
And it seems like the City agrees that the future is bleak for the pair, with hedge funds increasingly shorting the stock.
While, of course, the profit warnings would have played a part in these decisions, it’s the Competition and Markets Authority’s (CMA) investigation into alleged ‘greenwashing’ claims that may have seen the number of shorts increase.
Last month, the CMA announced it would investigate Asos, Boohoo and Asda over whether their sustainability claims were over-stated and if they were in fact misleading consumers.
Should the pair be found guilty, they will likely face a fine but, perhaps more concerningly even more damage to their reputations.
What is greenwashing?
Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
The CMA announced on 29 July that it would investigate the London-listed retailers over whether their own claims are considered misleading.
Specifically, the regulatory body was concerned over statements and languages used by the businesses, which it considered broad and vague, creating the impression that it was more environmentally sustainable than it is.
As well as that, the CMA believed that some items included in the companies' green and sustainable standards did not meet their own criteria and that there was a lack of information provided to customers.
Sarah Cardell, interim chief executive of the CMA said at the time, “this is just the start of our work in this sector and all fashion companies should take note: look at your own practices and make sure they are in line with the law.”
Implications for Asos and Boohoo
Cardell’s words suggest that the whole sector could be investigated and that Asos and Boohoo are just the first.
However, according to Julie Palmer, a partner at corporate restructuring firm Begbies Traynor (AIM:BEG), the pair could suffer more than the rest of the industry.
Aside from a fine, their reputations are at stake which given their audience profile might be far more damaging.
Much of their target audiences are generally younger people who are perhaps more conscious about where their clothing is coming from and would likely decide to ditch the retailers altogether if they were found guilty.
“Early stage of the investigation at the moment, but I think the key concern for retailers like Asos and Boohoo is that they very much sell to a young, impressionable, influenced crowd,” Palmer added.
“Environmental concerns are very much at the fore at the moment, so if opinion turns against them, it can turn very quickly.”
“If the CMA do find anything untoward has been happening, they could easily find themselves very quickly out of favour with a core group of people who support the business at the moment.”
“Whether the CMA will get quite heavy-handed if they find evidence of effective misrepresentation, or whether they use this to serve a public shot to retailers remains to be seen.”
The investigation outcome may be some time away, but that will be little respite for the retailers which are drastically running out of ways to help save the share price.
A negative outcome for Asos and Boohoo won’t be the final nail in the coffin, but it will be a blow at a time when the retail business is already struggling.