Analysis: Next and ‘business as usual’ in the time of the coronavirus

For some retailers, the pandemic poses an existential threat but many will ride out the turmoil and, when the situation calms, those that have managed to keep an eye on ‘business as usual’ as well as the emergencies that occur along the way will be better placed to take advantage of a recovery.

Next chief executive Lord Wolfson, who reported the retailer’s full-year results yesterday, was candid that coronavirus is “the biggest hit that the retail industry has seen, certainly in my career”, but was at pains to point out that it remains vital to evolve.

He said: “At some point, this will pass and the most important thing is to manage through the crisis, but it’s important to move the business forward.

“It would be easy for us to talk or think of nothing else, but that would be a mistake. Our sector continues to experience profound and lasting structural changes and these changes are not on hold.

“Indeed, it is possible that the pandemic may accelerate the transition to online shopping. We cannot afford to neglect our continuing efforts to transform every part of our business.”

Cool-headed decision making

While Wolfson pointed out the potential for an acceleration of ecommerce, he was circumspect about the extent to which that would take place – or even if it definitely would. “I have absolutely no idea,” he admitted.

Therefore, while retailers may be closing stores – both as a result of coronavirus in the short term or due to the structural change and cost burdens that predate it – retailers should not assume a permanent switch to online just yet.

While online is increasingly the motor of Next, Wolfson said: “It would be unwise to make decisions about the long-term future of stores on one week’s sales. When you make a decision about a shop it’s about the next four or five years, not the next six months.”

Working in new ways

The wide-ranging restrictions on travel prompted by the coronavirus outbreak have made once normal retail duties impossible.

Buyers, for instance, can no longer visit factories in China and elsewhere as they once would have done.

However, technology is helping to bridge that gap and its adoption now will open new ways of doing things in future. Wolfson said: “We are putting in place measures to compensate for a lack of face to face contact – video conferencing, online inspiration ‘trips’ and more.

“We’re learning our way. It’s interesting that now we have the need, we’re finding new ways of communicating with manufacturers.”

Collaboration

Working in partnership with others who bring particular expertise was already a feature of retail before the outbreak. Next has been working on a variety of initiatives that will add to its firepower when normality resumes.

One area is licensing. Last year, Next struck a licensing arrangement with fellow fashion retailer Ted Baker and more are under way. The intention is “to combine our sourcing expertise with our partners’ design skills”.

Next said this week: “We are very clear that for our licensing business to be successful, items must genuinely reflect the handwriting and DNA of our partner brands. To that extent, their input into the design process is crucial.

“Our belief is that where the combination of our sourcing expertise and our partners’ design skills produce something genuinely new and valuable for the consumer, the business will be a success.”

Before the coronavirus outbreak, Next was targeting annualised full-price sales of new licensed products to total £20m and notch up £4m of profit. While the pandemic may hinder progress, the building blocks are in place to push into new areas of business with complementary partners.

New business development

Next intends to leverage its strengths by making them available to new partners in new ways.

The retailer has unveiled Total Platform, a pilot scheme “to leverage the investment Next has made in its warehousing, call centres, distribution networks, customers, marketing and systems, and make those assets available to third‐party brands through their own dedicated bespoke brand website”.

The venture is expected to go live this year with one partner and Next is “actively talking to other brands about providing a similar service in 2021”.

While the fruits may ripen in future, it is another example of Next’s ongoing focus on business evolution that should put it in a strong position to bounce back post-coronavirus.

Cash is king

Keeping a close eye on costs and expenses is good business discipline at any time.

The coronavirus crisis has prompted retailers including Next to look again at their liquidity positions and costs. In that respect, the outbreak is a reminder that cash is king.

The retailer has modelled scenarios in which full-price sales slide by up to £1bn, or 25% of annual turnover. The very possibility – even though Next could “comfortably sustain” it – shows why cost management is crucial.

Potential measures Next may take include the suspension of its share buyback programme, the delay of discretionary capital expenditure and the sale and leaseback of a warehouse.

Next reported: “Combined, actions to conserve cash could retain within the business an additional £835m of cash. These actions would mean that, should the company lose 20% of annual full-price sales, we would still have £835m headroom within our current bank and bond facilities at the end of the year.”

Such financial security enables the retailer to weather the coronavirus storm and carry on with business as usual – or close enough.

Don’t stop investing

While Next is adopting an even more cost-conscious mentality, it is still investing – in systems and online marketing, for instance, each essential for any retailer hoping to succeed in the multichannel environment that will still exist once coronavirus has passed.

Wolfson said: “When the dust settles it will be the work we have put into securing the cash resources of the business and moving the business forward that will make the difference to the long-term future of the company.”

Wolfson has proved his mettle at Next over many years, and the industry has frequently turned to him for insight. His analysis of what will make for future success at Next will be as relevant to other businesses as it is to his own.