After Next gave an update on its festive performance and unveiled plans to raise prices in a bid to offset “unusually high” cost increases to the business as a result of last year’s Budget, Retail Week takes a look at what 2025 looks like for the fashion giant
The highly-anticipated Christmas trading results will soon be coming thick and fast, but it was all eyes on Next this morning as it offered an update for the nine weeks to December 28. Being the bellwether of the fashion market and in true Next style, the fashion giant delivered a bumper Christmas performance with full-price sales up 6% year on year, beating its previous guidance for the peak period of 3.5%.
The fashion retailer was modest in saying its number was “slightly flattered” by the timing of the end-of-season sale, and that when adjusted the underlying full-price sales figure was 5.7%. However, there is no denying it was an impressive performance for the business yet again.
Despite this, even Next isn’t immune from the cost pressures ahead as a result of the recent Budget. The fashion retailer announced in its latest update that it plans to offset heightened wage costs with “unwelcome” price rises as a result.
With this in mind, Retail Week takes a look at just how Next hopes to offset cost increases, the impact new National Insurance rules will have on the business and what 2025 looks like for the fashion giant as it continues to dominate the fashion market.
A very merry Christmas
Next started the 2024 Christmas trading updates on a high, topping off an impressive year for the business – something the market has come to expect from Lord Wolfson and his team.
But despite its ongoing upward trajectory, Investec equity analyst Kate Calvert called its most recent performance “better-than-expected”, in what have generally been challenging times for the retail sector. With growth in the UK for Next keeping up with expectations, overseas sales accelerating above expectations and online sales also up for the period, it was the Next stores that underperformed in comparison.
Shore Capital analysts, however, said that while this may seem a cause for concern on the surface, the “diverse nature” of the Next business – being its multi-channel, multi-brand and multinational offer – remains its secret to success, allowing it to “offset the slower bricks and mortar UK sales with outperformance elsewhere”.
Global Data lead retail analyst Emily Salter added that it could be the poor weather in December that put customers off physical shopping or simply that the strength of its online, branded proposition is just too good to resist.
“Investments in its store estate, such as its relocation to a much larger site in Bluewater shopping centre, should help create a more desirable in-store shopping experience and protect Next’s store sales in the future,” she said.
Calvert and Salter are optimistic about the future for Next with its label business, overseas markets and Total Platform all providing ongoing opportunities for the business in 2025 and beyond.
Salter added: “Next has greater scope to grow internationally, and the retailer expects the impacts of employer tax rises to dent consumer spending in the UK in the coming year. However, Next has proven capable of adapting to changes in consumer demand over the past few years, so if this is the case, the investments it has made into its online and branded propositions in particular will continue to pay off.”
All eyes on costs
Offset plan embed:
With costs in mind and a need to adapt in order for retail to remain on its feet, Next plans to offset cost increases, primarily increase labour costs, to maintain its profits moving forward. The fashion retailer said in today’s statement that while the 1% increase in prices on like-for-like goods is “unwelcome” it remains lower than UK general inflation.
The 1% increase in prices will “close the circle” according to analysts at Peel Hunt, but it’s the operational efficiencies that are likely to have the most impact across employee incentive, its warehouses, distribution centres and stores and electricity rates.
Today’s update, if anything, pledges confidence from the fashion retailer in its ability to overcome the challenges that lie ahead for the whole sector as it continues to dominate with high margins, ongoing international growth and efficiency plans.
So despite its plan of action to mitigate costs, combined with ongoing challenges from the UK macroeconomic environment, Peel Hunt equity analyst David Hughes said that having reported a “positive set of numbers” Next remains a “stand-out in terms of excellent retail operations.”
The impact of the Budget
Despite stellar sales and soaring profits, even Next is facing National Insurance rises and has been the first retailer bold enough to get into the nitty-gritty of what it means for the business.
Next is predicting a £67m increase in the cost of wages moving forward. The full-year cost will be £75m, but the main factors driving the change, an increase in the National Living Wage and the decrease in the Employer National Insurance threshold, do not come into force until April.
National Insurance is set to have the biggest impact, with the threshold reduction forecast to add £20m per year. A 1.2% increase in the rate adds another £6m to the wage bill.
Additionally, the retailer is expecting to pay £11m to workers currently earning the National Living Wage (NLW). Costing almost as much (£10m) will be raising wages for workers currently paid more than the NLW, those with more responsibility or ‘less attractive’ roles than basic earners.
This is all on top of the normal effect of inflation on worker wages, while Next is also expecting to shell out a further £8m a year to cover wage rises for its third-party service providers.
Next said in a statement: “For Next, maintaining appropriate wage differentials between the NLW and higher-responsibility roles will cost almost as much as the increase in the NLW itself.”
Overall, Next’s latest update was both honest and optimistic – a kind of resilience that needs to be mirrored by other retailers. But if rising costs are a cause for concern for Lord Wolfson and are going to impact even the likes of Next, it suggests that this could be an even bigger problem for some of retail’s other players this year.
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