Strategy spotlight: Five reasons Next will win during times of economic crisis

Next intends to find opportunity amidst adversity and its swoop on embattled homewares etailer Made.com demonstrates just that. 

As online sales moderate and store sales bounce back, the retailer is also controlling the controllables by reducing operating costs, improving services and exploring new supply sources.

However, as the UK economy continues to destabilise and consumers spend less on fashion, will Next’s enviable ecosystem and willingness to invest be enough to steer it unscathed through the volatility?

When Next chief executive and unofficial retail spokesperson Lord Simon Wolfson warns of a second cost-of-living crisis, the industry takes note. Reporting the fashion giant’s half-year results for 2022/23 in September, Wolfson said: “It looks like we may be set to have two cost-of-living crises: this year, a supply-side-led squeeze, next year a currency-led price hike as devaluation takes effect.”

On the back of a discouraging August and concerns around further inflationary pressures, Wolfson downgraded Next’s sales and profit guidance for the full year. However, while his prognosis brought little cheer, Wolfson has been known to exercise caution before Next marches on to beat expectations. 

Our Prospect analysts reveal Next’s priorities for success, where its investment is going and what future-proofing looks like for the business. 

1. Strategic stake-building during times of crisis

With a strong balance sheet behind it, Next is taking bold steps in investing and seeking growth, while others turn to cost cutting. 

Although its talks with Joules about a possible £15m investment fell through in September, Next has a keen eye on the “opportunities that will inevitably arise” as more retailers fold under the weight of the climbing cost of doing business.

Just this week, Next rescued Made.com from administration, acquiring its brand, domain names and intellectual property. The high-end furniture proposition should prove a good fit for Next, complementing its existing homewares offer.

Other growth opportunities will come via Next’s Total Platform, which offers a suite of online services to third-party brands. A fledgling business, Total Platform sales more than trebled (+234%) year on year to £59.1m in the first half of 2022/23.

It launched with Reiss – its largest Total Platform client to date – in February, with operating services including UK and global wholesale fulfilment, translated websites and a mobile app.

However, Next is not bullishly adding retailers to the platform. While still in discussions with potential new clients and “confident in the long-term prospects of the business”, the retailer admits it lacks the capacity required to take on any more major new clients until its new warehouse picking system is fully operational in the third quarter of 2023/24. It is also reducing the time taken to onboard new clients.

“I’m really expecting Total Platform to come into its own in 2024, but we will begin to start negotiating and recruiting new customers in earnest next year,” Wolfson told analysts, reflecting on its mid-year results in September.

“There is no point talking to people now if we say you’ve got to wait 18 months, two years, before we can go live.”

And it is only taking on Total Platform clients in which it can take equity stakes because, Wolfson said: “We think that is where a lot of the upside is, going forward.” 

Next acquired 44% of JoJo Maman Bébé’s shares in April, with the other 56% acquired by investment companies managed or advised by Davidson Kempner Capital Management, and upped its equity stake in Reiss from 25% to 51% in August. 

2. Facing into challenges 

Next’s full-price sales edged up 0.4% year on year for the 13 weeks to 29 October. Although “slightly ahead” of company expectations, the muted growth indicates that consumers are reining in their fashion spend as they prepare for a bleak winter.  

Its forecast that full-price sales in quarter four will be down 2% year on year will do little to reassure other retailers of a sales surge during the critical golden quarter.

And beyond that? Not even Wolfson knows, asserting at the half-year point that forecasting abilities are being challenged by complex variables and that the future cannot be predicted based on the past.

While forecasting is indeed particularly tough in the current environment, Prospect is optimistic about Next’s future performance.  

The retailer entered 2022/23 with a cautiously confident outlook, despite the ongoing impact of the pandemic and mindfulness of “macroeconomic and geopolitical risks”. Early in the year, UK sales were ahead of expectations, predominantly driven by “better than anticipated” in-store sales.

However, the closure of its websites in Ukraine and Russia followed, and at the mid-year point — as rising inflation gathered pace and with cost-of-living pressures set to rise — the retailer assessed its recent performance alongside internal and external economic data, downgrading its sales and profit guidance for the full year. Sales guidance for the current financial year is +4.8%.

While total sales growth may continue to be subdued over the next couple of years, Prospect expects total sales to come close to the £5.9bn mark by FY2026/27, with an increasing contribution coming from Total Platform as the business beds in and facilitates Next’s pursuit of additional equity stakes in other businesses.

Sales growth via Next’s website is likely to continue to slow in the short term to more normalised, pre-pandemic levels, but will subsequently improve, buoyed by increased warehouse space and Next’s Label third-party branded business.

3. Serving customers across channels

As cost-of-living pressures mount, customers’ needs are changing at a dizzying pace and by having established a solid ecosystem Next has the agility to meet those needs.

From the early days of ecommerce Next has been a frontrunner in its online proposition, raising the bar for online delivery via its strong operational infrastructure, which empowered it to quickly adapt as customers shifted online during the pandemic. 

Its financial position will continue to strengthen on the back of earlier investment into its omnichannel model, not only evolving robust online operations but prioritising the online value of stores, increasing channel integration via services such as in-store collection and returns, and building a single integrated service. 

The shifting contribution of Next’s sales channels reflects just how channel-agnostic shoppers have become. 

Prior to the pandemic, Next’s store sales had been on a downward trend, but group sales continued to grow overall, with growth in online sales offsetting the fall in in-store sales. 

Although Wolfson stated in August that online growth had “ground to a halt”, with stores experiencing a “renaissance”, this reflected “a short-term reversal of pandemic trends”, which he said were “unlikely to be indicative of longer-term trends in consumer behaviour”.

At present, the balance between online and offline sales is shifting, with online sales falling 1.9% in the third quarter of 2022/23 and in-store sales jumping 3.1%. Indeed, in its interim results, it revealed that full-price sales in stores for the full year are anticipated to be up 26% year on year for 2022/23, while online sales are likely to slip by 5%.

However, Next online sales still accounted for more than 60% of total sales in 2021/22 and, while Prospect expects this share to reduce in the current financial year as online year-on-year growth slows, levels will recover on the back of Next’s continued investment online and its plans to use slowing growth rates as an opportunity to increase choice on the website while eliminating product duplication. 

4. Shoring up the supply chain and growing warehouse capacity 

Culminating external factors have resulted in a “supply-side-led squeeze”, highlighting the potential vulnerability of global supply chains. Next is seeking to reduce exposure of its supply chains to unnecessary risks. 

Under pressure from soaring inflation, the war in Ukraine, the “exceptional increases” in energy costs, and faced with the challenge of the weaker pound next year, Wolfson said Next must “push the boundaries of our supply base to help mitigate sterling devaluation, through new sources of supply, without compromising our ethics, reliability, quality or design”.

Delivering better value through new supply sources is a priority. Options for Next could be more localised and dual-sourced supply chains.

While supply is at risk, so too is fulfilment capacity, which has been outpaced by the retailer’s fast online growth. In its half-year results for 2022/23 it said that full-price online sales had grown by 46% over the past three years in warehousing space “that was approaching the limit of its capacity in 2019”. This challenge has been exacerbated by return rates rebounding to “more normal levels”.

“Lower volumes in more space means that we can improve accuracy, efficiency and cost-effectiveness across most operations”

Lord Wolfson, Next

As a result of congestion in warehouses and the quick recruitment of inexperienced employees, labour costs per unit have been increasing and distribution costs have risen on the back of more difficulty in getting all of a customer’s order into the same parcel.

Next is introducing extra fulfilment capacity via the automation of its warehouse Elmsall 3, which is being brought on in phases throughout 2023.

Warehouse capital expenditure increased to £124m in 2021/22 (out of a total £184m of capital expenditure), which was mainly driven by the Elmsall 3. This is anticipated to stay at a similar level in FY2022. 

“Lower volumes in more space means that we can improve accuracy, efficiency and cost-effectiveness across most operations,” said Wolfson. 

5. Optimising its estate

Next’s new physical formats complement its online offer. The Beauty Hall concept, introduced in 2020, is enriching its burgeoning online beauty business, which comprises more than 200 brands including Estée Lauder and Clinique, as well as Next’s own-brand skincare line Woah, launched in early-2022. 

Taking advantage of the decline in department stores, it has also been introducing its own take on the department store style with shops that bring together fashion, home and beauty. This year it opened up a 98,478 sq ft all-under-one-roof store in Watford and it has also snapped up a handful of former Debenhams stores for its Beauty Hall format.

But that doesn’t mean it’s planning to grow its store numbers, which have gradually reduced over the past five years as it focuses instead on increasing sales space in modern outlets.  

It closed a net 14 stores in 2021/22 and its retail space will decline by around 2% in 2022/23  in line with the closure of some 15 stores.  

Some of those closures will be because the retailer has been unable to agree acceptable terms with landlords, others will be merged into other larger stores and the majority will be those situated in places where Next forecasts it would fail to achieve its target margin “on almost any terms”.

Next forecasts that fewer store openings will see capital expenditure on retail space expansion reduce to £10m in 2022/23, down from £14m the previous year, although “cosmetic and maintenance spend” is expected to come in at £29m versus £15m the year before.

Clearance stores continue to open, with a net five in 2021/22, supporting Next in selling its surplus stock and relieving some of the capacity pressures in its online warehouses.