Next shoppers shifted online during the Covid-19 pandemic and lockdown, helping the retailer to limit its full-year sales decline to 17% in a financial year in which its stores were closed for 20 weeks. At the same time, profits more than halved.
Next chief executive Simon Wolfson says its challenge over the coming year will be to manage the transition of sales from its stores towards online. The retailer predicts that in its current financial year, retail full price in-store sales will fall by 20% on those in the 2019/20 financial year. That year, retail sales reached £1.8bn. It says it must manage the loss of £0.5bn in sales from its stores while building that turnover back up online. “The scale of that change, with all the risks involved, is considerable,” he says. “But these are changes that we have spent the last five years addressing. Looking ahead, there is more uncertainty than ever - the consumer economy, future lockdowns and more. But there is one thing about which we are sure: our business will emerge from the pandemic better placed to meet the challenges and opportunities of the online era than it was at this time last year.”
The fashion-to-homewares retailer, ranked Leading in RXUK Top500 research, today reported sales of £3.6bn in the year to January 2021, 17% lower than the previous year - despite stores being closed for a 20 weeks of the year. Pre-tax profits came in at £342.4m, down by 54% from £748.5m the previous year.
Next online sales grew by 10% to £2.4bn over the full-year, while in-store retail sales fell by 48% to £954.5m. Overall total sales fell by £736m – mostly in the first half of the year. All of Next’s stores closed in the first lockdown last March. Days later, it also closed its online operations in response to staff concerns, before reopening them safely two weeks later in mid-April.
In the second half of the year, Next says that sales lost in-store (-£368m) were almost entirely offset by sales gained online (+£364m).
In the first eight weeks of this year, “stronger than expected” online sales were up by more than 60% compared to the same time last year. The retailer is raising its profit expectations by £30m to £700m for the year and warns that store sales will fall by 20% on a like-for-like basis that strips out the effect of store openings and closures. However, the retailer warns that if stores do not now stay open from April 12 for the rest of the financial year it is unlikely to meet its sales expectations for the year. (P48 and 57/8 for expectations).
Next said it was well placed to handle the pandemic – because more than half of its sales were already online, and because 62% of its stores are on retail parks - which tend to be local and so have been easier for shoppers working from home to get to, compared to shopping centres and city centres. Other factors in its favour included a diverse range of products – including the leisure clothing that has been popular in lockdown and which has been less likely to be returned when bought online. Next says that online full-price sales grew by 34% in the second half of the year, but only 13% more goods were sent out from warehouses, since shoppers did not tend to be buying more goods than needed with the plan of returning them. Finally, the financial resilience of its balance sheet meant it did not need emergency government lending. During the year the retailer spent £121m on warehousing and online systems as it brought forward planned investment.
Wolfson says there has not been a “grand strategy” that bought the company to this point. “Instead, the business has followed the money, developing new ideas bottom up, drawing on innovations generated throughout the group – new product ranges, new businesses, new distribution channels services, partnerships and markets,” he says. “It is evolution in the true sense of the word, where small trials that fail, fail fast, and those that succeed are developed as far as possible.”
The last 10 years, he says, have in many ways been about adapting to the “uncomfortable” truth that retail stores are at a “fundamental and irreversible disadvantage to online competition”. It’s not about price or home delivery, he says, but about the scale of choice available online compared to any physical store. Next, he says has used online to free itself from the constraints of space – it’s cheaper to offer several sizes of the same product online than stock them in 500 shops – while selling goods at a wider range of prices. It says the net effect of supporting wider choice has been to make its website more relevant and to give it a wider reach. Over the last two years, its customer base has grown by 40% to 8.4m – with the youngest and oldest groups its fastest growing customer segments.
“The annual decline in retail like-for-like sales has become the new normal and looks set to remain that way for many years,” says Wolfson. “The moment we reconciled ourselves to that fact was, in some ways, a new beginning. Managing the transition was harder than fighting it, but much more productive. It allowed us to follow the new money rather than defend the old.”
Next predicts that in-store sales will fall by 20% in its current financial year, on a like-for-like basis that strips out the effect of store openings and closures. It says its retail store business now has two challenges in a world that has moved further online as “history has been given a shove and, having moved forward, seems unlikely to reverse. Those challenges are to bring the costs of stores and staffing into line with “the new reality of lower sales” and to make sure its stores are relevant in an online world.
It now plans to manage down both the costs of having stores – last year it closed 18 branches and renegotiated rents in 62 shops by an average 58% reduction – and the costs of employing staff in those stores to “levels that can be supported by retail sales and online work available in each store”. In the last two years it has reduced its store staffing headcount to 21,600 from 24.700, mostly through natural staff turnover.
Next also plans to improve its store-based online services. Before the pandemic, its online shoppers collected nearly 50% of their orders in-store and brought back more than 80% of returns. Since them, shops now handle simple returns processing and some packing work – “which has proved particularly valuable at peak times”.
Third party brands now make up 70% of all products that are for sale on Next websites.
Selling third-party brands via its Label website, he says, has been an important part of that. While doing so may have been a decision to compete with itself, he believes it is now better to collaborate with other brands “to our mutual benefit” than “cling on to past advantages in the vain hope our customers will not find the competition. And of course, the broader our product offer, the more relevant our website becomes to an increasing number of customers.” It is important, he says, not too make too much profit at the expense of third-party branded partners and the company has lowered the commission rates it charges them twice in the last three years. “We will do so again if we are able to delivery further economies of scale,” says Wolfson. “We want our partners to view Next as an invaluable ally, not a necessary evil.”
Next is also working with third-party brands in its Total Platform business that enables its partners to outsource their ecommerce business to a greater or lesser extent. Currently it is working with five clients, including Laura Ashley, Victoria’s Secret UK, Reiss and Childsplay Clothing as well as an unnamed start-up brand that is set to launch in September. It has taken equity stakes in three of those – Reiss (25%), Victoria’s Secret (51%) and the new brand (33%) – in order to benefit from the effect of the Total Platform approach on their sales. It also has a stake in Platform Plus, a system that enables it to take orders on stock that is available in its partners’ warehouses.