Reporting full-year results Thursday, Next Plc offered its take on where digital and physical retail are heading.
In a Nutshell: CEO Lord Simon Adam Wolfson said Next, rather than employing some carefully crafted strategic vision, “has followed the money” over the years in what he described as a business “evolution in the true sense of the word.”
Next has instead developed new ideas from the ground up, tapping into innovations fostered in all corners of the company, where “small trials that fail, fail fast and those that succeed are developed as far as possible,” Wolfson said.
Overall, he added, new ventures have always been required to create value, align with Next’s core strength in fashion and homewares, offer strong operating margins and deliver a healthy return on capital.
“Retail stores were, and will remain, at a fundamental and irreversible disadvantage to online competition. This is not being driven by price or even home delivery, but by the scale of the choice websites can offer relative to any physical store. The annual decline in retail like-for-like sales has become the new normal, and looks set to remain that way for many years,” Wolfson said. “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.”
Because new ideas tend to threaten the establishment, following the money can be an uncomfortable process for many companies, he said.
“The decision to compete with ourselves through selling third-party brands and, more recently, the opening up of our sourcing skills to other brands through licensing were not entirely uncontroversial. We have learned to embrace these and other opportunities nonetheless,” he said. “Our view is simple: there is nowhere to hide on the internet, and we are 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.”
Next’s spread of digital and physical sales has evolved since 2005, when the 77 percent of sales that one came through stores is projected to shrink to just 29 percent for the year ending January 2022. Digital has taken over, according to Wolfson’s report.
Apparel’s dominance has slightly given way to homewares. Over the same period, clothing purchases contracted from 90 percent to a projected 79 percent while home purchases surged from 10 percent to an estimated 21 percent.
Digital retail offers greater freedoms, Wolfson said. “Today, the only real constraints on the size of our offer are the minimum order quantities required to make production viable, along with the quality promise inherent in our brand,” he added.
Next now offer greater choices across wider price ranges, helping to increase the retailer’s potential audience. Third-party branded items sold through its standalone website Label now “make up more than 70 percent of all the items that are for sale” through e-commerce, Wolfson said. The expanded assortment enabled Next to augment its customer base by 40 percent to 8.4 million over the past two years.
And the “longer the pandemic encourages online shipping, the more likely it is that consumers will keep shopping that way,” Wolfson added, though there’s little certainty and clarity about the trajectory of consumer behavior.
Wolfson said new businesses on its Total platform include new licensing contracts with Childsplay Clothing and Laura Ashley, while Victoria’s Secret UK is expected to be open for business in May. Reiss is expected to launch on the platform in February next year. A fashion startup temporarily referred to under the moniker NewBrand is eyeing a September debut.
Wolfson was candid about the challenge of ensuring that infrastructure can keep up with the staggering speed of digital growth, while managing real estate occupancy costs, keeping a tight rein on staffing expenses and improving omnichannel services.
Net Sales: Total group sales for the year ended January 2021 fell 17 percent to 3.63 billion pounds ($5.00 billion) from 4.36 billion pounds ($6.02 billion) in the comparable 2020 period. Most of the decline was in the first half of the year due to the pandemic.
Inventory levels were controlled during the year, with surplus stock down 17 percent from the prior year figures. Markdown sales were down 30 percent, largely due to a lower supply of clearance product online and temporary store shutdowns that hampered the usual mid-season sales.
Earnings: After-tax profit fell 53 percent to 286.7 million pounds ($395.4 million) from 610.2 million pounds ($841.5 million) a year ago.
CEO’s Take: “Our best guess is that the consumer economy, at least in the short term, will be healthier than many presume. It seems likely that a combination of pent-up demand along with a healthy overall increase in personal savings will serve to keep the consumer economy moving forward,” Wolfson said.
While he noted that there’s still an open question over the level of in-store sales once stores reopen, he said the current base scenario is for a decline in store sales on a like-for-like basis of 20 percent, making the store network “marginally profitable.”