Covid-19: Next predicts up to £1bn loss of sales

Retail heavyweight Next has modelled a worst-case scenario whereby it could lose as much as £1 billion of sales to Covid-19 this year, but it is also working on some interesting innovations that it hopes will help it expand its online business.

While delivering the annual results for the year ending January 2020 Lord Simon Wolfson, CEO of Next, sought to both outline the strength of the company, to counter the impact of the virus, and also indicate that ongoing investments in technology and other initiatives that he believes have placed Next in a strong position for a post-Covid-19 future.

“All the things we are doing to move the business forward and innovating are continuing and the current situation [with Covid-19] will end. We are increasing the investment in systems and accelerating developments. Online is all about great systems,” he explains.

But for the moment the focus is very much on mitigating the effects of the virus and Next has undertaken a stress test on its business by modelling three scenarios that put forward a decline in sales of 10%, 20% and 25% over the next 12 months.

Although Wolfson acknowledges all the estimates it is making are guesswork, and that Next has no better understanding than any other company, he believes the 25% decline is probably too “extreme” and that Next Is working to a 20% loss of sales across its business.

However, Aneesha Sherman, analyst at Bernstein Research, suggests in a note that even 25% could be hopeful: “We think the impact could be worse, given the trajectory thus far – sales up to last week were down 30%, even prior to the UK government social distancing directives.”

This decline did not feature in the full-year numbers that showed total group sales for the year ending January 2010 up 3.3% to £4.36 billion, with a major contribution from online that increased 11.9% to £2.16 billion. Profitability of online also outstripped that of stores with an increase of 13.3% compared with a decline of 22.8% in the physical retail division.

Retail collaboration

Whatever the ultimate impact of Covid-19 Wolfson does not believe there is any existential threat to the Next business and he is confident of the investment the company is making in technology and innovation for the future. Collaborations are at the heart of its plans.

Wolfson revealed the Total Platform initiative involving third-party brands effectively outsourcing their full online requirements to Next. It is being described as a pay-as-you-go answer to operating an online business. Brands pay Next a fixed commission on their total sales. The first client – with sales of £25-30 million – will be operational later this year and Next is looking to add more names in 2021.

“We’ll run their website and they’ll be hooked into all our services including data management, systems development and credit management,” he explains, adding that unlike Shopify this solution from Next will also include all distribution and fulfilment capabilities.

The other collaborative development is the creation of a licensing business that involves combining the sourcing skills of Next – that are particularly valuable in the complex categories of childrenswear, swimwear and men’s suits – with the DNA of partner brands. Ted Baker and Joules are among the brands currently onboard. “It’s a very small business. It’s like a small acorn we are putting into the ground,” he suggests.

Wolfson also highlighted the increased investment Next is making in its online systems, with a planned 38% uplift to 2021 compared with 2019 that will see £70 million being pumped into a variety of areas including marketing systems, platform development and software maintenance to enhance things like security over the next 12 months.

As part of these developments Next is in the midst of a complete overhaul of its website (dubbed Website Modernisation Project) that will be undertaken on a non-disruptive, modular basis over the next two and a half years at a cost of £12 million.

Such initiatives clearly excite Wolfson who recognises the absolute need to keep the business moving forward – especially at a time when it would be a lot simpler to put things on hold while dealing with the impact of Covid-19.

Such forward-looking actions might well be easily be overlooked, according to John Stevenson, partner and retail analyst at Peel Hunt, who says: “With the final results being in-line [with forecasts], this and the group’s key online developments – including a trial of ‘Total Platform’ as a one-stop shop online service for smaller third-party brands – will be sadly ignored today.”