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Next “stress tests” for next 15 years of online growth

Next has created a 15-year “stress test” for the business to assess its future as online sales continue to build momentum.

The retailer revealed its scenario during its full-year financial results for the period ending January 2019. Pre-tax profits dipped 0.4% year-on-year to £722.9 million, but total group sales increased 2.5% to £4.2 billion. While physical sales declined 7.9% to £1.9 billion, online sales increased 14.7% to £1.9 billion.

CEO of Next, Simon Wolfson, said stores are still an integral part of the Next business: “Just under half of our product sold is still in stores, but 50% [of the online sales] are picked up in store and 80% of returns are done through stores. The issues with stores is not the space, it’s the cost – we don’t think we have too much space, just too much rents and rates.”

During the media briefing in central London, Wolfson was quick to point out that its stress test was not a forecast or a plan, but the retailer has felt it necessary to test a potential economic structure for the business which exists in a rapidly changing digital landscape. The model is based on the financial consequence of continued online growth, with the presumption that physical sales continue to decline 10% on a like-for-like basis for the next 15 years, as well as an outlook where rents and rates reduce.

“We’ve seen more and more sales online and less come out of shops,” said Wolfson. “This will continue into the future, but it’s not driven by just convenience but also by choice.”

He explained that a consumer living in a small town will have more choice online than if they were to visit the retailer’s Oxford Street flagship. “Choice can never match the internet,” he added, pointing out that for every pound of Next business that transferred from store to online in 2018, the retailer incurred an additional 6p cost, which he believes will continue into the short and medium term.

Wolfson described how retail is in a period of transition, with Next at the beginning of a five-year period where he believes profits will be broadly flat while it reacts to digital changes. “The industry is changing because the consumer is getting a better service, better choice and the internet is open 24-hours a day. The more choice and convenience you give a customer the more clothes you will sell.”

Stores as online hubs

The retailer’s scenario suggests that by 2033 150 stores will remain open plus an additional 120 loss-making stores which will remain operating to provide a physical touchpoint for online services such as click & collect and returns.

Wolfson said more and more in-store staff are already working to process returns and collections, with online accounting for 12% of the work now done in store. At the moment it takes the retailer 15 days to turnaround returned items, but Next in-store staff are working to decrease this turnaround time to four days by repacking items ready for fulfilment from store. “We see that as a big opportunity, we can be much much better at processing stock and getting it ready for customers.”

The retailer also plans to spend around £1 million to increase the frequency of online deliveries to stores over the next year, as it noted that it cut back too much in 2018 which impacted replenishment and led to processing backlogs in stores.

Wolfson also noted that its RFID implementation from last year has become “invaluable” to finding stock in stores. The retailer rolled out £2 million of RFID tags across the business last October after writing the software for the technology in-house.

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