Online drives Next’s half-year profitability

Total group sales at Next have increased 3.7% to £2.06 billion. The retailer posted its half-year results for the period ending July 2019, which saw sales from retail stores drop 5.5% to £874 million, while online sales increased 12.6% to £1 billion.

Total profit before tax increased 2.7% to £320 million, with online seeing an 8.4% jump to £177 million, while retail sales dropped 23.5% to £56 million.

CEO, Simon Wolfson, said the online shopping revolution is about “the explosion of choice it gives customers”.

“The result is that customers, in every corner of the country, can now access a choice of goods, breadth of sizes and selection of brands that no single high street could ever contain," he said. "However uncomfortable this change may be, it is important to keep in mind that ultimately it is great for the consumer and so in the long run it should be good for our industry.”

Referring to the decline in bricks and mortar shopping, Wolfson said the “situation is not quite as one way as it might first appear.” According to the retailer, 50% of online orders are sent to stores for click & collect. He pointed out that some customers do not find home delivery convenient or wish to avoid the £3.99 charge by collecting from store for free.

He added: “Returns are a central part of our online service and 82% of returns come back through our stores. It is counter-intuitive, but the fact is stores have become an important part of our online service, though their rents are way out of kilter with the value they provide as collection and returns centres. So, if stores are to remain open, retail rents must fall and fortunately that is exactly what they are doing.”

Third-party success

Next’s online success is currently being driven by its marketplace Label business. Next has built a £500 million aggregation business to allow hundreds of third-party brands to sit alongside Next merchandise on its website. “In doing so, we have accepted and embraced the challenge of competing against ourselves as the price we pay for developing a leading aggregation business,” said Wolfson.

Label’s full-price sales are on an upward trajectory, with full-year sales forecasted to be up 19%.

Third-party brands fulfil customer orders from their own warehouses, but the parcels then enters the Next warehouse system to be delivered directly to the consumer either at home or through click & collect in store. This takes 48-hours, rather than the 24-hours promised on Next-branded products. But customers who order third-party items as well as Next’s own brand can choose to either receive one consolidated delivery offered in 48 hours, or to receive their Next goods within one day and the Label products a day later. There is no extra charge for this split delivery, but Next said 50% of customers are choosing to consolidate their order.

Emily Salter, retail analyst at GlobalData, said Next needs to make sure it builds an awareness of its third-party products and fulfilment methods, considering and Asos also stock similar brands.

“Next states that it aims to be its partner brands’ most profitable third-party route to market,” she said. “Exclusive brand collections would also aid this, with Joules launching its men’s formalwear collection only with Next. Next Pay, its credit scheme, and Next Unlimited, its delivery saver scheme, are two attractive key components of the online channel that help to build shopper loyalty, as well as its distinct focus on family shoppers.”

She concluded: “As the business transforms from a traditional retailer to a platform based business servicing a wide variety of clothing and home brands it has the potential to become not just a leading global online brand in the long term but also one of the most profitable.”