Next’s evolution through revolutions
Next has arguably been the most successful UK non-food retailer in modern times so when its long-standing CEO Lord Simon Wolfson talks then it’s always worth listening to what he has to say about his business that invariably reflects what is happening in the wider retail landscape.
At the company’s recent presentation of its annual results he considered how retailing had changed over the past 25 years while he had been at the clothing and home-wares business. One of the most profound changes has been the role of the store as the primary channel to market, aided in those earlier years by Next’s famous paper-based, Directory, catalogue.
Subscribe to TRBThe move of sales to the online channel has been dramatic and even over the last 10 years like-for-like sales at Next stores have fallen significantly – by around 30% in the average store. Thankfully Wolfson has found rental costs have adjusted down by a similar amount but he highlights that other costs, such as a 32% increase in shop-fitting costs, have put pressure on the payback period for physical space.
“You either give up on space or re-look at it. We’d rather have our stores…but the [historical] 24-month payback is now not relevant. It’s now more like 30-months. This slower payback on capital has changed our criteria [for running stores],” he suggests.
Next has been particularly clever in proactively managing each of its stores and taking into consideration the impact the physical outlet has on online sales – notably click & collect and returns – within a certain radius. Running stores on a break-even, or even a modest loss, based solely on in-store sales has been acceptable if it helps drive greater online revenues within an area.
The flip side to the online channel exerting pressure on the stores estate is the opportunities presented to Next from leveraging its digital capabilities and reach. Online had historically involved Next’s own-brand goods but increasingly Wolfson has become excited by the ability to use the Next infrastructure to sell non-Next products. Various brands have come into the company’s portfolio through opportunistic acquisitions.
Citing 10 brands that have been in the fold since 2022 the growth in full-price sales has hit an impressive 53% and in only the past year it has grown by 24% that suggests an acceleration. When brands are brought into the mix they can be plugged into the current 16 million Next customers, its websites, warehousing, call centres, and funding capabilities.
Wolfson says the cost to set-up a brand on the Next platform is a mere £3 million (which includes stock and people) so the maximum loss is capped at this figure, which makes the risk/reward ratio huge, in his words. The opportunity for success is sufficiently high that the plan is for Next to keep adding brands. These will be identified as part of its strategic imperative of having its radar fully switched on to any opportunistic acquisitions.
Another impactful element on the Next business that certainly did not exist 25 years ago is AI. Although Wolfson admits to “only scratching the surface of what AI can do for the business” it is already having a meaningful impact on entry-level job opportunities at the retailer. The adoption of AI has not resulted in fewer jobs at Next but has led to the business not employing more people.
“AI means we can be more productive…we do not anticipate losing people but our growth will not result in [employing] more people. If we are reflective of the wider economy, then those in jobs need not worry too much; the challenge will be for those looking to join the workforce,” he suggests.
While Next, as ever, has a firm handle on events and the way the wider market is likely to move the words of Wolfson represents much food for thought for other retailers and highlights the challenges and opportunities ahead for the wider retail industry.
