Next online sales on track to overtake its store revenues this year

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Next online sales on track to overtake its store revenues this year

25 September 2018 by Chloe Rigby

 

Next says its online sales look set to overtake its store sales this year. The fashion retailer set out in its half-year results today how it plans to deal with this, Brexit and other challenges.

 

Although it posted rising sales for the first half of its financial year, thanks to an unusually warm summer, and pencilled in a rise in full-year profits as a result, it also says that the UK retail market remains “volatile, subject to powerful structural and cyclical changes.”

 

Next reported group sales of £1.99bn, in the half-year to July 2018, up by 3.8% on the same time last year. But while online sales of £892.3m were 16.8% up on last time, store retail sales of £925.1m were down by 6.9% on last time. Pre-tax profits of £311.1m were 0.5% up on last time, with a £163.3m contribution from online (+21.2%) and £73.2m from stores (-23%). The fall in in-store profits was driven by “the dis-economies of scale caused by declining like-for-llike sales”, said the retailer. Full price store sales fell by 5.3% and the retailer says that it will see only a marginal increase in trading space in 2019/20.

 

Now it says it expects full-year retail sales to come in just shy of £2bn, and online, including its finance business, to overtake that figure to reach £2.1bn. In its last full year, store sales came in at £2.3bn and online at £1.7bn.

 

Here are some of the changes that the fashion retailer, ranked Leading in IRUK Top500 figures, spelt out – and what it plans to do about them.

 

FASHION SALES MOVE ONLINE, AND AWAY FROM STORES

Next says that it is seeing “profound and rapid structural change” in the sector, with more of its sales likely to take place online than offline in the its current financial year. A decade ago, Next’s store retail sales accounted for 67% of sales, and contributed £2.2bn of turnover. This year, the retailer expects retail sales to come in at just under £2bn and contribute less than half of group sales, and less than 30% of its profit. At the same time, online sales are set to rise to £2.1bn. That’s a far cry from its 2008 turnover of £816m from online.

 

As yet, says Next, its store sales have fallen by 10% while like-for-like sales have fallen by 32% because “we have continued to invest in profitable new space”. In order to meet the challenge, it aims to manage closely rent levels and lease terms, while focusing “intensely” on the role that stores play within online delivery and returns. Currently about 50% of its online orders are collected from its shops, representing about 38% of its ecommerce sales by value. It has launched same-day click and collect in some stores, of items that are already in those stores. Orders are typically turned around in about 15 minutes. Now it plans to integrate its online and retail businesses further, creating a more unified service platform to benefit both its customers and its third-party brand partners. Currently 4% of online sales are fulfilled using stock recalled from its stores.

 

It also plans to take stock that sells well online into its stores that are likely to sell that items. If needed the item can still be ordered online and serviced from the store. “The aim is to bring some of the dynamism of an online offer to our retail stores,” it said in today’s results statement.

 

The retailer says the growth of online sales has come in response to continuous development of its online platform – latest updates include a search engine that uses machine-learning to rank and selects products, while it is also developing mobile sites for its international websites, and introducing a nextpay credit app to act as a payment card in stores.

 

Next said: “The transition from retail to online has not been painless and represents a continuing battle. The juxtaposition of retail’s fixed cost base with online’s variable costs and lower third-party margins is challenging. To make up for the profit on a 5% loss of sales in our retail business, online sales (at current average margins) would have to grow by 8%. Of course, as our online business grows in size, the percentage growth required to make up for retail’s decline will reduce.”

 

It added: “We are often asked: ’What will the high street look like in 10 years time?’ The only honest answer to this question is that we do not know; we can see the general direction of travel but can predict neither the speed nor endpoint for the changes that lie ahead. Our approach is to build as much flexibility into our operations and cost base as it possible to minimise the negative effects of falling retail sales and maximise opportunities for growth online.” To tackle this “extremely challenging” task it will need to constantly reinvent and experiment within the business.

 

PREPARING FOR A NO-DEAL BREXIT

Next’s chief executive Simon Wolfson advocated leaving the European Union, and today the retailer said that it would be in the interest of both the UK and the remaining EU countries that “the UK’s departure from the EU is carefully managed, accompanied by a period of transition and some form of agreement for free trade. However, at this stage there can be no certainty that any such agreement will be reached, so we are preparing Next for the possibility that the UK leaves the EU with neither a transition period nor a free-trade agreement in place.”

 

The retailer says that it doesn’t see a material threat from a no-deal scenario to its ongoing operations and profitability either in the UK or its £190m EU turnover. However, it is setting up administrative, legal and physical infrastructure for that eventuality and is “confident” that will be completed by next March.

 

Imports

Next says it sees queues and delays at UK and EU ports as the requirement for customs declarations increases as high risk in a no-deal scenario. It would like to know from the Government how they plan to manage and mitigate that increased workload. But it says that in clothing and footwear there is “no reason why goods should not flow with relatively little friction through customs from the EU, in the same way they currently come into the country from non-EU countries. The issue will be the preparedness of the UK authorities and UK business.”

 

It says a potential increase in tariffs and duty on goods coming into the EU represents a medium level risk, as does the potential fall in the value of sterling and the associated rise in cost prices. It has classified the associated admin and costs as low risk, along with the potential for rising duties and tariffs on exports.

 

Currently, 3% of its stock is imported from countries, including Tunisia, Morocco and Mauritius, that have existing free trade agreements with the EU, with zero tariffs on clothing and footwear. While, says Next, that is intended to continue, there is a medium level risk that these arrangements won’t be in place by the time the UK leaves the EU.

 

Just under a third (31%) of stock is imported from countries such as China that have no free trade agreement with the EU; tariffs on imports of that clothing and footwear currently stand at an average of 11.8%. Ten per cent is from the EU and Turkey and is currently duty free, but would be liable to the standard level of import duty the UK sets when it leaves the EU. Next says it will be open to the UK to change its tariff rates to ensure that UK consumers are not adversely affected overall by tariffs on EU goods – and says that if the Treasury doesn’t change tariff rates “it would end up increasing taxes on UK consumers which, in the circumstances, we believe would be unhelpful.” Those tariffs have not yet been published but, says Next, “it would be very useful if the Government could clarify its intentions in respect of overall tariff rates in the event of a no-deal Brexit.”

 

The retailer is also estimating that an increased volume in customs declarations would cost it around £100,000, and it is currently making sure its computer systems and imports team can deal with that increase in workload.

 

EXPORTS

The retailer exports both through stores in Ireland, the Czech Republic, Slovakia and Sweden, and online. Online deliveries are either sent from its UK warehouses direct to EU customers or are shipped to its German warehouse to send directly to EU customers.

 

Next says one key risk of shipping to Germany is of paying double duty. It has set up a German company which would be likely to buy goods from its UK company before selling them on to customers. It plans to bond the German warehouse so goods would only incur duty when they leave it to be sold in the EU. It has also set up an Eire company to supply its shops in that market.

When goods are sold to customers direct from the UK, it would represent a “very serious increase in costs to consumers as any increase in selling price required to recover the cost of duty would itself incur duty for the customer.” However, at the moment all purchases going into the EU that cost less than €150 do not incur duty, and most of its orders are under that threshold. That, however, could change.

 

Image courtesy of Next

Original source: InternetRetailing

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