Next reported a surprise drop in sales over the Christmas period yesterday (4 January) and warned on profits as conditions on the high street become increasingly tough for retailers.
Its CEO, Lord Wolfson, has spoken previously about how fashion retailing is becoming like “walking up a down escalator”. And he expects that escalator to get “faster” in 2017.
Retailers face a perfect storm this year of rising costs and dampened consumer spending. The former includes the implementation of the national living wage, a new apprenticeship levy and revaluation of business rates, while rising inflation and prices will dent consumers’ spending power.
In fashion, times are even more difficult. Wolfson referred to a “cyclical” decline in demand for clothing and footwear, which makes up around 80% of its sales, as consumers spend on other sectors such as eating out.
Yet it is not doom and gloom across the retail sector. Discounter B&M Bargains reported record like-for-like sales growth of 20.5% as shoppers flocked to its store for cut-price decorations. And online only retailers such as Asos continue to see double-digit growth.
“We are a value retailer and value retail does very well in times of economic uncertainty, and consumers are uncertain about what lies ahead with Brexit,” says Simon Arora, B&M’s CEO, according to The Telegraph.
There is no doubt that retail faces a difficult 2017. But Next has some issues of its own making, and many of them are to do with its brand.
For starters, Lord Wolfson admitted that “all” of its UK growth came from selling other brands. That means its Label business, which sells brands such as Mango, Superdry and Dune, is easily outperforming Next own label.
That is a concern because own label is what gives shoppers a reason to visit Next stores. According to its numbers, in-store sales were down by 3.5%.
Plus its Boxing Day sale underperformed. Next prides itself on not succumbing to discounting like so much of the rest of the high street and so doesn’t partake in events such as Black Friday.
But as John Lewis pointed out, the “shape” of Christmas shopping is changing and Boxing Day sales don’t have as much lure as they once did.
Clive Black, head of research at Shore Capital, says: “We believe Next may be one of the key victims of the demise of Boxing Day sales, with a material proposition of sales volumes being pulled forward.”
This suggests that the opportunity to buy cut-price Next clothing isn’t enough to bring people back in store.
Rethinking the Next customer
Despite all this the Next brand remains strong. According to YouGov BrandIndex, it has the third strongest brand on the high street behind just Marks & Spencer and Debenhams. And it ranks well across almost all metrics, from buzz (a balance of the positive and negative things said about a brand) to quality and reputation.
If there is one area where it falls down it is value. Here it ranks 10th with a score of 10.1. And as B&M’s Arora said perceptions of value are important in times of uncertainty.
Without knowing how other big high street retailers performed over Christmas it is hard to judge Next’s performance. But the fall in the share price at other major retailers suggests analysts and the market think it is a sign of things to come and that conditions are only going to get more difficult.
And with shoppers moving away from the Next brand, it has some work to do to ensure it doesn’t lose its lustre.
Emily Stella, an analyst at Verdict Retail, concludes: “These recent results may mark the start of a difficult period for the retailer. As it stands, Next’s current shoppers aren’t buying into its proposition – perhaps an indication that Next is failing to identify with its target market. To avoid falling into the same trap as M&S, Next will need to carefully rethink who its customer is and how to best attract them.”