Next’s better-than-expected Christmas trading update told a familiar story, likely to be replicated across retail as trading statements come in: store sales down, online sales up.
The bellwether fashion giant’s retail division suffered a 9% decline in full-price sales over the Christmas period, but online was ahead 15% – beating internal expectations by 2.2%.
While the strong online performance obviously compensated for a decline in-store, it is not simply a case of ecommerce taking up the slack – it’s more complicated, and other retailers are confronting similar complexities as they seek to hone their business models.
“ Around 50% of Next’s UK online business, in terms of order numbers, is fulfilled through shops”
Online success, perversely, contributed to slightly lower profit guidance from Next. There was a £2.5m reduction “as a result of the increased operational costs associated with the higher online sales”.
Next provided useful insights into the dynamics of its profitability in last year’s preliminary results. The retailer revealed then that every pound lost in full-price store sales equates to 60p in profits. But every additional pound spent online only adds 19p to the bottom line.
That’s because of the dynamics of each channel. While stores bear fixed costs that don’t change along with sales levels, online brings variable costs that flex up as well as down dependent upon factors such as demand.
Next, whose online division has benefited over the years from being built on the back of its successful Directory mail order book, has done well in balancing multichannel operations, as its Christmas financial performance and the City reaction to it shows – its share price has risen almost 11% since its update.
But the same dynamics are likely to affect retailers more generally, and not all are so skilful in managing them.
Next has long actively managed its store estate, churning space and renegotiating rents to its advantage as they come up for expiry.
And shops play an important role in the multichannel environment. Around 50% of Next’s UK online business, in terms of order numbers, is fulfilled through shops.
At the time of last year’s interims in September that equated to 38% of UK online sales by value. And 4% of its online sales were serviced from stock recalled from branches.
However, the balance between online and bricks and mortar continues to shift and that has implications for the future shape of retail.
Next boss Lord Wolfson told Retail Week last week that “people have to wake up to the new reality that the days of high streets being filled with clothes stores are over and the days of sky-high rents are over”.
“Next has set a good example through the clear disclosure of the dynamics of its business, in-store and online, over a long period”
Of course, retailers want the best deals possible from property owners but they, like retailers, will need to find new models.
In November, the value of retail property fell 1.9%, according to property company CBRE. It was the biggest month-on-month fall in almost a decade, indicative of the hard times engulfing many retailers.
The value of shopping centres was down 1.5%, high streets 1.6% and retail warehouses by 3%, showing the urgency of enhancing the role of stores in the multichannel context.
It is a big industry headache and so daunting it’s hard to know where to start.
But Next has set a good example through the clear disclosure of the dynamics of its business, in-store and online, over a long period.
Similar depth of disclosure could usefully be replicated by others.
That way retailers and the wider industry can benefit from pooled knowledge and experience that can inform the best decision making.
Arguments about confidentiality don’t hold. If Next can do it, so can others.
A more informed, more open conversation would benefit all in retail.