Next grows profits as rents in high streets decline

High Street Retail:

Next boss Lord Wolfson says that Next was cushioned by his online ‘head start’, while he feels “concerned” for the future of the high street when competitors are struggling to survive. Next was fortunate to have the head start it had with its online sales, which have boosted its sales and high street rents are now being cut.

As reported by Isabella Fish of Drapers online, Next’s profit before tax grew by 2.7% to £319.6m in its half-year results to 31 July, full-price sales were up 4.3% and total sales, including markdown, were up 3.8% on last year. While in-store sales fell by 5.5% to £874.3m on the same period in 2018, and online sales grew by 12.6% to £1bn.

Lord Wolfson cited the “head start” Next had with its online business as a major factor in its success compared to other retailers, moving from a catalogue model to online:

“We were incredibly fortunate that we started this millennium with a mail order business because a mail order business has, in essence, all the assets of online – other than a website – that you need for online trading.

“We had the delivery network, we had the systems, we had the warehouses and the customer-base. Because we had that base from 1995 onwards, that has been enormously helpful to us over the last 20 years,” said Wolfson.

According to Drapers, Next’s website was launched in 1999 and cost £7,000 to build and launch. Its Label business, selling third-party brands, increased 26% on full-price sales with total sales, including markdown, up 29% in the first 6 months of 2019, compared with 2018.

At the end of the first half of 2019 Next had 499 stores, and Wolfson admitted to Drapers that he is worried by the number of high street store closures:

“Of course it’s a concern, but it’s a concern we’ve tackled head-on. It’s not going to be painless and we’re not through the woods yet, but with the extent and speed that rents are being cut and the relatively short-term that leases are being offered, we can see a way of managing that decline in such a way that the group continues to prosper.”

For the year ending January 2020, Next says it expects to renegotiate 37 leases, achieving rent reductions of 28% and renewing for an average lease term of 4.2 years.

“The conversations we’re having with landlords are matter-of-fact, not confrontational. At the end of the day, there’s a price at which we can afford to keep shops open and a price at which we can’t, and we give that option to the landlords,” says Wolfson.

“I feel badly for landlords in a way because the rents being so high is not the fault of retail landlords, we have built rents up to where they are and we’re now paying the price of that. As and when leases are coming up for renewal, we’re offering the landlord what we can pay to keep the shop open for the duration of the term they’re offering us.

“Firstly, average rents are coming down by about 28%. Secondly, on average we’re taking a four-year term of lease. So, we’re reducing both the risk and the costs.”

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