Next Retailer Clothing
This report will focus on Next Group and its subsidiaries in UK, its competitors in the UK and so on
Introduction:
The history of NEXT goes back to 1864 when J. Hepworth & Son under the name of Gentleman’s Tailors founded it. In 1981 Hepworth bought the chain of Kendalls shops to establish a new Womenswear group of shops. This was how NEXT came into existence.
NEXT is a UK based retailer offers moderately priced clothing for men, women, and children; footwear; accessories and home products; and furniture through about 480 stores primarily in the UK and Ireland. It also franchises nearly 130 stores elsewhere in Asia, Europe, the Middle East, Russia, and Turkey. NEXT targets customers in their 20s and 30s who are looking for stylish but affordable clothes to take them through the next fashion trend. Revenue comes from its retail stores, its NEXT Directory catalog business, a direct mail catalogue and transactional website with more than 2 million active customers, and Ventura, a division which provides customer management services to companies wishing to outsource their customer administration and liaison. Ventura also began providing warehouse and distribution services in 2007.
Key Facts:
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Web Address |
http://www.next.co.uk |
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Number of Employees |
39,155 |
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Turnover (GBP Mn) |
3,283.8 |
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Financial Year End |
January |
PEST Analysis
This is basically a checklist of the political, economical, socio-cultural and technological aspects of the environment. It helps us get a closer view at the general environment and can also be used as a forecast of the future. (Wilson and Gilligan, 1998).
PEST can also be known as STEP, STEEP, AND PESTEL analysis.
They stand for: Political
Economic
Social
Technological
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Political A stable political environment can be the foundation for long-term decisions to be made by the company. This prerequisite is fulfilled, as the United Kingdom is a Member State of the European Union. Being a member of the European Union has its advantages, which is the open transfer of goods. This makes it easier for NEXT to be able to sell their products to different European countries. |
Social At present, there are 60.5 million people living in the United Kingdom (2007) and it is estimated that by the year 2020 there will be more than 66.7 million people will be living there. This would lead to an increased growth of new customers. Also, as working hours have decreased over the years, people nowadays have more spare time. This allows them to get into more details about the products that they purchase i.e. whether the products are manufactured in environmentally friendly factories and whether child labor has been used. At present, GAP has been accused of using child labor in India in 2007. |
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Economic One of the most critical and unpredictable factors is the economy, which consist of the interest rates, exchange rates and inflation rate. The British pound has remained strong over a long period of time although the Euro has been getting stronger. The strong British pound has made foreign investments for NEXT comparatively inexpensive, and secondly, it is very costly for outside firms to set up themselves within the UK. However, this has also given many countries reasons not to engage in trade with the United Kingdom. |
Technological Over the years, the Internet has come to become one of the most crucial developments in today’s world. Next’s online store and catalogue are one of the key factors that have kept it upto date with today’s competition. Also, as we look over the years at the number of Internet broadband users, they have increased at an average of 77% between 2002 and 2006. |
SWOT
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. (www.quickmba.com)
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Internal Environment |
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Strengths Robust financial performance Strong support operations NEXT Directory Ventura |
Weaknesses Reducing like for like sales Geographic concentration |
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External Environment |
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Opportunities New markets Increase in online sales Store refurbishments |
Threats Intense competition Increase in labour wages within the UK Weak retail sales in UK Restrictions on imports from China |
Strengths
Strong Performance
NEXT plc’s financial performances have been growing at an increasing rate over the past 5 years. The group turnover has increased 5.7% to GBP 3.3 billion. This progress has been achieved by rigorous cost control, good stock control, improving gross margins and continued sales growth in the NEXT Directory.
NEXT has a strong cash flow, which has increased at a rate of 20.48% from GBP 398.2 million in 2006 to GBP 500.8 million in 2007. Also, as the operating cash flows have been strong, it has allowed the group to repurchase shares and pay dividends. NEXT repurchased shares worth GBP 217.5 million in 2006 and GBP 316.6 million in 2007. NEXT has also paid dividends of GBP 103.7 million in 2006 and GBP 103.9 million in 2007. These have helped strengthen the financial position of NEXT.
Strong Support operations
NEXT has launched two divisions, the Next Sourcing and the Ventura division. These were established to support the main business. The Next Sourcing works exclusively for Next to design, merchandise, buy, and manage quality control. Next Sourcing has offices in India, Hong Kong, China, Sri Lanka, Romania, Turkey and the UK.
On the other hand, the Ventura division handles the call centre and the customer services for NEXT through two call centres located in India and the UK. It operates across sectors such as Telecoms, Utilities, Financial Services, Travel, Media and the Public Sector. These operate as profit centers. Ventura’s turnover for the year increased by 28% to GBP 191 million and the operating profits were GBP 20.6 million.
NEXT Directory
NEXT Directory is one of the largest mail order companies in the United Kingdom. NEXT Directory had a 13.1% increase in revenue from GBP 685.0 million in 2006 to 774.5 million in 2007, while its operating costs rose by 48.5% from GBP 96.9 million in 2006 to GBP 143.9 million in 2007. This has been achieved by improved stock availability, lower returns rates, and increased service charge income. The Internet has become an important part of sales as it compromises of 50% of Directory sales since January 2007. The online sales boost have bee due to strong online infrastructure. The online sales figures for Directory were approximately GBP 387 million in 2007. Directory grew by 6% in fiscal 2007 to have approximately 2.14 million active customers. NEXT Directory’s strong performance drives the overall revenue and profit growth.
Ventura
Ventura continues to excel, its turnover for the fiscal year 2007 has increased by 28% to GBP 191m. Ventura continues to capture new clients by focusing on being able to provide its customers with high quality service at a remarkable value for money. It operates across a number of sectors including Telecoms, Utilities, Financial Services, Travel, Media and the Public Sector. Ventura employs over 10,000 people and also manages a wholly owned call centre in Pune, India. Ventura will begin to sell warehouse and distribution services by making use of the available capacity in the NEXT Retail and Directory network.
Weaknesses
Reducing like for like sales
As noticed, revenues for the Next retail division rose by 1.7% in fiscal 2007. However, the retail division recorded a like-for-like sales decline of -2.9% in fiscal 2006 and -7.2% in fiscal 2007. The Next group has been concentrating on opening of new stores than in investing in older stores. This has led to an underperformance in older stores. There has also been a reduction in the Sales-per-square-feet from GBP 514.5 in fiscal 2006 to GBP 467.6 in fiscal 2007 and this indicates problems in product range and promotional strategy.
Geographic Concentration
Next derives almost 95% of its revenues in fiscal 2007 from the UK. Next have franchise stores overseas in Russia, India, Middle East and Turkey. However, revenues generated from these stores are not large enough to provide varied benefits to the Next group as they contribute only 5% to the total revenue in fiscal 2007. On the other hand, its competitors like Marks and Spencer have a far wider geographic reach. For example, Marks and Spencer, which is an international department store, has a retail chain of 515 owned stores in the UK, Republic of Ireland and Hong Kong. M&S also have international franchisees that operate over 200 stores in over 30 different countries worldwide.
Opportunities
New markets
Next opened 13 new franchise stores in Russia and 5 in Turkey.
Increased Online Sales
The Internet has had a great impact on everyone consumers as well as retailers. Online shopping has grown steadily within the UK. Online retailing has grown by 33.4% to GBP 10.9 billion, which is about 13 times faster than the retail sector. Online shopping accounts for nearly 30% of the overall retail sales in the UK. Online sales per month have grown from GBP 82 million in 2002 to GBP 1,373 million in 2005. Online retail sales are going to become a large part of the overall retail sales in the UK.
The Next online portal nect.co.uk offer online retail sales of women’s wear, men’s wear, children wear, home accessories and other online services like photo art, fresh flowers and wedding list. They also sell electronic gadgets, home appliances and house fixtures through next.co.uk/electric. Online sales not only provide that extra convenience to customers but also helps cut down on its operating costs. Next is well established in the online market and should gain returns from the expected increase in online sales.
Store Refurbishments
Next is spending GBP 16 million to modernise the top 10% of its clothing and home furnishing stores in 2006. It will also be refurbishing a further 96 fashion stores of the 480 stores by January 2008. It will also be designing a new logo and get new stone flooring and chrome fittings. The refurbishment should elevate the performance of the older stores, which underperformed in 2006 due to insufficient investment.
Threats
Intense Competition
UK’s retail industry is mainly merged with Tesco, Asda, Sainbury’s and Morrisons controlling the sector. The group operate almost 1,900 stores in the UK and account for more than 30% of the market share. It derives most of its benefits from its large-scale operations especially through sourcing and distribution, which is its competitive advantage. Furthermore, there is increased competition from Marks and Spencer’s and Waitrose who plan to expand further in countries such as India and China and in the UK too. For instance, Marks and Spencer’s currently own 515 stores in the UK, Republic of Ireland and Hong Kong. M&S also have international franchisees that operate over 200 stores in over 30 different countries worldwide. They also plan to increase their ‘simply food’ stores by 37 new stores in 2007 and also renovate 70% of it stores by end 2007. This increasing competition from key players could influence Next’s margins and its market share.
Increase in labour wages within the UK
The minimum labour wage rates are rising in the UK. The wage rate for workers aged 22 and over increased from GBP 5.52 to GBP 5.53 an hour. The rate for those ages 18-21 increased from GBP 4.45 to GBP 4.60 an hour. The rate for those aged 16-17 increased from GBP 3.30 to GBP 3.40 an hour. These changes were effective from October 2007. Next employs about 39,155 full time employees. An increase in labour costs would have an unfavourable impact on the group’s margins.
Weak retail sales in UK
Consumers that spend in the UK tend to be under stress while worrying about taxes, interest rates, house prices, and the steep increase in utility and fuel bills. The Bank of England was forced to raise interest rates to 5.75% in July 2007. The high energy prices have caused greater inflationary pressures. The raised interest rates will put pressure on consumer expenditure, which could lower Next’s revenues.
Porter’s Five Forces
The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.