Question

The nature of the business of Next PLC and relevant information of the industry. (500 words)

This information should be available in the Annual Report and a five-year summary in the annual report should be the starting point. Additional information should be available online. Issues, such as the trends in growth of sales and profits, profitability and any other key indicators for this company and the sector should be included on this part of the report.

Answer 1

Next PLC is a retail chain which was launched in February 1982. Next operates with over 500 stores in UK and Eire, it also has over 200 stores in 40 countries overseas. A brief look at their 5 year financials –

Source – Annual Report, Next PLC

Trends in growth and profits -

There has been an annual compounded growth of 4.96% in total sales over the time period under consideration. This despite the challenging business environment in the European regions. There were multiple economic, political factors (Brexit, Euro crises) which plagues the business environment over the last 3 years. Next PLC has ensured a consistent growth pattern. The brand primarily has been customer centric, it has been able to adapt well to the changing preferences, trends. Their products are designed and developed by an in-house designer team which constantly conducts market research to ensure that the products listed are relevant and niche.

The operating profit margin averages around 19.15% (5 year average) and the net profit margins average around 14.95% . The EPS has grown at a annual growth rate of 14.72% from year 2012 to 2016.

Profitability

The Operating profit margin for the year 2016 is at 17.4% vs. 2015 18.33%, which essentially means there has been a fall, which can be attributed to the increase input costs. A similar fall is seen in the net profit margin (2016 – 13.8%; 2015 – 14.34%). There has been a downtrend in profitability margins over the past 5 years which can be attributed to the increased costs of raw materials, labour, higher maintenance / upgradations required for technology etc.,

Sector update and company positioning

The retail industry is typically plagued with narrow margins, there has been increased competition in this space. The online retailing platform has been adopting aggressive marketing strategies by offering heavy season end discounts. However, Next PLC with its niche business model (40% in-house designs; 60% non-competing brands) and its ability to scale up substantially over a short period, adapting technology to expand the outreach have given it the advantage of continued sustenance and growth.

Conclusion

Next PLC has strategized to improve the customer service by providing tighter / shorter delivery schedules. From the marketing perspective, they have chalked out a strategy to target their customers better and offer personalised advertisements. There is a greater allocation towards the marketing budget. In the year 2016 £8m was allocated towards advertisements and marketing. The online retailing industry is seeing a paradigm shift of ordering via smartphones / tablets as against desktop / laptops. There is greater effort to simplify mobile applications and ease the process of placing order and checking out.

There are macro economic factors which plague the company, the company will have to plan accordingly to mitigate the risk arising from currency fluctuations, inflation and increased cost of labour / logistics. There has been renewed focus on reducing the operational costs, the company has introduced the automated storage and retrieval which has resulted in reducing the labour cost per unit from £4.5 to £2.4. These initiatives are likely to see long term benefits by improvisation in profit margins for the company.