Lord Wolfson of Aspley Guise offered Westminster a crash course yesterday in how to negotiate with the European Union (Ashley Armstrong writes). “In my experience, you never get the deal you want unless you are comfortable with walking away — otherwise you’re pleading, not negotiating,” the Next chief executive said.
The retail boss’s tactics will come as no surprise to landlords that have had Next knocking on the door demanding rent reductions, despite it being one of the most financially sound retailers in Britain.
The company was founded in 1982 by Sir Terence Conran and George Davies. It has more than 500 shops in Britain and Ireland, as well as 200 elsewhere.
Rather than waiting for the last gasp to go cap-in-hand to landlords, Next has been making the most of its healthy bank covenants and track record of attracting shoppers through the door to boost its bargaining position with landlords fearful of rising vacancy rates. As a result it has secured average rent reductions of 29 per cent, although Lord Wolfson, 51, said that in practice this could be between 10 per cent and 60 per cent.
In January, Next’s Nostradamus set out his stall, predicting that in the coming 15 years there may be more brands but far fewer shops as online shopping continues to boom. It’s grim reading for landlords, but Next’s “stress test” assumes that if high street sales continue to fall by 10 per cent a year for the next 15 years, this should drag rents 54 per cent lower, too.
Such cautious financial discipline makes Next investors less worried about the fate of the high street and more concerned about what may happen to the fashion chain if its chief executive decides to have an alternative career. The Eurosceptic boss joined Next as a store assistant in 1991 and swiftly rose through the ranks as assistant to Sir David Jones, the former chief executive, before joining the board in 1997. In 2007 he famously warned that the economy was heading for a slowdown and Next rode out the recession relatively unscathed.
Most recently Next has continued to shrug off the wider retail malaise by churning out a surprise 4 per cent rise in second-quarter sales. The unexpected boost has resulted in a £70 million upgrade to sales forecasts for the full year, which translates into a £10 million boost to profit guidance to £725 million.
Unpicking the numbers, Next makes more sales online than in its shops, mainly because it has moved its catalogue business into an online marketplace stocking hundreds of brands including Reiss, Barbour and Boden, which sell at a higher price and attract a slightly older customer than Asos, the British online fast-fashion retailer. Recent glitches at Asos’s overseas warehouses have highlighted the challenges that online-only clothing retailers face. Asos is guiding that profit margins will fall this year to 1 per cent. Next has five times those margins.
Next has revealed that every pound of online sales costs the chain 6p, but it has realised its shops can help to reduce these costs if it can encourage customers to pick up items from a store so that orders can be delivered in a single shipment. Next has encouraged this behaviour by offering a free click-and-collect service or charging £3.99 for home delivery. As a result, half of online orders are collected and 80 per cent of returns come back to the shops.
Asos would kill for that kind of distribution and it’s telling that Amazon has teamed up with Next to allow customers to pick up parcels from its high street stores. It’s difficult to think of many traditional retailers that can stand up to the might of the American online giant. Next may just be one of them.
ADVICE Hold
WHY It’s the strongest name in the sector, but taking a bet on retail could still be contrary
Devro
London’s prized status as a truly global stock market means that its companies can be affected by many and varied challenges overseas — tensions in the Middle East, trade policy in America and environmental concerns just about everywhere, to name but a few (Greig Cameron writes). Yesterday, to that list could be added the impact of African swine fever in China.
For Devro, the spread of the disease through the country that accounts for about half of global pork output is a big deal — it is, after all, the UK’s only listed maker of sausage skins — but, in unveiling its results for the first half of 2019, it was playing it cool. Rutger Helbing, 52, its chief executive, suggested that it was too soon to know the exact effect of African swine fever, but he believed that the overall impact would be “neutral” for the company. He pointed to a plentiful supply of frozen pork in China, but acknowledged that the disease was leading to raised pork prices in Europe.
Based near Glasgow, Devro is a truly multinational business, with manufacturing sites in Europe, China, Australia and the United States. While sausage casings make up the bulk of its revenue, it is gaining traction in consumer goods areas such as savoury snacks.
Results for the first half of the year showed a 0.8 per cent decline in revenue to £119.2 million as collagen casing volumes fell by 1 per cent. However, underlying pre-tax profit rose by more than 4 per cent to £14.9 million. The interim dividend was held at 2.7p.
Devro said that the year had got off to a slow start, but volumes between February and June were 1 per cent up on an annual basis. Moreover, the outlook for the remainder of the year was said to be promising, with sales tipped to accelerate in the Americas and Asia Pacific.
Devro’s shares started the year at about 160p and have been above 200p since the beginning of May, but have some way to go to reach 2015’s 327p level. Yesterday’s 5p, 2.4 per cent, dip to 205p won’t have helped there, but analysts have a target price on the shares of between 240p and 250p, so there could be more upside over the next few months.
ADVICE Hold
WHYMay be affected if pork prices start to increase rapidly