LONDON (Reuters Breakingviews) - Among UK retailers, Next has tended to give some of the most cautious guidance. This year, that looks the right approach. The clothing chain predicts a particularly doom-laden year for the British high street and warned pre-tax profit may fall by as much as 14 percent. That’s down to Next’s own issues, but also spiraling costs for retailers. Britons’ more ready embrace of online than consumers in some other markets adds to the crunch.
Unlike various rivals, Next plans to pass Brexit-related manufacturing cost increases on to its customers. Management expects price inflation of up to 5 percent to depress sales revenue by 0.5 percent as shoppers buy fewer items or trade down to cheaper options. Unhelpfully, doing business on the UK high street will be more expensive in other ways. A higher national living wage and revised business rates look set to add 13 million pounds to the group’s overheads in the year to January 2018.
The new levies will see retailers paying more to sustain physical stores where returns are already diminishing. High street footfall decreased by 8 percent in the week to Dec. 21 compared with the same period a year earlier, according to retail analyst Springboard.
That’s partly because Britons now like to shop in front of a screen. The percentage of UK clothing sales on the web is roughly triple that of the Spanish and Italian markets, according to Euromonitor, at 17 percent. For Next, that means that as well as keeping its increasingly expensive physical stores open, it must invest 10 million pounds this year getting a sub-par mobile offering up to scratch. Yet the company also says that shoppers are spending less on clothes overall.
Overseas rivals H&M and Zara-owner Inditex are flying higher, with the latter’s net sales increasing by 11 percent in the nine months to the end of October. It’s partly because their designs are snappier. It’s also because they’re less exposed to one particular market. British peers Primark and Marks and Spencer report on their Christmas trading next week. Next has rung in the New Year with a glum tone.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.