What next for the cost of living crisis? Even retailer Nostradamus Wolfson is baffled

The next boss Lord Wolfson is retail’s Nostradamus

The next boss, Lord Wolfson, is seen as the Nostradamus of retail, with an astonishing ability to predict what will happen not just in retail, but on a broader macroeconomic level. In fact, he was one of the first businessmen to predict the economic crisis of 2008-09.

However, as the UK faces the biggest cost-of-living squeeze in more than 30 years, even Wolfson isn’t sure what to expect next.

“We’ve never seen anything like this before and we don’t know exactly how it will play out,” he admits.

“The uncertainties in the coming year are not what we have had in the last 20 or 30 years, in terms of the level of inflation of essential goods or the inflation of our own products.

The UK may have seen rising inflation and cost prices before, but Wolfson, who has run Next for 20 years, says inflation is ‘much more prevalent’ than even during the credit crunch .

The next boss is keen to point out that the current cost-of-living crisis is caused by what he calls a “supply-side” problem.

He explains that the disruption of global supply chains, as well as what he calls “chronic labor shortages” across many sectors of the UK economy, means there is simply no not enough goods, energy and skilled workers to maintain the standard of living at the levels we have become. used to.

Wolfson thinks government policy can — and should — help alleviate this problem.

“We are disappointed that the broader government has done little or nothing within its powers to increase the underlying supply of goods, energy and skilled workers.

“It is important to recognize that government interventions to ‘pay’ for inflationary increases do nothing to increase the underlying supply of goods and services.”

Wolfson says the government can do a lot to increase supply: “It can knock down the self-defeating barriers it has placed on the foreign workers who support our economy and speed up, simplify and reform the planning process to increase the supply of desperately needed housing.

“We hope the government will use its powers wisely and do all it can to tackle the UK’s many supply-side constraints. I have no proof yet that they will.

Skyrocketing transportation costs to alleviate in 9-12 months

Wolfson says that in terms of the cost of his own goods, rising freight costs are the biggest driver of price increases.

He explains that retailers have exacerbated the supply chain crisis by ordering larger volumes of stock.

“As the world has restocked over the past six months, there has been a squeeze in manufacturing capacity around the world, which has driven prices up. We’ve all ordered more product to account for the longer time than it takes to get here. That created a strain on capacity,” he says.

However, he expects the situation to improve by the start of 2023. “Best-case scenario, we’ll see some relief in the next 9-12 months.”

Despite Wolfson’s warnings, Next had a better year than expected last year. He revealed yesterday that pre-tax profit rose 10% from pre-pandemic levels to £823million, a whopping 140% increase on last year. The brand’s full-price sales also jumped 12.8% from 2019/20 figures.

Wolfson says this is largely due to “underlying consumer strength” and the level of pent-up demand post-lockdown.

Pre-pandemic behavior returns

There’s been a lot of talk about the pandemic transforming consumer behavior, however, Wolfson says his client has reverted to old shopping habits since restrictions eased.

Upcoming formal wear sales have improved
Upcoming formal wear sales have improved

There was a return to more formal dress and a noticeable reduction in homewear and “very casual” sales at Next.

“We are seeing a return to pre-pandemic habits at all levels. The participation of the different categories returns to what it was before the pandemic. I think it’s a direct reversal of trends,” he says.

“If people are sitting at home and not going to work, they won’t buy a suit or a blouse, but if they are going to work, they will buy a suit.”

Wolfson also highlights a trend toward “more investment dressing,” with shoppers spending more on outfits.

“We find that consumer preferences slightly increase our pricing architecture. They buy less cheaper items and more investments.

The Next boss acknowledged that the growth of working from home had boosted more sales during the week for the retailer.

“More business moves into the week from the weekends. I think it’s about working from home and being able to manage your time over seven days of the week rather than doing 9 to 5 and having your time off on the weekends. We’re not seeing as big of a weekend spike as we would have before the pandemic. »

READ MORE: Retail Responds: Spring Statement Fails to Avert Cost of Living Crisis

Store sales improve

Despite the headwinds encountered so far in 2022, Wolfson admits Next’s performance is “slightly ahead” of what she expected in January.

“I wouldn’t want you to think the UK’s performance is strong,” he said. “What we’re seeing so far is slightly better than expected, but you shouldn’t read too much into it as cost of living pressures are likely to increase throughout the year.”

Despite the proclamations, Wolfson says he is “less pessimistic” about the performance of his retail stores, although conversely he is not as optimistic about his online business, over the coming year.

Next Oxford Street
Next expects its stores to perform better in the coming year

The retailer expects stores to generate an additional £78m in sales in the current year, while online sales are expected to be £168m less, although the vast majority of this shortfall stems from the closure of Next’s Russian and Ukrainian websites.

Wolfson says Next stores benefited from the disappearance of other high street retailers. “We underestimate the effect of other people leaving the high street on our stores. There are a lot of names that were there three years ago that aren’t there today,” he says.

However, don’t expect Next to open any other stores. Indeed, Next expects to reduce its retail space by approximately 2% over the coming year due to the closure of some fifteen stores.

The retailer plans to open two department store format stores this year, one in the Atria center in Watford next month and the other in the Trafford center in Manchester due to open by the end of the year.

However, Wolfson says he won’t invest heavily in stores. “We should not expect a radical change in our store portfolio. Because retail sales continue to decline, there is simply no money to invest in redesigning the entire store. »

He predicts this will be a retail trend: “What you will see in general is less investment in physical retail. It’s much harder to justify investing the same amount of capital in a move or a change of store.

However, Next is looking to add other products and concessions to its stores.

“We look for opportunities to add other products to our stores where we have excess space,” he says.

Next’s Total Platform activity, which gives third-party brands access to the retailer’s online logistics and back-end systems, gives it the ability to team up with brands and enter into franchise deals, says Wolfson.

Next launched its first Gap franchise at its Oxford Street store this month and Wolfson says it is actively seeking other similar partnerships.

The cost of living crisis may create uncertain times that even have Wolfson scratching his head, but he’s clearly not sitting on his laurels. Instead, it continues to find other ways to entice customers to shop with Next. Some things remain predictable as ever.

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