Next ups online marketing spend as return on investment exceeds expectations
The retailer has increased its digital advertising spend by £10m this year to £65m, and plans to test how much further it can push expenditure without compromising its rate of return.
Having credited the role of marketing in driving a 40% increase in its online customer base, Next plans to increase its investment into online marketing by a further £15m next year.
This year the retailer expects to spend “at least” £100m on online marketing, including the cost of staffing the department, having progressively increased investment over the last few years in marketing professionals, data scientists and marketing software. The result of these investments has been a “sustained increase” in the measurable returns delivered by digital spend, the business said in its half year financial report today (29 September).
In fact, over the last six months digital marketing has “outperformed” Next’s expectations, delivering on average around £1 of net cash profit for every £1 invested – well above the 50p return anticipated.
The business has therefore increased its marketing spend by £10m this year to £65m, and plans to test how much further it can push expenditure without compromising its rate of return.
Next first announced plans to cut its investment in traditional media and shift spend into digital advertising in 2018. Marketing spend is now 100% online, with Next indicating that it expects no change to come in that strategy. By comparison, in 2017 Next invested just £41m into online marketing, while £69m went into printed catalogues. The last catalogue was printed in February this year.
In 2017, just £13m of total online marketing spend was digital media spend. That has since increased by 400%, driving a 73% increase in Next’s online customer base over the five years. Next now claims 8.4 million customers online.
Retail bounce back ‘stronger than anticipated’
Comparing on a two year basis due to the unprecedented impact of Covid-19 last year, statutory total group sales were up 5.2% over the period to £2.1bn, while full price sales were up 8.8%.
In the last eight weeks alone, full price sales were up 20% versus 2019, “materially exceeding” the retailer’s expectations of 6%.
Profit before tax over the six months therefore reached £347m, a 5.9% rise. Next is increasing its forecasted profit before tax for the year to £800m, up 6.9% on 2019 and £36m ahead of its previous guidance of £764m.
Broken down, online sales increased 52% over the two years, from £1bn to £1.52bn. Demand has been particularly high in home and childrenswear, Next said.
Online growth therefore offset a 38% drop in in-store retail sales, which fell from £874m to £540m. Nevertheless, retail sales have performed better than expected, Next said, as the bounce-back after the reopening of non-essential retail in April was “far stronger than we anticipated”. Online sales have also fallen back less than expected.
However, the CEO Simon Wolfson warned underlying conditions are “almost certainly” not as good as they currently appear. The combined effect of pent-up demand for clothing, record consumer saving ratios and far fewer overseas holidays has materially boosted sales in recent months, an impact which “must inevitably diminish as time goes on”.
Nevertheless, Next said it is optimistic about returning to long term growth, as it banks on the development of its own product ranges, the accelerated increase in its customer base, the growing success of its third-party brands proposition Label, and the launch of its Total Platform business.
Growing ambitions for Label
Development of the Next brand is continuing “at pace”, the retailer said. “Liberated from the physical constraints of the four walls of retail shops, our product teams have flourished.”
The brand has also expanded into new product categories, from performance sportswear through to garden furniture.
“In all of these efforts we are guided and constrained by one overarching principle – we must genuinely create value for our customers,” the business said.
Alongside the diversification of its own product offer, Next has continued to broaden the offer of third-party clothing, home and beauty goods sold on its website, both by adding new brands and by extending ranges from existing partners.
“Our ambition remains simple: we want to be our branded partners’ most profitable third‐party route to market,” Next said.
Having struggled to profitably promote Label products through adverts placed on third-party media as much of the profit goes to the partner brands, Next has also begun to collaborate with selected partner brands on co-funded external digital campaigns, reporting “very encouraging” results that are driving strong returns for both parties.
The retailer said it is looking to “aggressively extend” this program in the year ahead and hopes to further increase awareness of Label’s offering.
Total Platform’s performance
Meanwhile, Next has said it expects to fulfil online sales of around £50m through its Total Platform this year, generating £3m of profit, which is within its target range.
Total Platform offers brands access to Next’s suite of online services, providing websites, warehousing, distribution and contact centres, along with retail till systems. The retailer says the platform will “liberate” brands from time-consuming activities in which they have “little competitive advantage”, allowing them to instead focus on the design, buying and marketing of their brand.
Earlier this month Next acquired a 51% stake in Gap in the UK and Ireland in return for running its online business through Total Platform. Gap joins Victoria’s Secret, Aubin, and Reiss, in which Next also claims sizeable stakes.
Next said it expects to see a profit contribution from this equity of around £7m this year, including £5m from Victoria’s Secret and £2m from Reiss.