Analysis of NEXT plc and its environment

Contents

1 INTRODUCTION

2 OVERVIEW
2.1 The Market
2.2 The Company

3 ANALYTIC TOOLS
3.1 PEST - Analysis
3.2 SWOT - Analysis
3.3 Competitive Analysis

4 CONCLUSION

5 MISSION STATEMENT

6 OBJECTIVES AND STRATEGIES
6.1 Good quality and price
6.2 Relationship between Next and its environment
6.3 Shopping as en event

7 BIBLIOGRAPHY

1 Introduction

This Report should give the reader an overview of the clothing retail market in general and an in-depth analyse of NEXT Plc in detail. The main emphasis in this essay are the Retail and Directive division of NEXT Plc because they are the cash generators. Furthermore it shows the current situation of NEXT, its environment and the recent development of the company. The report also provides a mission statement and strategies how to be more successful in the near future.

2 Overview

2.1 The Market

The UK clothing market is a declining market. The clothing industry is beset by competition from companies which have invested in hi-tech machinery leading to greater efficiency or have moved their production to factories in cheap labour cost countries to produce their products. However, most companies in this sector make only moderate profits. To expand the market share in this arena is not easy, and therefore it needs a great deal of endeavour, knowledge, as well as energy and money.

Clothes retailers fall into two broad categories: firstly, those selling own-brand clothing and, secondly, those selling third-party wear. Major retailers such as Marks & Spencer and the Arcadia Group are good examples of the first group, as are chain operations such as NEXT and Gap. The second group includes the major department stores and the majority of independent retailers in the UK.

Clothing retailing is a highly diverse industry. The retail sector ranges from low-cost and discounts retailers through to independents, sportswear, formal wear and highly exclusive designer boutiques. However, as in most consumer goods markets, it is at the middle level where the major players are to be found and money can be earned.

2.2 The Company

The history of NEXT goes back to 1864 when it was founded by J. Hepworth & Son under the name of Gentleman's Tailors. In 1981 Hepworth bought the chain of Kendalls shops to establish a new Womenswear group of shops. This was the birth of NEXT. NEXT Plc is a trendy high street retailer which sells moderately priced clothing for stylish women and men in the age range 20 to 40. The company also provides home shopping and financial services.

NEXT operates through five divisions: NEXT Retail operates the high street shops through more than 330 stores covering the UK and Ireland; NEXT Directory is the mail order division which also contain the e-commerce platform; NEXT Overseas operates retail outlets in the United States, Asia, Continental Europe, and the Middle East through franchise agreements; Ventura runs the financial services division. Other activities include telecommunications software services and property management.

NEXT Retail accounted for 69% of the fiscal revenue for the year 2000 ; NEXT Directory, 19%; Ventura, 9%; NEXT Overseas, 1% and other activities, 2%. More than 96% of sales were achieved in the UK market.

Taking an up to date snapshot of the current situation of the Company, it is quite a success story. NEXT nearly tripled their sales during the last six years, Source: see Chapter 7 from GBP 544 m (1994) to GBP 1430 m (2000) and dividends have increased steadily.

Abbildung in dieser Leseprobe nicht enthalten

3 Analytic Tools

3.1 PEST - Analysis

This analysis is a helpful tool to take a closer look at the general environment. Although the PEST analysis rely on past events and experience, it can be used as a forecast of the future (Wilson and Gilligan, 1998).

Political factors

The political environment is good. The government is stable and reliable, even if Britain fails to achieve total agreement with some EU policies from time to time. At the present no EU directives are known which will have a direct effect on the UK clothing retail industry in the near future.

Due to the EU membership a trend can be seen towards stricter environmental protection legislation. This may have a direct or indirect effect on NEXT or his suppliers.

Economic factors

Looking at the economic environment, it is somewhat tricky since on the one hand there is the strong sterling compared to the Euro. Euroland encourages imports and endeavours to hold domestic prices at an attractive level. But on the other hand it is difficult for the UK to be competitive outside its boundaries because of the high pound sterling exchange rate against the Euro. As NEXT sells about 96% in the UK marketplace, this may currently only have a limited effect, but could be more important in the future when thinking globally. Fig. 2

Abbildung in dieser Leseprobe nicht enthalten

This can also be seen on the "Big Mac - Cross Rates" table, where hamburgers sold in the UK are more expensive than in most other countries. So an investment outside the UK might be very attractive - also speaking of "re- imports" to transfer the goods back into the domestic market.

Source: see Chapter 7 Another issue is the falling unemployment rate. For the UK population this is good news but for companies like NEXT, this has different implications. For NEXT it means higher expenditure on wages, as well as greater difficulties in recruiting good employees.

Social factors

Speaking of the socio-cultural future it should be mentioned that people retire earlier these days, as well as working shorter hours. Average working hours per week have decreased over the last 20 years. As a result many people have more spare time. This means they have time to compare prices in the High Street and the quality of goods and services from retailers. But as a result, they spend more time in the shops.

Another issue these days are the "Green environmental issues". Because people have more time and have ample access to the media via the TV, radio, as well as newspapers and the Internet, the consumer is better informed and therefore this awareness of environmental issues challenges him to care. He wants more than just a product. He is interested in the production process. He wants to know if the factories are environmentally friendly or not, where his product was build and under which circumstances etc. etc. So one problem in the clothing retail sector could be child labour. There are companies who rely on it in order to be competitive in their domestic market, for example Marks and Spencer. Marks & Spencer had been accused of using child labour in Indonesia in 1999. But once the customers becomes aware of such practices, companies get into real trouble if they do not respond immediately. Consumers who are looking for a best price purchase, may however not be prepared to consider the economic price which their social conscience inflicts on those companies whose products offends their ethics and which they consequently shun.

Technological factors

Another issue is the speed of technological transfers which also has an impact on the industry - it is not comparable with the fast growing internet business - but nevertheless it is important. New technology allows new products to be developed, e.g. Lycra®, Supplex® or other synthetic material. Existing materials can be produced quicker and cheaper. Adopting these technologies can be a decis ive factor as to whether a company is ahead of his competitors or whether it lags behind.

3.2 SWOT - Analysis

The SWOT analysis examines the organisation's external environment and also explores the internal environment (Lynch, R 1997). This requires listing and analysing the main strengths of business, its weakness and the likely threats and opportunities it will be facing in the future (Doyle, P 1998).

Organisational Strength

The strength of NEXT Plc is their adult fashion wear for people between 20 to 40 which are sold under their own label. This is their main target group. While some of its competitors have problems to satisfy this segment, NEXT managed it very well in the past, selling their stylish products at reasonable prices. NEXT customers associate with the NEXT label - good quality of the cloths used and good workmanship. As they are using their own brand they can react on consumer wishes very quickly and have total control over the quality management.

Organisational Weakness

Further gains can be made by the e-commerce division. NEXT, who spent GBP 125,000 sees the internet as an extension of the telephone to order their products online. It is nothing more than a vehicle to get the orders to the retailer. Their competitors interpret the interne t phenomenon differently. Debenhams for example invest more than GBP 5m on internet technology and Mark and Spencer even spend GBP 50m in e-commerce and digital TV. Right now, nobody can tell if e-commerce will be the future of shopping and customers are satisfied sitting on the computer to chose their clothes. But if the trend of internet shopping goes further NEXT is in a bad situation compared to its competitors because its platform is not sufficient enough.

Another weakness is the concentration of similar type of clothing retail companies on the UK market. This can damage NEXT if competitors gain market share or if consumers change their habits and NEXT cannot adapt to these changing trends quickly. To diversify into foreign markets could balance any possible risk of decreasing sales. Furthermore such a policy would strengthen NEXT's position if the pound become weaker or if the government decides to join the Monetary Union.

Environmental opportunities

Nevertheless mail order is an important plank in the retail trading stakes. Employees aged 20- 40 have little time to do their shopping. So it is good that NEXT has gained a foothold in this market. They are ranked number one among the High Street names which are offering mail order clothing. This could be a great opportunity for NEXT to increase market share - speaking of the domestic market as of the foreign markets - to use their knowledge and experience over the years they can make it even harder for its competitors to step in. More opportunities are mentioned at chapter 6.

Environmental threats

A threat is the low market growth and the strong competition. Some companies are very aggressive in their attempts to gain market share or to maintain it. To reach their aim they are offering high street products manufactured in third world low labour cost areas at dumping prices. Tesco for example offered Lewis 501 denims twenty pound cheaper than the high street shops.

3.3 Competitive Analysis

The objective of such an analysis is to investigate how the organisation needs too form its strategy in order to develop opportunities in its environment and protect itself against competition and other threats (Lynch, R 1997).

The report will use the Porter Model to give an idea what kind of influences exists and how a company can deal with it.

Fig. 3

Porter's Five Forces Model

Bargaining power of suppliers

Abbildung in dieser Leseprobe nicht enthalten

Source: see Chapter 7 To what extend have the suppliers of NEXT power over the company? In the case of NEXT the influence is limited because there are a lot of providers in this sector. If a supplier were to ask for an increase in his price, or for other better conditions, his customer could easily replace him in a short period of time. Therefore mutual dependence is rated low.

Bargaining power of customers

So far as the customer is concerned he has probably the most power because it is he who buys the product and spends his money. The impact of an individual buyer who goes shopping at a branch and seeks price cuts is likely to be negligible. However speaking more generally, if the phenomenon was multiplied by many thousands of price conscious customers who are not willing to pay the ticket price, management will need to cut prices to avoid losing sales. Because clothing is not very item specific - a pullover is a pullover - whether you buy it from NEXT or Marks and Spencer. The only way to attract cons umers to buy a company's products instead of the competition's, is to add value, such as label, style, price or quality. But still there is no guarantee that NEXT will perform better than other clothing companies. The customer decides which product he likes - not the company.

Threat of new entrants to the industry

A threat to NEXT are the new competitors entering the market. Maybe not the small ones because there is a lot of capital needed to go head to head with NEXT - the threat comes more from the big labels, department stores or chain companies outside the UK. Companies such as Calvin Klein and Donna Karan, for example, have money, knowledge and the power to enter the clothing market in a short period of time. Both which opened their 8,000 to 10,000 square feet stores on New Bond Street or Ralph Lauren which opened his 45,000 square feet store in central London demonstrate how to infiltrate a rather conservative domestic market.

Additionally, US catalogue retailers are venturing into the UK market. Lands' End, the ninth biggest mail order company in the US, had opened a subsidiary in the UK but also struggle from the strong rivalry, sales are down by 1.9% to USD 143m (2000).

Threat of substitute products or services

Another threat in the eyes of Michael Porter is the issue of substitution. Speaking of the clothing retail market this problem is not a big issue. A pullover can be a substitute for a jacket, or trousers for skirts, but since NEXT is provider of all these items anyway so the impact of a substitute is limited. However the threat in this market is that NEXT fails to note these trends. The Customers would substitute NEXT with a trendier company if their products are not stylish, interesting or mainstream enough to attract customers or the timing is wrong.

Rivalry among current competitors

There exist a huge number of clothes retailer in the UK approximately over 25,000 combined with other outlets make them more than 45,000. This indicates a high rivalry between competitors. In this phase of the market cycle where there is more or less no growth, competition is often price-based and therefore very aggressive. To build customer loyalty with price cutting strategies is very difficult if not impossible. That means consumers are looking for the best offer with regard to price, service and quality. If NEXT wants to increase market share it must take sales from its competitors and that increases rivalry. So it is a kind of price spiral where companies have to cut prices to sell their products. This leads to decreasing margins and probably to less competitors. This can be seen in the grocery shopping sector where competition was such though that only a few big companies survived. Another issue are the high export exit tariffs. If a company like NEXT, Marks & Spencer or C&A want to leave the UK market it means they have to sell all their branches and get rid of most of their employees. This causes a lot of problems in terms of the relevant trade unions, bad publicity or cost for developing a social viability plan. These are some reasons why companies mostly stay in their known marketplace instead of leaving them for new opportunities.

4 Conclusion

NEXT is an example how a boat can be steered through storms and waves. While most of its competitors struggle from the declining market, NEXT managed to increase its market share over the last six years. Due to high sales they could increase their dividends which had a positive effect on shareholders and investors.

The company is well positioned in the UK market and very flexible to react to consumer wishes. They established with a minimum of time and money a quick and easy solution for those customers who want to order via the internet. By now they are the only big UK clothes retail company who earns money with e-commerce. Marks and Spencer for example expects to be profitable by 2003.

In our time it is very important to link a company with an image, to give it its individual identity. That is one way or probably the only way to differentiate from its competitors. Many big British corporations like British Airways, Rover or Marks and Spencer missed to build a strong brand value and that is one additional reason why those companies suffer today. NEXT on the other hand linked their label with trendy clothes and professional fashion with good quality and price.

NEXT also expands its network by opening more, bigger and more customer friendlier stores. To translate their aim into action, a contract was signed to buy at least 13 former C&A stores which will bring them face to face with Marks and Spencer.

5 Mission Statement

A mission statement should provide focus for goals, clarify issues and outline visions and objectives. It needs to communicate the essence of the company to the employees, shareholders and to the public (Hassan, M 1988). Similar to this, Doyle (1998) points out, that a mission statement describes the purpose of the business and its essential characters.

Without a statement it is like the Cheshire Cat in Alice in Wonderland who said, "If you don't know whe re you're going, it doesn't matter which way you go."

One example of a mission statement for NEXT Plc could be:

We want to be the best clothing retailer in the United Kingdom. We strive to exceed our customers expectations, for our customer is our king. Our stores are well situated and easy to reach. The environment is to be treated with care. We sell fashionable clothes of excellent quality and price. Our employees are our treasure. Our goals are double-digit sales growth and satisfaction of our shareholders in the long run.

This statement indicates that NEXT relies on its core business as a basis for further enlargement. Furthermore the management is marketing orientated - customers are top priority and should be satisfied as often as possible speaking of clothes as of services. The stores should be easy to reach to attract new customers whose intention was to shop elsewhere rather than at NEXT. Because the "green issue" is getting more important everyday it should be one of NEXT main concerns. The product itself must satisfy the customer speaking of quality and price to generate customer loyalty in the long run. The employees are the soul of a company. If employees are well motivated and committed to their jobs, they can surmount every obstacle. In increasing market share NEXT is improving its negotiating position with its suppliers which in turn is likely to lead to an increase in profit margins. As a result NEXT will become an attractive investment proposition which will lead to strengthening of its capital base.

These are the pillars of success and will lead NEXT to increased sales and shareholder value.

6 Objectives and Strategies

6.1 Good quality and price

This is the key factor for success. But how can this objective be achieved? One possibility is to look for a supplier who is located in an emerging market to participate at the low labour costs. However this country should have a clothing manufacturing background, for example India, Turkey or Hong Kong so that it is easy to recruit well trained employees. Furthermore should the supplier be a part of the production process so lean management could be implemented and stock capacity reduced. A quality officer from NEXT should be at the suppliers at all the time to guarantee the high quality of clothes. To lower the costs and to gain a better trade position - suppliers should be reduced to a minimum and therefore new price conditions negotiated. This can lead NEXT to low costs and high quality in the long run.

6.2 Relationship between NEXT and its environment

As it was mentioned at the PEST analysis - the green issue is gaining greater importance and NEXT should strive to make further progress in this direction.

There are two tracks which should be followed. First of all the production process. NEXT should guarantee that the plants are environment friendly.

In other words that the factories are equipped with up-to-date filters which reduces erosion and the used chemicals are biological decompositioned at all times. Another issue is labour force - NEXT and its suppliers should aim their production to be achieved without using child labour and should communicate this to its customers. To be credible in the public eye a joining up with a non-profit-organisation such as Save the Children to monitor NEXT activities in this sector could prove worthwhile. The outcome of this could be a badge which says "we fight against child labour" and this is useful for marketing purposes. The second track is the customer itself. He should be aware that resources are limited and therefore the use should not be wasteful. Because of this, NEXT should use paper bags and only when it is really needed, contrary to this, Tesco uses plastic bags and even the smallest items are wrapped. So money can be saved and the environmentally awareness be sharpened.

6.3 Shopping as en event

In this segment where market shares are mostly gained by price competition it is vivid to be special. One way to make shopping as an event and therefore add value for customers is to have superstores. Everything should be generous. Starting with shelves to corridors to customer care and service in general. Nothing should be omitted to satisfy the customer - he is king.

So NEXT should close their smaller branches and replace them by superstores. They should offer special services like make-up studio, clothing consulting stations or child care. Also small events like fashion shows, autographing sessions or book reviews could be helpful to attract new customers and make them enjoy their shopping. NEXT should also provide a resting place where husbands or other not actively engaged in the shopping process can sit, relax and drink a cup of cafe.

A strong brand, good service and all the other strategies which are mentioned above should lead automatically to the main aim "double digit growth" and an even better market positioning for NEXT Plc in the near future.

7 Bibliography

Books

Lynch, R (1997), Corporate Strategy, Financial Times Management, London

Wilson and Gilligan (1998), Strategic Marketing Management, 2nd edition, Butterwoth Heinemann, Oxford

Doyle, P (1998), Marketing Management and Strategy, 2nd edition, Financial Times Prentice Hall, Harlow

Financial Services

Wright Investor Service (www.wisi.com)

Hoover's Online (www.hoovers.com)

Hemscott.Net Group Plc (www.hemscott.net)

Key Note - Market Information

Lands' End, Inc., Annual Report January 2000 (www.landsend.com)

NEXT Plc, Annual Report January 2000 (www.next.co.uk)

Figures

1. Wright Investor Service

2. Anonymous, (April 27th 2000), `Big MacCurrencies', The Economist

3. Porter, M (1980), Competitive Strategy, Free Press

Papers

Anonymous, (October 14th, 2000), `Next forges ahead with expansion plans', The Guardian

Anonymous, (September 6th, 2000), `M&S in drive to expand e-commerce', Financial Times

Arlidge, J (May 14th, 2000), `Britannia's brand-new start', The Guardian

Finch, J (October 18th, 2000), `Debenhams fight back', The Guardian

Finch, J (March 24th, 2000), `Shopping unlimited', The Guardian

Hassan, M (1988), Starting and operating a new small business, Cabrillo College, Watsonville

Milne, S (October 27th, 1999), `M&S target of child labour claim', The Guardian

Miscellaneous

www.businessonline.org/info/mission.html

www.debenhams.co.uk

www.marksandspencer.co.uk

www.savethechildren.org

ERASMUS Student #99073559