PESTLE Analysis of NEXT PLC 2008-2012
The business environment of a firm is vast, unpredictable and always changing. The external environment is especially critical to a business so firms use frameworks such PESTLE Analysis as well as others such as Porters Five Forces framework and SWOT to help them analyse the external environment and thus make more informed strategic decisions. One such firm, Next PLC will be analysed in this essay, looking at how it has achieved growth over the last few years (2008-2013) and the reasons for any such growth strategies. This will be followed by a PESTLE Analysis of its external environment.
NEXT PLC HISTORY
Next PLC is a UK based retailer that was first started in 1982. The first Next store opened with a range of collections of clothing, shoes and some accessories mostly for women. They soon introduced childrens, mens and home equipment. Today, Next boasts over 500 stores in the UK and Ireland with more than 200 franchised stores around the world. The Next Directory, a home shopping catalogue and website was introduced in 1988, followed by a Next ecommerce website 10 years later. In 2008, Next PLC acquired womens partywear label Lipsy (Nextplc.co.uk).
WHAT IS PESTLE ANALYSIS?
Pestle Analysis is a framework that managers of firms use to scan the external macro environment in which the business operates in order to make better strategic decisions. This is because Pestle factors play a very important role in the value creation opportunities of a firm’s strategy. But because Pestle factors are external to a company, most firms treat them as either opportunities or threats (Grant 2005). Typical factors that are considered as part of the external environment in a Pestle analysis are listed in the table below;
Table 1: PESTLE factors
However for this essay, we will be concentrating on the PESTLE Analysis framework for Next PLC.
NEXT PLC PESTLE ANALYSIS
The PESTEL framework will analyse the always changing and volatile environment in which Next PLC operates by finding the forces that have the most impact on Next’s performance:
Spending and budget cuts by the UK government during the recent hard economic times meant overall spending by consumers was suppressed and as the years have advanced, the awareness and the reality of necessary government public sector cuts continued to dampen consumer spending and may well continue to well into the foreseeable future (Next Annual Report 2012).
Increase in cotton prices from where the company sources some of its products also added a financial strain on the Next bottom line and together with relatively high global inflation; all these economic factors had an impact on the sales and profit margins of Next PLC. This was especially towards the end of 2011 as rising inflation, predominantly in fuel and food, began to limit consumer spending. Another economic factor from the external environment that helped to further limit the growth of Next PLC was less availability of consumer credit to both consumers and businesses alike. The recent spike in mortgage rates announced by mortgage lenders is indicative of an economic environment where credit conditions remain gloomy.
Another economic factor that has slowed down consumer spending in the UK is unemployment which took a turn for the worst in 2011 and made worse by continued public sector cuts resulting in less public employment. As well as low growth in wages meant that consumer demand was anaemic (Next Annual Report 2011; 2012).
As Table 1 showed, social factors in a Pestle analysis include changes in demographics, labour and social mobility, lifestyles or changes in fashion. Social changes have the potential to be either threats or opportunities for companies such as Next PLC. For example, in 2008, Next PLC bought Lipsy, a hip women’s label after facingcriticism for failing to keep in touch with "Heat generation" of shoppers as earlier stated (This is the 18-25 age group). Next PLC had realized that younger consumers were rapidly growing and being captured by online fashion giant ASOS who were specifically growing by targeting just this demographic market that Next did not have in its ranks. By specifically buying Lipsy, Next was taking advantage of social changes in both demographics and fashion in order to stay current and relevant to today’s fashion scene. It of course remains to be seen if Next PLC can capture this market from Asos using Lipsy (Marketing Week 2008).
New inventions and developments as well as changes in information technology can all be considered technological factors that can fundamentally influence or impact a company’s performance. For example, in the last few years, the internet, mobile smart phone technology and social networks have grown extremely fast in stature especially among the 16-34 year old demography. These new technological platforms represent new avenues for sales acquisition and marketing and are thus becoming vitally important when it comes to targeting younger consumers. In fact, the biggest growth for Next has been in internet based sales (Next Annual Report 2011; 2012).
According to the Next Annual Report (2011), severe weather in December 2011 conspired to hamper sales, something the company did not envision.
Next PLC also recognises the current trends in consumers and governments demanding businesses to reduce their carbon foot prints. The company is committed to reducing its own by minimising recycling waste, lowering transport emissions and packaging in some of their products (Next Annual Report 2011)
The UK government increased VAT from 17.5% to 20% (HMRC 2011). This affected Next PLC because it meant that product pricing increased, adding to higher operating costs.
Increase in minimum labour rates in the UK and also in countries where Next manufactures some products meant the company is spending more on wages (Next Annual Report 2011).
NEXT PLC GROWTH STRATEGIES
In this section, I will be reviewing how Next PLC has achieved growth over the last couple of years since the 2008 financial collapse until now and why the company has chosen certain growth strategies. This will be done by reviewing Next PLC company reports and accounts over the last few years. Next’s company accounts will help to compare and evaluate the compaines performance over the last couple of years and analyse what strategy was used.
RESULTS FOR THE YEAR ENDED 2011
According to the Next Plc Annual Accounts (2011) although like for like sales in Next retail declined between 2010 and 2011, operating profit was up 8.5% on last year and group turnover was up by 1% from £3.41billion to £3.4 billion. Group profit before tax went up by 9.1% to £551.4million, representing its best profit figures for sometime.
More importantly, the company’s Net profit margin was higher than close sector (apparel) competitors such as Marks and Spencer and Debenhams (all grouped as apparel retailers). Marks and Spencer’s 2011 NPM was 6.28% while Debenhams’s was 5.30% but Next’s was 11.61%, the highest. Why is Net Profit Margin important? Alternatively called the primary efficiency ratio, it is widely used to assess a company’s performance (Elliot and Elliott 2003)
Earning per share was also up 15% to 229.9p. EPS is of great interest too because it serves as a measurement of a firm’s profitability and shareholder return. It gauges profitability from an equity shareholder’s perspective. All things being equal, a company with a high EPS growth is more attractive than one with a low EPS growth (Elliott and Elliott 2003).
Below in Table 2, I compare the Basic EPS figures of two competitors of Next PLC; Marks & Spencer and Debenhams.
Table 2: Basic EPS growth of Next PLC v Competitors
One thing to note is earnings growth of Next PLC was generated by a combination of its own capital base (high asset utilization) and equity capital. It is an indication that Next PLC can generate high earnings using its own capital base hence less reliance on equity capital and gearing, a very good growth strategy (Annual Accounts 2011; Elliott and Elliott 2003)
What all these accounts tell us is that Next PLC managed to achievecompany growth compared to its competitors through a number of strategies as detailed below;
The first strategy was through controlling its costs and budgeting conservatively for growth therefore, because the company budgeted conservatively for growth, this enabled them to keep tight control of their stocks and costs. With costs kept down, the company aggresively pursued other avenues of growth even in a weakened economy (Next Annual Report 2011).
NEW STORE OPENINGS
A second strategy that Next PLC has been able to use to pursue sales growth through opening new stand alone HOME stores, a new concept which which delivered profitable new stores and avenue for growth. Lipsy selling space is also being planned with more Lipsy stores to be opened in the future. Overall retail trading space for Next PLC was increased by 402,000 square feet in 2012, an increase by 6.6% from 2011. The increase in new retail space contributed to a 4.3% increase in sales (Next Annual Report 2011; 2012).
The Company also continued to expand its online sales in 2011 and 2012 through the NEXT Directory, which did account for 27% of Group sales and 40% of profits in 2011, making the internet a very important growth avenue for the company both in the UK and the international online market (Next Annual Report 2011; 2012)
GROWTH THROUGH ACQUISITIONS
In 2008, Next acquired Lipsy for £17million, a hip women’s partywear label which designs and sells its own branded younger women’s fashion clothing through retail, internet and wholesale channels,in an effort to appeal to younger women consumers.This particular acquisition was very important for the company after facingcriticism for some time for failing to keep in touch with "Heat generation" shoppers who fall in the 16 to 34 age spectrum. This particular age group was best captured by online fashion retailer ASOS who though 30 times smaller than Next PLC are rapidly growing and specifically growing by targeting just this demographic Next PLC lacked (Marketing Week 2008)
GROWTH THROUGH CASH CONTROL
Next PLC continued to have very good cash generation compared to their rivals, enabling them invest excess cash in opening new stores and continue refitting older stores. In the year ending 2012, cash generation of Next PLC helped increase earnings per share by 6 percent. So cash was one of the strategies that enabled Next PLC to grow yearly and perform better than rivals (Annual Accounts 2011; 2012).
In conclusion, looking at the Next compamy accounts, you can see that the company used different strategies to keep growing depending on the financial figures.
ANALYSING FUTURE PERFORMANCE OF NEXT PLC
Next PLC is planning to grow in the future through a number of ways stated in its Annual Report (2011; 2012).
- It plans to improve and develop its NEXT product ranges in 2011 and 2012, as already evidenced by the success in this area during 2011.
- It plans to grow profitably by increasing NEXT Retail and Lipsy selling space. Growing the Lipsy brand is especially recommended as it represents new growth space in a market segment it’s not currently very strong in, women’s partywear and the 16-34 age group.
- Future growth will also be got by increasing the number of NEXT Directory customers and their average spend and handling gross and net margins through efficient product sourcing, constant cost control and effective management of stock levels and operational capital.
- The company also intends to soon pursue the lucrative overseas online market where it’s currently non-operational such as in China, Pakistan, Russia, Japan and India (Next Annual Report 2011; 2012).
These are challenging times that are facing many retailing companies today. The tough economic environment in both the UK and other international markets means that many businesses have to come to terms with an external environment fraught with opportunities and challenges that will either make them or break them. A PESTLE Analysis is one of the frameworks that helps businesses deal with the external business environment helping managers make decisions by analysing such external environments in an effort to remain competitive and profitable. Next PLC understands that facing such an environment requires knowing its stremgths and weaknesses and matching them to available opportunities and at the same time trying to neutralise threats that weaken it further. The company has managed to perform well and remain profitable despite the challenges it has faced in the last couple of years.
Elliott, B., and Elliott, J. (2003) “Financial Accounting and Reporting” 7th Ed. Pp 672-680 Pearson Education Ltd
Grant M. Robert (2005) “Contemporary Strategy Analysis” 5th Edition, Blackwell Publishing
Next PLC Annual Accounts (2012) “Next Annual Report and Accounts” Leicester, Next PLC[online] at http://ir2.flife.de/data/next/igb_html/pdf/1000007_e.pdf
Next PLC Annual Accounts (2011) “Next Annual Report and Accounts” Leicester, Next PLC[online] at http://ir2.flife.de/data/next/igb_html/pdf/1000005_e.pdf
Next PLC (2012) “Our History” Available Online at http://www.nextplc.co.uk/about-next/our-history.aspx
Marketing Week (2008) “Analysis: Painful times for the Next generation” Centaur Communications
HMRC (2011) “Increase in the standard rate of VAT to 20 per cent”[online] at
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