What our man learned about Next from Lord Wolfson

A six-minute AGM must be a record, but it was well worth the six-hour drive.

Grand tour

Last week I embarked on a grand tour from Cambridge to Stoke via Leicester. No doubt the cities are beautiful, but my aim was to get to know three companies better. The first stop was Next at 9.30am, or rather the anodyne hotel just off the M1 in Leicester where it held its Annual General Meeting. The official business lasted just six minutes, which gave me half-an-hour to buttonhole Lord Wolfson and his colleagues, scoff a croissant and a black coffee, and get to Churchill China for 12.00.

Churchill China's AGM was more leisurely. Employees showed us plates and bowls, and took us around the factory. Regrettably, I had to peel off half way through the tour for another tour around another crockery factory just 20 minutes down the road at 3pm. My guide there was Dick Steele, chairman of Portmeirion. Its AGM was yesterday, and didn't fit so snugly into my itinerary.

A dangerous game

Buttonhole isn't quite the right word, but particularly at bigger companies it can be difficult to get your questions in when the meeting retires for refreshment.

Phalanxes of corporate advisers, ex-employees and other chums of the directors form around them, sometimes presenting a barrier that requires sharp elbows and a quick tongue to penetrate.

Technically, questions during the formal AGM should relate to the often prosaic motions to be voted on, but it can be a dangerous game leaving questions about how the business makes money, why it should make more, and what might stop it, to the bun fight after.

That's the game I played though. I hate going first with an off-topic question during the formal meeting, and so apparently did the handful of other shareholders present.

The dope on Directory

Next's board was accommodating and quite matter of fact. I'd gone to Leicester determined to get a better impression of Next Directory, Next's catalogue. It seems to have blossomed into an online business that earns more than half Next's prodigious profit.

While revenues from fast growing online fashion brands bear comparison with Directory and are growing faster, they're nowhere near as profitable. But is the comparison fair? Directory is also a traditional catalogue operation, and it has retail outlets acting as showrooms and collection centres.

Unsurprisingly perhaps, Directory is not a standalone business. In terms of orders, it is mostly online. About 90% of Directory orders pass through the company's website and the remaining 10% or so are placed by phone.

The catalogue is no longer the principal sales channel, it's been relegated to a (substantial) marketing cost. Directory depends on the retail stores though. More than half of orders are delivered to stores for customers to collect (accounting for about 35% of Directory revenue).

Hurdles ahead

If in future, as seems probable, fewer customers see benefit in the catalogue, and if, as seems possible, fewer customers see benefit in the stores, some of the advantages Next has enjoyed are in decline.

Next has been upfront in its annual reports about declining like-for-like retail sales and the potential impact on profitability. It's also been upfront about its declining credit business.

Online it's simpler to pay with a credit card than it is to use store credit. You don't have to page through terms and conditions, and your browser's probably remembered your credit card details for you. As a mail-order incumbent, Next had a superior distribution network, but over time rivals have caught up, at least in terms of delivery speed.

Hope springs

With many of Next's traditional advantages in decline, in future it will be playing in a much more competitive market, threatening the extraordinary levels of profitability that attracted me to the business in the first place.

My impression is that Next has, perhaps, one big advantage it can build on, and, perhaps, one big opportunity it can mine.

The advantage is its cost of distribution, which it believes is low enough that third party fashion brands would be more profitable using Next for distribution than their own networks.

This cost advantage is behind the growth of LABEL, the fastest growing part of Directory that sells third party products. The opportunity is abroad, described to me as "virgin territory". Next has invested in distribution hubs in China, Russia, and Germany, which is speeding up distribution to its overseas businesses.

Next's own brand, particularly at home in the UK, has enriched shareholders for decades but growth must come from somewhere else now.

"It's difficult"

LABEL and international revenues are only a small proportion of total revenue. LABEL brings in about 10% of Directory revenue, and less than 10% of total revenue comes from abroad.

With growth dependent on these relatively new initiatives I can understand the fears that have driven Next's share price down. On the other hand, being a fan of Next's annual reports and its long-serving chief executive I can see how alive it is to the shifting competitive sands, and why it became such a good competitor.

There are two main reasons I go to AGMs. The first is to find out stuff I don't already know. The second is to test cod theories out on people who know more than I do.

One of my theories regarding Next involves demographics. Listed Internet rivals like ASOS and Boohoo.com target customers in their teens and twenties. I wonder if they will ever be Next customers, and whether Next's customer base has already aged.

Sadly, in the rush to get on with the grand tour, I forgot to ask, though I know my children are used to buying five items from ASOS and send four of them back.

On Twitter, an investor asked me what I thought following the AGM. The constraints of the 140 character format didn't trouble me.

"Next = difficult," I tweeted.

Next stop…

I'll talk more about Churchill China and Portmeirion another time. Though Next has fallen off my buy list, Portmeirion remains on it.

Of Churchill China, I tweeted:

"Very impressed by Churchill management/strategy. Price always seems sky high though."

No doubt there is a correlation!

Contact Richard Beddard by email or on Twitter.