Next chief executive Lord Wolfson has played down the impact of a potential 6% price increase, which it revealed today would be necessary to mitigate the government’s new living wage and general price inflation by 2020.
The retailer said it would have to increase wages by £147m by 2020 because of the combined effect of national living wage (£27m) and the Office of Budget Responsibility’s forecast for wage inflation of around 4.5% per year (£120m).
“If the £120m cost comes through, it is because wages have gone up by 19%, so in that environment a 6% price increase is one our customers could afford,” pointed out Wolfson. “In fact they could still afford to buy more clothes, so you need to put that price rise in context.
“You need to look at the maths of taking the cost as a cost or putting it through the prices.
“The last time we put prices up by a similar amount, around 7% – about five years ago when there was a big devaluation in the pound and a huge spike in the price of cotton – we experienced a 1.5% drop in sales,” he said.
“The cost of that drop of 1.5% it is unlikely to be more than £20-£25m in terms of profit, so that will be more like 2%-3% of profits against a cost of 18%. The maths overwhelmingly favours putting the prices up, particularly in an environment where your customers can afford it,” he said.
Next will have to raise its hourly wage from £7.04 per hour to £7.20 for over-25s from April to comply with the new living wage regulations. This will cost £2m, which Wolfson described as “manageable”.
“We will have to take this one year at a time,” he said. “With the size of a business like Next [whose annual UK wage bill is £600m this year], the £2m would not encourage us to change any terms and conditions of benefits for example.”
Next’s total group sales rose 2.7% to £1.9bn and profit before tax increased 7.1% for the six months ended July 31.
The retailer’s Directory sales increased by 8.2% to £767m during the period, while operating profit was up 7% to £184m.