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Customers must bear brunt of cotton crunch, says Next

High street giant vows to increase prices by 8% to protect profits in face of rocketing cotton costs.

Next stands to lose £60m profit in the first half of 2011 if it does not pass the spiralling cost of cotton on to customers, according to chief executive Lord Simon Wolfson.

Wolfson this week lambasted a report by analysts Investec Securities which claimed the price of the average autumn shopping basket at Next had already surpassed its equivalent at Marks & Spencer for the first time in a decade - but conceded the retailer would be forced to pass on price hikes of about 8% next year.

“We have to strike a balance between loss of margin and loss of sales, and we have decided the lowest risk [course of action] is to put prices up. If we raise prices by 8% we can afford for the number of units [sold] to drop by the same amount,” he said.

Cotton prices have risen more than 80% since July, which, by the time it has been passed on up the supply chain, translates to approximately an 8% increase in the cost price of garments to retailers.

The hike is driven by a range of factors [see box] but Next said it was also being artificially inflated by investors trading it as a commodity.

Wolfson said Next had already bought all its product for the second quarter of next year but that retail prices for the period were “looking uncertain” because he did not know how long the “speculative bubble in cotton prices” would last.

Investec said Next’s average basket price for autumn 10 was 13% higher than for autumn 09 and speculated it was trialling price increases ahead of the 2011 crunch point.

However, Wolfson rubbished the report, claiming Investec was not comparing like-for-like items. “Trench-style macs are very on-trend, in quite expensive cotton twills, so [Next’s autumn 10 version] is more expensive. Every retailer has a good, better, best offer, but Investec has taken good [from autumn 09] and compared it with best [for autumn 10],” he said.

Investec said prices at Next were generally moving up without any obvious upgrade in quality. Analyst Katharine Wynne said: “We’ve been conducting the same basket analysis with the same methodology for more than 10 years and this is the first time I’ve seen price rises of this level.”

Cotton prices soar

Nick Peksa, commercial director at commodity analysts Mintec “Cotton prices hit a record high of 84p per pound on Tuesday as demand outstripped supply. China’s production is projected to be 2% down from last season’s volumes, thanks to harvest failures in some parts of the country, and China running down state reserves to reduce the effect of higher world cotton prices on Chinese textile manufacturers. India imposed an export ban on cotton in mid-April and production in Pakistan is forecast to drop 10% due to the floods that affected the country in July. It is possible we’ll continue this upward trend in cotton prices at least until the new cotton crops come in late next year.”

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