Next day delivery

A UK fashion retailer profits online by remaining in-store

Even Next themselves sound surprised by their continued strong performance. In the firm’s latest annual report they outline a nightmarish environment starring an anemic consumer and featuring spiralling manufacturing costs before concluding that actually Next performed “remarkably” well.

The firm has been surpassing expectations year after year. How the company has managed to consistently generate profit while operating in a fragmented and saturated industry is of interest to floundering fashion retailers globally.

Just returning something I bought online

The reason seems to lie on the web. While retail sales in bricks and mortar stores were down -1.4% from 2011, Next Directory, the online catalogue, grew by over 16%. This easily offset retail losses; online sales now generate a third of group revenue.

Typically, fast fashion retailers have struggled to convince consumers to come online (Fashionistas often want to try before they buy). Next profits have primarily come from convincing consumers to part with cash over the internet hence squaring the circle many rivals had been struggling with.

Of Mortar and Modems

The company’s approach to online fashion is promising for tangible retailers, but less so for their online counterparts. Next operates a system whereby anything purchased online can be returned in store; around 60% of online refunds are now done through Next stores.

This may look like poor cost control to the more hardnosed retailers, but it is vital for putting would be customers at ease. Picky and busy thirty-somethings can merely go down to one of Next’s 500 retail stores and return those shoes should they not look just right.

Next has also shown notable ability in catering to a customer base which demands instant gratification. Anything ordered before 9pm will be delivered first thing the next day. Rivals are envious of such logistical prowess.

Yet consumers are demanding nothing less. Next continues to profit from a mix of store ubiquity, customer trust and almost instant delivery. That will be hard to replicate anywhere.  

The Reconquista

Mexican oligarchs are expanding abroad

Mexico both benefits and suffers from its close proximity to the United States. When the ‘gringos’ on Wall Street trigged a financial crisis, Mexico was plunged into an even deeper recession than its northern neighbour.

Still, the benefits may be coming round again. Mexico houses a growing number of firms with global ambitions. Grupo Bimbo, a bread maker, purchased Sara Lee Bakeries in 2010 to become the US’s biggest baker. Another giant, Grupo Modelo, has long been exporting its wares abroad. Corona extra, one of Modelo’s most popular brands, sells strongly in the US but also in places like Hungary.

Not the only one with money to burn

It’s not merely bread and beer which are developing a Mexican taste. Cemex, a large cement producer, has grown from its Monterrey base to be one of the largest producers globally. A recent acquisition of Rinker, an Austrailian cement materials firm, for £15.3 billion has added to its global credentials.

What does Mexican beer, bread and cement all have in common?

The decision to expand a firm’s operations abroad often stems from a mix of opportunity and necessity. This doesn’t seem to apply to the likes of Cemex. The firm has a 35.7% operating margin in Mexico and a paltry 0.2% in the U.S. Bimbo doesn’t fare much better; a 9% Mexican margin is eroded to 2.7% in the U.S.

What allows these firms to expand is their dominance at home. Grupo Modelo holds over 60% of the beer brands Mexican’s are guzzling. Cemex and Bimbo hold over 80% in cement and bread.

Such control over captive markets provides the Mexican oligarch with security and room to focus on foreign expeditions without worrying about pesky Mexican consumers. The recent strong performance of the Mexican economy, growing at around 4% annually, has further lined the pockets of such firms.

The Reconquista excites many in the country as it is seen as about time Mexico exerted itself on those across the border. Yet the strategy of expanding with low margins abroad, whilst protecting entrenched monopolies at home, is likely to benefit foreign consumers more than Mexican ones. 

Électricité de France (EDF)

The state backed behemoth that is shaping the nuclear industry

When E.U heads’ of state promised to reduce carbon emissions by 80% by 2050, the world seemed a more agreeable place. The dilemma now flaring up between nuclear, wind and fossil fuels has left some wondering how the E.U intends to keep the lights on.

One company which will shape the nuclear future is the French state colossus, EDF. The company owes its origins to a nationalisation of over 1700 energy minions by the then industry minister Marcel Paul. The French government used the firm to drive an economic revival following WW2. It has been of “strategic” importance ever since.

However, beginning in 1999, the firm has gradually been exposed to market forces. EDF was compelled to share its monopoly over French energy markets, ceding 20%, under the instruction of the E.U commission. This was followed in 2004 by the floating of a 15% stake in the firm on the CAC 40. (See graph)

Just  Fukushima and the Eurozone?

Private investors have been unimpressed. From a high of €80 the stock has dwindled to €16 today. Mr Porgolio, group CEO, cites the Eurozone debacle and Japan’s Fukushima disaster as drags on performance. This has some substance to it, Since Fukushima, rival firms’ stocks have also plummeted, yet EDF leads the pack in poor performance.

The nouveau président français may have something to do with this. Prior to the election, François Hollande promised to cut nuclear energy dependency from 75% to less than 50%. Yet on arrival to the Elysee Palace this has become more an “aspiration” than a “policy” as Monsieur Hollande seeks to grapple with réalité.

Policy or not, Hollande is not Porgolio biggest fan. The EDF CEO campaigned rigorously for the now departed Sarkozy and slapped down Hollande’s energy plans as “unrealistic”. Rumours have sprung up suggesting Porgolio may not see out his 5 year term to 2014.

The double edged sword for EDF is that it exists at the behest of the French government. The firm advanced in the 70s as France looked to reduce its exposure to oil price volatility. Its fortunes may now turn the other way.   

Don’t write nuclear or EDF off just yet   

Just as Hollande begins to grapple with the practicalities of government amidst the see of promises he made in opposition, so the UK coalition are waking up to the implications of their own green energy promises.

The Liberal Democrats have long modelled themselves as the clean energy party, and the Conservatives have played up their green credentials, yet their coalition is looking likely to commit the country to a new era of new nuclear power stations. The Hinckley point plant in Somerset next year, should a deal with EDF be agreed, will be the first since 1995.

EDF UK head, Vicent De Rivaz, sees the Somerset deal as crucial to the group’s attempts to diversify from French income dependency and the UK government’s efforts to move away from fossil fuels.

Still, the plan could go awry. When the Blair government announced its commitment to new nuclear, energy back in 2007, energy giants boasted they could build without any sort of subsidy. This now looks misguided as additional safety costs following the Fukushima disaster are driving up the cost of nuclear. A look across the channel reveals just how costly it may turn out to be. Flamanville, the site of a new nuclear plant managed by EDF, has run over budget, by around double, and time, by over 4 years. This hardly bodes well for the new nuclear revolution.

It is therefore unsurprising that not many firms are willing to get involved in British nuclear renovation. EDF and Centrica, a rival firm, are now the only two companies willing to part with capital. Hence the government is trying to concoct schemes to tempt investment. The latest idea is a “strike price” for the price of energy per megawatt hour (MW/H). Essentially, the government would subsidies firms if the price of energy were to fall below the agreed price.

EDF agree in principle to this pricing strategy, but not in detail. The current price of energy stands at 41 MW/H. EDF is hoping to get a strike price of potentially over £100 MW/H. Given that offshore wind generation comes in at around £130 MW/H some are wondering whether the government should bother with nuclear at all.

EDF also faces grumbles from its UK customers. The firm was recently fined over sales practices to the tune of £4.5m. Customers on This Is Money, a popular consumer finance website, rate the firm bottom of the big six for customer service every year. With energy bills shifting from £422 in 2004 to £1258 today, expect many more irate consumers.

Like its main backer, EDF suffers from large debts and low productivity. Some are hoping nuclear will make a comeback in a more efficient form. Whether it does, is partly down to EDF.