Already bespoken for: a retail dead end

Next is running out of room for expansion. Abigail Townsend looks at the chain's conundrum

Next, the fashion chain reporting half-year results this week, faces a conundrum. It is a star performer, achieving steady growth and maintaining a loyal following: no easy task in the fickle world of fashion retailing. Yet it also has to maintain those standards and grow in a market notable for stiffening competition and slowing demand.

The fashion retail sector is huge - valued at £35bn this year, second only to food. Clothes shopping is a national pastime. Yet Richard Hyman, the chairman of the retail consultancy Verdict, believes worrying trends are developing.

"A feature of the wider market now is that there is barely any selling price inflation, but costs are continuing to rise," he says. "There's only one way to combat that, and that's to sell more products, but it's not going to be easy. We are forecasting that clothing spend will be a bit below the total retail average over the next five years. People have got other things to spend their money on."

Next also suffers because its 344 stores already dominate high streets nationwide, so it has less room to expand without cannibalising existing sales. In March, Next reported that like-for-like sales had been flat in the first seven weeks of the year because its new, larger shops were stealing business from its smaller outlets.

Yet the group has little choice but to focus on bigger stores. They are more cost effective, as upper-floor rents are cheaper than for ground floors, and it allows the company to push more products. Instead of just women's fashion, for example, it can devote space to childrens- wear and homewares, both areas of growth in a competitive fashion market, without giving them their own, expensive, stand-alone shops.

Bigger stores alone will not stave off the tougher competition altogether, however. Next had benefited over recent years from a weak performance by Marks & Spencer, yet the department store is enjoying a revival, thanks in no small part to the man who founded Next - George Davies. Next's youthful chief executive, Simon Wolfson, must be privately annoyed with Mr Davies, whose Per Una womenswear range competes directly with Next. The chain also faces competition from supermarkets selling cheap but fashionable gear. Arguably, none is as successful as Asda, home to the George label, launched by none other than Mr Davies. The brand is currently being spun out as a high-street chain in its own right, with shops opening in Leeds last week and Croydon tomorrow.

In other words, Mr Davies is being a pain. Says Simon Proctor, a retail analyst at broker Charles Stanley: "There's not a direct overlap but the mid-market retailer is under threat from people competing on price at the lower end and from people competing on high fashion and better quality at the higher end. I have some doubts about George as a stand-alone retailer but it is a good brand, and all retailers should be concerned and aware of what it is up to."

The run-up to Christmas and the New Year will be pivotal for Next. With parties and work dos to dress for, it is a critical time for all fashion retailers, but particularly mid-market ones such as Next. Yet the chain will not be able to sit back and wait for the partygoers to come tripping through its doors. Says one analyst, who asked not to be named: "Tailoring is less important to George than to Next. But that and formal wear have become a large part of its offering, and that can only increase going forward."

First, though, Next will show how it performed over the summer. No one is expecting a bumper set of results. Pre-tax profits are likely to come in at around the same level as last year, at £115m, hit by the retailer buying back shares and the timing of its summer sale, while current trading will be dented by the heatwave. In June, retail sales surged ahead but subsequent data for July and August was weaker, as the weather deterred even the most ardent shoppers. What is more, the few retailers that did benefit were supermarkets, electrical stores and other general retailers - in a heatwave, you want paddling pools, ice creams and fans, not formal blouses.

Yet while the figures are not expected to light up the City, neither are they likely to contain any nasty surprises. Next is not a trailblazer and most believe the shares, at 1141p on Friday's close, are fair value and are not predicting an upward swing. Nor will the clothes it sells ever be cutting-edge or appeal to the truly fashion-conscious. Yet while that might turn off a whole generation of shoppers, for a vast swathe more, Next is exactly what they want, for themselves as well as their families. And customers like that have a habit of coming back.

As Mr Hyman says, Next is following some of the golden rules of retail: "It achieves some of the best performances in this market, it has a strong following and its product is good. Next is a good business."

Wolfson's challenge

Simon Wolfson may be sick of his youthful label, but there is no escaping it: at just 33 he was made chief executive of Next, in August 2001, and is still the youngest person to lead a FTSE 100 company.

Yet while his job, with a total package last year of £692,000, may have turned less high-flying 30-year-olds green with envy, the City was more sanguine.

After all, he knew the business well, starting as a shop assistant in 1991, and his father (former Next chairman Lord Wolfson of Sunningdale) could give him the odd tip. He has also been surrounded by a respected senior management team, with former incumbent David Jones staying on as chairman.

Yet that is not to say that his time at the helm has been glitch-free.

The biggest hiccup came this time last year, when Next stunned the market with a fall in sales. The group had been caught out by a mild start to the autumn and its range of woolly jumpers and warm coats stayed firmly on the shelves. The shares posted their steepest drop for two and a half years and the City was unforgiving; Next just did not have a reputation for making such mistakes.

The update prompted fears of a weak Christmas, but that proved to be unfounded, and the shares started 2003 on the rise. A weak trading update in March caused another sell-off but the stock has recovered since then.

What happens next will depend largely on what Mr Wolfson - now 35 - has to say this week.