The Board has a policy of continuous identification and review of key business risks and oversees the development of processes to ensure that these risks are managed appropriately. Executive directors and operational management are delegated with the task of implementing these processes and reporting to the Board on their outcomes. The key risks identified by the Board are summarised below:
Business strategy development & implementation
If the Board adopts the wrong business strategy or does not implement its strategies effectively, the business may suffer. The Board needs to understand and properly manage strategic risk in order to deliver long term growth for the benefit of NEXT's stakeholders. The Board reviews business strategy on a regular basis to determine how sales and profit budgets can be achieved or bettered and business operations made more efficient. This process involves the setting of annual budgets and longer term financial objectives to identify ways in which to increase shareholder value. Critical to these processes are the consideration of wider economic and industry specific trends that affect the Group's businesses, the competitive position of its product offer and the financial structure of the Group.
Liquidity & credit risk
The Group has adequate medium and long term financing in place to support its business operations. The Board continues to assess its exposure to counterparty risk in the light of the prevailing economic climate both in the UK and globally and its treasury policy is amended as necessary to manage counterparties with which deposits, investments and other transactions may be made.
NEXT is exposed to credit risk in respect of its Directory and other business customers. Rigorous procedures are in place with regard to the Group's credit customers and these are regularly reviewed and updated as required. Key suppliers whose services are essential to the successful running of the business also face credit risk. These include the production of the Directory, provision of IT systems and certain systems and suppliers to the Group's warehouse and distribution network. The Group's risk assessment procedures for key suppliers identify alternatives and develop contingency plans in the event any of these suppliers fail.
The success of NEXT relies on the continued service of its senior management and technical personnel and on its ability to continue to attract, motivate and retain highly qualified employees. The retail sector is very competitive and NEXT staff are frequently targeted by other companies. The Remuneration Committee identifies senior personnel, reviews remuneration at least annually and formulates packages to retain and motivate these employees. In addition, the Board considers the development of senior managers to ensure adequate career development opportunities for key personnel, with orderly succession and promotion to important management positions.
Product design & selection
The success of NEXT depends on providing exciting, beautifully designed, excellent quality clothing and homeware. Success also depends upon its ability to anticipate and respond to changing consumer preferences and trends. Many of NEXT's products represent discretionary purchases and demand for these products can decline in periods of negative consumer confidence. As a consequence, NEXT may be faced with surplus stocks that cannot be sold at full price and have to be disposed of at a loss. Executive directors and senior management continually review the design and selection of NEXT's product ranges. This ensures, so far as possible, that there is a well-balanced product mix that is good value for money, and available in sufficient quantities and at the right time to meet customer demand.
Key suppliers & supply chain management
NEXT relies on its supplier base to deliver products on time and to the quality standards it specifies. It continually seeks ways to develop its supplier base so as to reduce over-reliance on individual suppliers of product and services, and to improve the competitiveness of its product offer. If input costs rise, for example raw materials or labour costs, NEXT will work with existing suppliers to mitigate the inflationary impact. New sources of supply will be developed in conjunction with NEXT Sourcing, external agents and direct suppliers.
Non-compliance by suppliers with the NEXT Code of Practice may increase reputational risk. NEXT carries out regular inspections of its suppliers' operations to ensure compliance with the standards set out in this code, covering production methods, employee working conditions, quality control and inspection processes. NEXT also monitors and reviews the financial, political and geographical aspects of its supplier base to identify any factors that may affect the continuity or quality of supply of its products.
Retail store network
Growth of NEXT Retail is dependent upon developing the trading space within its store network and customers spending more. NEXT will continue to invest in new stores where its financial criteria are met and refurbish its existing portfolio when appropriate. New store appraisals estimate the effects of sales deflection from existing stores, although the performance of new stores and sales deflection may differ from estimates.
Successful development of new stores is dependent upon a number of factors including the identification of suitable properties, obtaining planning permissions and the negotiation of acceptable lease terms. Notwithstanding there have been a number of retail failures in recent years, prime sites will generally remain in demand, and increased competition can result in higher future rents.
Directory customer base
Growth of the NEXT Directory depends upon the recruitment and retention of customers and increasing the average spend per customer. NEXT will continue to recruit new credit customers where they satisfy its credit score requirements. However, there can be no assurance that new customers will result in higher sales per customer or lower incidence of bad debts, compared with the existing customer base.
In addition, NEXT requires its internet website to attract new customers and encourage existing customers to continue ordering from the Directory. Management continually review the configuration, content and functionality of the website to ensure it provides a positive customer shopping experience. Service levels and response times are monitored to ensure that the website is both resilient and secure at all times.
Warehousing & distribution
NEXT regularly reviews the warehousing and distribution operations that support the business. Risks include business interruption due to physical damage, access restrictions, breakdowns, capacity shortages, inefficient processes and delivery service failures. Planning processes are in place to ensure there is sufficient warehouse handling capacity for expected future business volumes over the short and longer terms. In addition, service levels, warehouse handling and delivery costs are monitored continuously to ensure goods are delivered to Retail stores, Directory customers and third party clients in a timely and cost-efficient manner.
IT systems & business continuity
NEXT is dependent upon the continued availability and integrity of its IT systems, which must record and process a substantial volume of data and conduct inventory management accurately and quickly. The Group expects that its systems will require continuous enhancement and investment to prevent obsolescence and maintain responsiveness. Back up facilities and business continuity plans are in place and are tested regularly to ensure that business interruptions are minimised and data is protected from corruption or unauthorised access or use.
Call centre capacity & service levels
NEXT is dependent on the efficient operation of its own and third party call centres to receive and respond to customer orders and enquiries. Insufficient manpower, supplier failures and interruption in the availability of telephony systems to meet customer service requirements are the principal risks. The Group continuously monitors call centre operations that support the business to ensure that there is sufficient capacity to handle call volumes. Capacity forecasting is used to manage peak demands and growth in business volumes, and customer satisfaction is measured on a regular basis. Business continuity plans minimise the risk of business interruption.
Treasury & financial risk management
The main financial risks are the availability of funds to meet business needs, default by counterparties to financial transactions (see Liquidity & credit risk), and fluctuations in interest and foreign exchange rates. In addition, business expansion and share buybacks may necessitate the raising of additional finance, which can in turn increase interest costs and give rise to fluctuations in profit. Higher debt could also increase the proportion of cash flow required to service debt and potentially increase exposure to interest rate fluctuations. NEXT operates a centralised treasury function which is responsible for managing its liquidity, interest and foreign currency risks. The Group's treasury policy allows the use of derivative instruments provided they are not entered into for speculative purposes. Further details of the Group's treasury operations are given in Notes 27 to 30 of the financial statements.
In addition, NEXT has to fund its defined benefit pension scheme and ensure that sufficient contributions are made to meet outstanding liabilities as they fall due. If NEXT fails to provide sufficient and timely funding, action may be taken by the pension scheme trustees, or the Pensions Regulator, which could result in an acceleration and/or an increase in overall contributions towards any deficit. Management meets regularly with the trustees to assess fund performance, as well as to agree future contribution levels and any necessary changes to members' future benefits.