High street retail giant Next has issued a caution about potential price increases due to the ongoing conflict in the Middle East. CEO Simon Wolfson mentioned that the company is preparing for a scenario where the war persists for three months, and if the situation escalates between the US, Israel, and Iran, Next may need to raise prices to cover increased costs.
Next disclosed that it has already incurred a £15 million financial impact from the conflict. This expense was allocated for additional expenses related to fuel and air freight because of disruptions in shipping and rising oil prices. The company stated that they have managed to offset this impact through savings in other areas of the business.
The Middle East conflict, which contributes around 6% of Next’s annual sales, is hindering growth in those regions and is expected to affect costs, selling prices, and consumer demand across the company.
CEO Lord Wolfson, also a Tory peer, explained that the company has accounted for £15 million in extra costs arising from the conflict, primarily in fuel and air freight, assuming the disruption lasts for three months. While these costs have been balanced by savings elsewhere, any prolonged impact might lead to passing on costs to consumers through higher pricing.
Next highlighted that sales in its international division are already feeling the effects of the Iran war, prompting a downward adjustment in its forecast for international turnover to 14.3% for the current fiscal year. However, the company raised its UK sales guidance from 1.6% to 2.2% due to a strong sales performance in the initial eight weeks of the financial year.
The company expressed concerns that the Iran conflict could disrupt consumer demand and elevate costs. Lord Wolfson emphasized the uncertainty regarding the medium-term effects on supply chains, freight rates, factory prices, and consumer behavior, contingent on the duration and impact of the conflict on global energy infrastructure.
Next, being a significant player in the retail sector, often serves as an indicator for other high street retailers. Its warnings of potential price hikes could indicate a trend for other chains to consider similar actions if the conflict persists.
Economists have predicted that developments in the Middle East may contribute to an increase in UK inflation due to surging oil and wholesale gas prices. The Bank of England estimates a potential rise in inflation from 3% to 3.5%, which could delay any interest rate cuts and potentially lead to higher borrowing costs.
Despite the risk of rising expenses, Next reported better-than-expected annual profits, showing a 14.5% increase to £1.16 billion. The company has raised its profit forecast for the upcoming year to £1.21 billion, assuming a resolution to the Iran conflict before summer.
Market analysts have noted that prolonged conflicts could impact sales for Next, although the company’s overall progress remains positive. Next’s shares have increased by 23% over the past year, outperforming the wider FTSE 100 index.
Market experts emphasize that rising fuel costs are likely to extend beyond pump prices, potentially leading to price hikes if the Iran conflict continues. They anticipate that upcoming inflation data will provide more insights into the retail sector’s challenges amid ongoing geopolitical issues.
