13/09/2012 12:33 BST

Middle Class Shops Post Positive Results - But Why?

The rise of the middle-class retailers continued today as Next and John Lewis both posted positive half-year results.

Clothing and homeware store Next reported its first half sales were 4.8% ahead of last year, with underlying profits up 10.2% - although there was a decline in like for like sales, costing the company £18m in profit.

However, cost cutting and Next's growth in online sales added a further £27m, with more profitable space - the use of new Home stores and larger format “Shoreham-style” shops - adding another £14m.

Next's plans for the future include rolling out additional shopping choices of same day, evening, sunday and next-day-to-store, and extending its cut-off for next day delivery to 10pm.

It also plans to continue its rapid expansion of its international online business, a key driver for growth.

John Lewis meanwhile reported an impressive turn around from its disappointing results in January - gross sales of £4.4bn, up 8.7%, with profit before tax of £144.5m, up 59.8%.

Charlie Mayfield, chairman of John Lewis Partnership, said in a statement that the success was due to three elements:

  • More favourable conditions created by one-off events, such as the Diamond Jubilee, the lead up to the London 2012 Olympic and Paralympic Games and the anniversary of the VAT increase which depressed sales last year
  • Trading team improvements such as Waitrose's Brand Price Match and improved product designs in John Lewis
  • And the multi-channel sales strategy of click and collect, and other changes made in physical stores

Mayfield concluded by predicting a fragile consumer demand, with slower positive growth and lower profit increases for the year end results.

But why are Next, John Lewis and similar middle-Britain stores outperforming at a time when most of us are spending less?

john lewis

John Lewis reported profits before tax were up nearly 60%

Merchandise, Multi-channel offerings and More Middling Incomes

The reason formerly middle-class stores are performing well is potentially because of the recession," said Lauren Charnley, stockbroker at Redmayne-Bentley Stockbroker.

"We have seen Burberry issue a profit warning this week, so the increase in sales for the likes of John Lewis and Next could be from consumers who would normally have shopped in more luxury stores moving to a more middle-class shopping experience.

"The range that Next and John Lewis offer is quite vast, so consumers can often get what they require regardless of budget."

Jaana Jatyri, founder of fashion forecasting company, agreed, saying when times are tough, a large chunk of shoppers become deeply ‘small c’ conservative.

"When belts are tight, any clothes purchase feels like an investment. And paying a premium for a quality item which may last beyond the end of the season makes sense," she said.

"The middle-Britain stores are perfectly placed to capitalise on this, with their image of quality goods and reasonable prices."

However, Richard Perks, director of retail research at Mintel disagreed, arguing the number of luxury consumers trading down to middle-class brands to save some pennies was not significant enough to affect the sales.

"Largely (the success) comes down to the merchandise," he said. "Debenhams for example has got its segmentation of its products right - whereas Marks and Spencer has got it badly wrong.

"Next is firing on all cylinders - it's not just about getting the price level right, it's because it's the best at integrating its online and in store offering.

"It's been helped by M&S doing badly; it's taken most of its younger consumers...and Next is beginning to overcome one of the traditional problems of online browsing - its web offering is so much better than the 'catalogue being copied and pasted online' strategy others are sticking to."

m and s

Marks & Spencer has "got it badly wrong" according to analysts

John Lewis too had been boosted by getting to know its market better, providing a good service online (around 20% of sales are now through the website) and by vastly improving its fashion range, Perks added.

Trendstop's Jatyri said Next was leading the way for multi-channel shopping by making sure its directory ranges complement, rather than copy, what it sells in its physical stores.

"Cost-conscious shoppers can try on and touch the clothes in the high street stores - and then buy online where they can compare the prices with Next's rivals," she said.

"Next's website has also diversified its offer, stocking brands other than Next and offering credit to customers."

Online sales are boosting overseas figures too; Mike McCudden at stockbroker Interactive Investor said this was "doubtless a savvy way to mitigate the impact of our own lacklustre economy".

"Many had hoped the double whammy of the Queen's jubilee and the Olympics would deliver a shot in the arm, but the effects look to have been minimal, so perhaps building this overseas business will be critical as they fight to ride out this storm," he offered.