Unveiling the Secrets Behind Next's Marketing Budgets: The Power of the Hurdle Rate

Next’s CEO Lord Wolfson has revealed that when determining the marketing budget, the company does not simply set a specific amount to spend or set targets for sales generated from marketing. Instead, they employ a "hurdle rate" for marketing expenditure. Wolfson explained that Next strives to achieve a profit of £1.50 for every pound invested in marketing during the first year. If this target is not met, the budget is adjusted accordingly.

The productivity of our marketing efforts completely determines the size of our marketing budget," he stated, noting that the retailer is still uncertain about its marketing expenses for the remaining year in the UK.

Nonetheless, Next plans to raise its marketing budget for international regions by 55% in the second half of 2023. Wolfson mentioned that the company had been under-investing in several territories, unaware of their potential.

The marketing function and overseas efforts have transformed previously unprofitable marketing into highly lucrative marketing. Next is pleased with the returns on its marketing investment for the first half of the year. In the six months leading up to July 2023, Next saw a 3.2% increase in full-price sales, a 5.4% increase in total group sales, and a 4.8% increase in pre-tax profit, amounting to £420m.

The retailer exceeded sales expectations and incurred lower costs during the period, which can be attributed in part to the favorable weather in May and June when customers were purchasing summer clothing, according to the retailer.

Over the past year, Next has undertaken a series of acquisitions. In November, it acquired the failed brand Joules, followed by the purchase of the Made.com brand and intellectual property in December. In March of this year, Next acquired the Cath Kidston brand. Additionally, at the beginning of this month, Next acquired an additional 21% stake in clothing retailer Reiss, increasing its ownership stake in the company to 72%.

Next will not become a monotonous corporate entity despite its recent acquisitions, according to Wolfson. The company's objective is to establish a network of "entrepreneurial" brands instead. Wolfson stated that their focus is on making strategic investments and adding value. If these investment opportunities arise, Next may develop into a conglomerate. However, if such opportunities do not present themselves, the company will not pursue this path.