A good deal of the excitement surrounding e-commerce play The Hut Group, aka THG (THG), is linked to its Ingenuity logistics and technology platform.

This is an end-to-end solution offered to third parties in the same way Ocado’s (OCDO) online groceries platform is sold to global supermarkets.

But hiding within established retailer Next (NXT) is a little-known platform business of its own which could have significant potential.

WHAT IS INGENUITY?

To understand the opportunities for Next it is first worth considering THG’s experience. Ingenuity is the white-labelling of THG’s technology, translation, logistics and marketing capabilities to brand owners to power their direct to consumer websites.

The ready-made online sales platform is a full service covering everything from designing a website to taking payments and delivering goods.

Regarded as THG’s future growth engine, Ingenuity offers investors a way to play the need for brand owners to accelerate their adoption of direct to consumer strategies.

Clients signed up to date range from Nestle and Coca-Cola to Toblerone (Mondelez), Homebase, GSK vitamins and PZ Cussons Beauty, as well as Hotel Chocolat (HTOC:AIM) and Revolution Beauty (REVB:AIM), while a collaboration deal with Japanese tech investor Softbank has boosted the new business pipeline.

In the first half of 2021, Ingenuity’s commerce revenues grew by 165.5% to £18.3 million and consensus calls for a full year haul of £50 million.

Clouding the picture however is THG’s share price plunge since founder, chairman and CEO Matthew Moulding outlined plans (16 Sep) to break up THG just a year after its much-hyped initial public offering, jolting investors into reappraising the investment case.

INGENUITY’S GOT ISSUES

In a note ahead of an Ingenuity-focused capital markets session on 12 October, Numis explained that Nestle’s use of THG’s platform was an important stamp of approval, although the broker pointed out Ingenuity has ‘reasonable reliance’ on a number of contracts clinched with the Swiss foods giant.

Transactional websites are live and operational for Nestle’s Optifast, Minami and Klean Athlete brands, yet neither the Quality Street nor Purina direct to consumer stores agreed to in 2020 have been launched under the Ingenuity platform so far.

The broker also cautioned that the majority of THG’s contracts signed to date are with beauty and fast moving consumer goods brands. ‘For many, we aren’t convinced there is a scalable customer proposition,’ warned Numis.

‘A minority of customers may start buying their Toblerone bars and Coca-Cola cans from dedicated websites, but we don’t expect grocery shopping missions to disaggregate to any meaningful extent to brand websites.

‘If we are wrong, and some of these propositions do scale (and for some of the beauty brands it is easier to envisage this happening), then will THG retain those contracts?’

Numis also flagged the risk that brands could look to take elements of content creation and marketing in-house and questioned whether THG can invest sufficiently to be ‘the best-in-class provider of logistics and technology for the range of products and geographies they are looking to offer their services’.

IS NEXT THE LOWER RISK OPTION?

Given the uncertainty around the shape of THG going forwards, investors should familiarise themselves with Next’s Ingenuity-like ‘Total Platform’ operation.

Over the past decade, Next has successfully transitioned from a store-led business model to an online-led one, with physical shops accounting for 67% of sales in full year 2010, falling to 42% in 2020. Liberum Capital sees that reducing to 29% in the year to January 2022.

As succinctly explained on the retailer’s website, the Next Platform, which came to the fore during Covid lockdowns, ‘draws on all our assets – stores, warehouses, delivery networks, systems, marketing, credit facilities – to create a powerful aggregation business selling hundreds of third-party clothing and home brands alongside our own Next merchandise.’

The online shopping shift is enabling Next to benefit from sales commission on third-party brands and sales into overseas markets without the associated retail overheads.

WHAT IS TOTAL PLATFORM?

Now, Next is leveraging the expertise, infrastructure and software it has developed for its own online business to provide a third-party e-commerce outsourcing service named Total Platform, launched in May 2020 after a pilot exercise.

As Next explained in its first half results (29 Sep): ‘Total Platform takes us beyond the confines of our own website, offering client brands the benefits of our technology, warehousing, logistics and other infrastructure, for the benefit of their own online operation.’

Total Platform aims to ‘liberate brands from capital hungry, complex and time consuming activities, in which they have little competitive advantage; allowing clients to focus on the areas where they add the most value – the design, buying and marketing of their brand’.

This year, Next expects to fulfil online sales of around £50 million through Total Platform, which should generate £3 million of profit at an operating margin of 6%. In addition, equity stakes in four of its clients should make a profit contribution of around £7 million.

Total Platform’s six clients to date are Childsplay Clothing, Laura Ashley, Victoria’s Secret, Reiss, start-up luxury menswear brand Aubin and American clothing company Gap. Four are successfully trading on the platform with the others launching over the next 12 months.

‘In the process of developing this new business, we have come to believe that the potential to create value for clients is so great, that it is worth the group investing in new clients as and when they sign up for the service,’ continued Next, which has acquired equity stakes in Victoria’s Secret UK and Eire (51%), Aubin (33%), Reiss (25%) and Gap UK and Eire (51%).

The delivery of the Reiss Platform in Spring 2022 will be Next’s most ambitious and comprehensive to date, taking Total Platform’s capabilities to another level.

THE FUND MANAGERS’ VIEW

Next is the largest holding in the TB Chawton Global Equity Income Fund (BJ1GXX3) managed by Michael Crawford, who says Total Platform ‘follows the example of Jeff Bezos at Amazon who has successfully built new revenue streams from assets built for the core business; in their case using their massive computing capacity to provide third party “cloud” computing services.

‘The strategy increases utilisation rates and therefore overall group return on capital.’

Crawford adds that Next CEO Simon Wolfson ‘stated at the start that he does not know whether, when we look back in five years’ time, this will be seen as an important development.

‘Currently there seems to be good momentum and no shortage of demand. In fact, the main constraint to growth is resource bottlenecks in areas such as software development and warehouse capacity.’

The Chawton fund manager stresses that under Wolfson, Next has ‘always had a focus on profitability and high returns on capital unlike many in new technology areas and so will want an adequate return’.

Wolfson is ‘a meticulous planner and so would not be allocating more capital to the project if he does not foresee this. It is still early days, but progress made so far suggests this could develop into a
material business for the group’.

Elsewhere, William Meadon, one of the managers of investment trust JPMorgan Claverhouse (JCH), another investor in Next, comments: ‘To survive and thrive as a retailer it is essential to have access to the best data and technology.

‘Next is an example of a company which, in our opinion, continues to stand apart from its competitors, both in terms of strong leadership and its successful online presence.’

Meadon believes the Total Platform has the capacity to be ‘a key factor that will add to Next’s attractive growth prospects in the long-term’.

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