How "Marks & Sparks" Lost its Spark

November 11, 2019

Marks & Spencer’s performance has suffered recently, culminating in investors losing faith and the high street retailer being relegated from the FTSE 100 Index in September. Its profits dropped in the first half of its financial year, and the value of its shares have dropped by a third over the past year, flatlining at 182 pence this month. The retailer’s decline stems from deep-rooted issues in its clothing division and in an attempt to revitalise the business, M&S is now undergoing a major transformation plan. Will this attempted turnaround be successful in fixing a broken business model or is it simply an exercise in slowing the company’s decline?

 

The main issue, and the largest contributing factor to the fall in profits, is its clothing division, with like-for-like clothing sales falling 5.5% during the six months up to 30 September and leading to the departure of the division’s director, Jill McDonald. Chief executive Steve Rowe described the M&S’s long-suffering clothing division as the “thorn in our shoe.”  When Rowe took over the top role in 2016, he made fixing the clothing division his top priority, but mistakenly delegated the responsibility to McDonald. M&S has now admitted that the department is now 18 months behind schedule, covering virtually her entire tenure. One of the many issues in the department was that the group consistently failed to address the decade-long complaint by investors and customers to revamp its clothing lines, especially within womenswear, as well as its lack of appeal for the younger generations. In addition to its clothes being described as too “old-fashioned” and “conservative”, the business itself has been described as “historically too slow to market” and having “too many slow-moving lines.” In other words, the group was unable to move products around the country fast enough, in part due to the 135-year-old company’s slow and complicated logistics. M&S now faces competition from fashion giants such as Primark and Asos, which are slowly eroding M&S’s market share. Opinions differ on M&S’s main problem: Rowe blames the 5.5% decline in clothing sales on buying errors that result in popular sizes being sold out too quickly. Indeed, McDonald made a serious buying mistake ahead of a jeans promotion that left rails empty for a month. However, retail expert Richard Hyman believes it goes deeper and that the brand has lost touch with its customers: “M&S was about quality at an unbeatable price, not fashion for fashion’s sake. But over time, they have sacrificed those values to try and cut costs and become too corporate.” This has led M&S into a downward spiral: as less is invested in its product, quality falls; “your sales keep falling so you cut costs further. It is very hard to get out of,” he says.

 

Nevertheless, M&S is in the process of a massive restructuring aimed at modernising the company. Overseen by Archie Norman – a former management consultant with a reputation for corporate turnarounds – and led by Steve Rowe, the transformation plan involves more than 100 large stores closing or relocating, a strive to move a third of its clothing sales online, extensive changes to senior management, and crucially, changes to its clothing department. M&S has said it was going to make sure it had enough products in all sizes, and be quicker to restock popular and fast-selling items in store. In addition, it will cut the size of its range and instead focus on buying the potentially more popular items. In an attempt to attract younger customers, they are changing the fit of their clothing. For example, in menswear shoppers have complained that the clothes were “too old”, and so the group has started to stock more slim and skinny-fit trousers.

 

Aiming to branch more into online sales, M&S forged a joint venture with Ocado this year, buying 50% of its shares for £750million. Ocado will start delivering M&S products from September 2020, after its contract with Waitrose expires. Rowe was optimistic about the agreement, claiming the deal “was the only way we could have gone online within an immediately scalable, profitable and sustainable business.” Yet Hyman has said “I can’t see the central logic of the Ocado deal. Online [food retailing] in the UK is 7% of the market, suggesting people are not clamouring to buy food online.” Looking at the change in share prices for each company after the announcement was made, it appears Ocado benefited more from the deal than M&S. Ocado’s share price rose 4%, while M&S’s shares fell by 8%. One can also question whether the two businesses will fit well together: M&S is a relatively upmarket convenience store where the average basket price is only £13. Ocado in contrast, is a full-service grocery store where most customers are doing their weekly shop, not topping up. There is the risk that M&S will not be able to retain the current Ocado customer base, and that shoppers will defect to Waitrose when the current agreement with Ocado ends.

 

The transformation programme has yielded positive effects in M&S food halls nonetheless. It has returned to growth for the first time in over two years, with like-for-like sales up 0.9% in the six months to 28 September. This came as a result of price-cuts and new, simplified ranges. M&S has also said that it was seeing a positive response to its current winter season clothing, which it says is a “better value product”. Rowe has said the firm was starting to see the benefits of the transformation plan. However, Neil Wilson, chief analyst at markets.com, said that overall change has been far too slow, and according to Bloomberg consensus forecasts, it is predicted to grow slowly in the years ahead. Online sales growth was less than the group predicted, at just 0.2%, which Rowe described as “disappointing.” Nevertheless, M&S shares rose almost 7% in early London trading to touch their highest level since October 22. Barclays analyst James Anstead described the results as a “reasonable outcome” given the negative noises from the company about clothing in particular. He added that the progress on cutting costs had blunted the impact of weak clothing sales. 

 

Despite this bounce, and the fact that it forecast some improvement in trading in the second half of the year, market conditions remain challenging. Dropping out of the FTSE 100 marks the first time the retailer has not been a member since the index was launched in 1984. The restructuring programme has been slow, and investors have also endured a significant cut in the dividend in order to generate £600million for M&S’s joint venture with Ocado. The contrasting performance of the food and clothing divisions has led to speculation that the group might break up, however Norman has pointed out that most of the profit comes from combined stores. Managers are also made to feel that there is no value in dividing the business, since both sectors are lowly rated and out of favour with investors. A former executive has said that it needs “another Per Una” movement, referring to the clothing brand launched in 2001 by famed designer George Davies. “In all these years Per Una has been the only thing that really moved performance at M&S,” he said. Chief executive of consultancy firm Retail Economics, Richard Lim, describes M&S as “confused” and as having a “broken business model”. The group needs to speed up its transformation if it is to stay afloat in a market that is undergoing unprecedented evolution and disruption.

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