Saturday 23 November 2019

Dr John Lynch: This is a critical year as M&S struggles to regain its spark

LOU Grade, the British entertainments tycoon and film-maker, identified the essence of retail trading many years ago. Asked "What's two and two?" the unblushing impresario replied: "Are you buying or selling?"

Modern retailing is not just a matter of flogging your gear and emptying your till, nor has it ever been. However, with retailing now global, those basic miscalculations of the nature of the marketplace which might have gone unpunished in the boom, have been highlighted mercilessly by critics. This was particularly true during the punishing investment climate of the last decade or so. The best in the business have not been immune to mistakes.

For instance, a repeated lack of sure-footedness has dogged the path of one of the great heroes of 20th Century retailing, the British group Marks and Spencer, since the turn of the millennium. This has left the once much-admired group on the back foot so often that, in my view, it is reaching a critical point in its 130-year history. This may well throw up an investment opportunity that should warrant close attention.

With M&S, the stakes are very high. The group boasts sales of £10bn (€11.8bn), having 762 stores in the UK, 21 in Ireland and 410 overseas, including 244 franchises. Overall, it employs some 81,000 people.

I find it odd that I am one of a declining band of oldies who still identify M&S with the brand name St Michael, which was once the cornerstone of the company. It was introduced in 1928 and for the next 73 years it was a synonym for quality. The controlling Sieff family, (Michael Marks' descendants) exploited this quality assurance to the full. To promote the St Michael brand, the company contracted with only British manufacturers and M&S provided its own quality-control teams, which also had the aim of keeping prices low.

Following the retirement of long-term chairman Lord Sieff in 1984, M&S had a 16-year period of stability. Derek Raynor and Richard Greenbury both served eight years as chairman. However, by 2000, Mr Greenbury had been replaced. From this point, M&S had a revolving door situation with chairmen and chief executives. There was also an unsuccessful attempted takeover by Philip Green (BHS) for £12.5bn in 2004, along with years of mediocre results.

Of the confidence-eroding features of the recent M&S performance, I'd highlight the move in 2000 to eliminate the St Michael's brand, replacing it with 13 brands. This was an attempt to segment the firm's market. A measure of its lack of success was the rebranding exercise in 2011. The study favoured only the retention of the Per Una brand.

The second decision was ending the practice of using UK manufacturers, citing rising costs, and a move to importing goods from low-cost countries. This resulted in a perceived drop in quality. However, it should be noted that its rivals were already selling low-cost, imported goods.

There is a view by some analysts that the British business of M&S is a mature one, and international growth is imperative.

Its early international expansion was not successful. The company expanded into Canada in 1973 but exited in 1999. In 1975 it opened a store in Paris and later expanded into other French and Belgian cities. However, by 2001 it had retreated from continental Europe too. This was described by one chairman as an act of retail vandalism. Since then, M&S has been busy re-opening overseas branches, usually by joint venture and franchises.

Today, M&S generates international sales of £1.1bn, accounting for 15pc of profits. The company has a market capitalisation of £6bn, its share price is 384p and market analysts predict the price this year will range from a high of 425p to a low of 330p.

It should also be noted that food sales, from its food halls and convenience chain Simply Food, account for £4.7bn. Its problem lies with general merchandise sales, which have declined for six consecutive quarters. For value-conscious, younger shoppers, the Autograph range is too expensive, and Limited Addition is not cool. Per Una, while successful, doesn't appear to appeal to the younger shopper. Primark is more attractive to the younger, value-conscious customer.

This is a critical year for M&S. Will the new management team arrest the merchandise sales problem? As the UK market is mature, should M&S rationalise its UK stores and concentrate on international sales? Should the company consider joint ventures with Primark for clothing, and concentrate on food sales? The new management team faces some tough choices.

Dr John Lynch is a former chair-man of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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