Sunday 15 December 2019

Magic and Sparkle loses its sheen with sales decline

M&S says it's committed to Ireland, but how has it fared in a difficult consumer environment, asks John Mulligan

NEW LEADING LADIES: From left, Lulu Kennedy, Rachel Khoo, Alex Wek, Rita Ora,
Emma Thompson, Annie Lennox and Doreen Lawrence, all M&S models
NEW LEADING LADIES: From left, Lulu Kennedy, Rachel Khoo, Alex Wek, Rita Ora, Emma Thompson, Annie Lennox and Doreen Lawrence, all M&S models

Having suffered a 5pc decline in sales at its Irish outlets in the last financial year, has Marks & Spencer lost its magic and sparkle here?

Operating at the top end of the market, the British chain is arguably a bigger potential victim of the consumer flight to value than other operators such as Tesco or Dunnes.

German retailers Aldi and Lidl have stolen a march on rivals, securing a combined 16.3pc of Ireland's multi-billion euro grocery market as consumers struggle to eke out pay packets savaged by tax hikes.

But while the British retailer has had a tough time in Ireland over the past few years, its sales declines have been in line with those of rivals amid the economic meltdown.

Tesco - Ireland's largest grocery retailer - said that its like-for-like sales here fell 5.5pc last year.

That's bad, and at M&S things have been little better. And industry insiders suggest that Dunnes - which doesn't reveal sales figures - will have been hit just as hard.

M&S operating profits at its international-owned stores outside the UK fell 38.1pc to £8.5m (€10.7m) in its last financial year. It said that decline was due to start-up costs for new outlets in western Europe and India, and also the continued macro-economic pressure in Ireland.

M&S closed four of its Irish stores last year, shouldering a £24.1m (€30.3m) restructuring and redundancy charge. It currently operates 17 outlets here.

Aside from the sales drop, it also had to manage a dispute with trade union Mandate. That was resolved last month when M&S agreed better pay terms than had been recommended by the Labour Court in March.

The M&S sales decline in Ireland can't be directly compared with other operators such as Tesco because of the nature of its product mix - clothing, as well as food, is an important element of its offer. Yet it does give a helpful indication of how M&S has fared alongside competitors.

M&S chief executive Marc Bolland has previously voiced his commitment to the chain's Irish arm.

"We are all determined to stay in Ireland," he said. "We've got good store locations, and therefore, the plan is going forward. We're not going to give any outlook what year we will return to a positive number because it is very much dependent on the environment."

Mr Bolland has bigger things to worry about right now. Last week, he faced a grilling from shareholders at the company's AGM as they questioned why his turnaround plan for the group was taking so long to bear fruit.

John Stevenson, a senior analyst with Peel Hunt in London, said there's no reason why M&S wouldn't remain committed to its Irish operations at the moment, despite the still challenging macro-economic backdrop for retailers.

"M&S wants to be in Ireland," he said, pointing out that the retailer is prepared to overlook the medium-term economic impact for the long-term opportunity.

Mr Stevenson also said that M&S learned a tough lesson when over a decade ago it decided to exit the French market in what was a knee-jerk reaction, surrendering strong physical trading locations as it fled. When it eventually returned, it had to start from scratch again.

That strengthens the resolve to see through transitory tough times.

Clive Black, head of equity research at Shore Capital, agreed that M&S has a future in Ireland.

"M&S should most definitely bother with Ireland to my mind. It remains a key component of their European business and Ireland is a market, where despite economic challenges, the M&S brand is very well known and, with the right offer, should be profitable," he said. "Despite scrubbing out the possibility of future growth with economic recovery, the cost of exiting Ireland would also be reasonably prohibitive to our minds."

But he added that while M&S has a loyal customer base for core items such as smalls, underwear and lingerie, it needs to do more."There is a need for stronger ranges in ladies', men's and children's wear to drive growth. With the right ranges and an effective online capability, M&S should return to growth in Ireland."

Retail expert James Burke also believes that M&S has a position worth defending in the Irish market, with the demise of the Superquinn brand potentially offering a greater fan base for the UK retailer amongst well-heeled consumers.

At the same time, he wonders if M&S needs to improve its food offer to distinguish itself further from competitors. While its ready meals were a game changer 20 or 30 years ago, rivals now have strong offerings.

"M&S set the bar for the industry, but the gap between them and others is not as wide as it once was," he said. "The next level of innovation is harder to find."

"But there's a perceived gap at the top end of the market where Superquinn had been," he added.

Mr Burke thinks that M&S could help to reinvent its offering in Ireland by introducing or expanding concepts such a specialised deli counter that's more than just a ham or cheese-slicing service, for instance.

"If I was in the M&S boardroom in the UK or Ireland I'd be talking about the need to embrace the craft area of food retailing more."

He also thinks that in M&S may need to educate younger consumers in Ireland a bit more about its offering.

"I think that for the average customer who visits M&S on an occasional basis, there's a mismatch in terms of the offer and how the consumer actually perceives it."

He believes that some consumers may not realise that M&S may stock the types of items they're looking for.

M&S has a strong following among mature and senior consumers, but persuading different generation to shop there is essential for the chain's longevity.

That's especially true in relation to its clothing. New ranges have been well-received by critics, but failed to translate into the kind of sales boost that might have been expected.

John Stevenson said that the clothes may sell well at locations such as Marble Arch in London, but that hasn't filtered through to the regions, where retailers such as Next continue to be successful.

"A fundamental issue for M&S is the clothing offer," he said. "Next are resolutely focused on their customers. It's not high fashion, but decent basics and M&S have failed to do that."

M&S has been running adverts with celebrities such as singer Rita Ora and model Rosie Huntington-Whitley to lure hip young shoppers. But it still has some way to go before it slips off its reputation as a handy place to buy granddad his Christmas present. Last year, M&S sold 1.3m pairs of slippers in the UK. The chain reckons that one-in-five men in Britain has been watching World Cup matches while wearing its comfortable home footwear.

It's the kind of statistic that only serves to underscore just how much work needs to be done if M&S wants to appeal to a new generation of shoppers.

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