Marks & Spencer’s food offer has gone from hero to zero. Chief executive Sir Stuart Rose is determined to regain the initiative, but faces big problems. George MacDonald investigates

On Monday, Marks & Spencer made a dramatic break with tradition when big-name brands appeared on its food shelves alongside its proprietary lines.

Coca-Cola, Heinz and Weetabix are among about 350 lines that will be tried out in stores in Teesside and Tyneside, along with M&S chief executive Sir Stuart Rose’s personal favourite – Tabasco.

Opinion is divided on the trial, but nobody would disagree that Marks & Spencer’s food offer needs to be spiced up. Just how poorly its eats have been performing was thrown into stark relief last week as the retailer rushed out a first-quarter update revealing a collapse in food sales.

While every other food retailer has been able to report like-for-like growth of more than 3 per cent recently, M&S suffered a 4.5 per cent slide. Marks & Spencer food supremo Steven Esom, recruited a year ago from Waitrose and once seen as a potential successor to Rose, paid the price and was shown the door. His successor, John Dixon, has 13 years’ experience in M&S’s food arm and will “increase the pace of change”, said Rose, to improve operations and trading.

The fear is, however, that M&S’s food problems may run deep. “I think they’ve got some structural issues,” says one grocery chief.

PRICE AND QUALITY
Marks & Spencer may be renowned for top-quality food, but it is also has a reputation for high prices. The two have become out of kilter, some observers argue.

Hard discounters have been notching up record growth as shoppers increasingly seek value – sales at Aldi and Lidl increased 21 per cent and 13 per cent respectively in the 12 weeks to June 15 – but competitors closer to M&S, such as Sainsbury’s and Waitrose, have also managed to maintain momentum.

“I don’t think M&S’s quality represents the price premium it has,” says one supermarket executive.

Last week, Rose said that food retailers are engaged in the biggest price war in 20 years, but insisted that M&S would not chase prices down for the sake of it. “We only offer the best quality and that will be our continuing stance. We have to look at the whole offer – the right catalogue, the right innovations, the right promotions – all at the right time,” he said.

However, some industry observers argue that M&S’s reliance on own-brand would make it problematic to cut prices even if Rose wanted to, because the retailer would have to take the bulk of the margin hit rather than share it with suppliers to the extent that other grocers can.

Through its Project Genesis programme, M&S has tightened its terms with food suppliers, but that has also brought some difficulties. For instance, in May, Northern Foods mothballed its Fenland Foods ready meals factory, which did the bulk of its business with Marks. Northern said the decision was “in accordance with our strategy to continue with businesses only where terms generate an adequate return”. Northern did not specifically blame M&S for the closure – and there were other reasons behind it – but the implication drawn by some on the food sector was that M&S was demanding tough terms from its suppliers.

If suppliers cannot generate sufficient return, M&S’s detractors say, what incentive is there to work on the innovation and quality that M&S needs?

CHANGING SHOPPING HABITS
Grocery sources believe ready meals and sandwiches may account for as much as 40 per cent of Marks’ food sales, although M&S does not split out figures.

But how the nation eats has been changing. Other grocers have noted and promoted a shift towards the preparation of meals at home rather than reliance on prepared food. This trend has also been driven by the high-profile efforts of celebrity chefs such as Jamie Oliver, Gordon Ramsay and Hugh Fearnley-Whittingstall, who encourage cooking and the use of fresh ingredients. M&S has acted to claim a share of demand with the launch of its own 300-strong ingredients range, but critics say it needs to move further and faster to anticipate and reflect change.

At the same time, the quality and variety of the big four grocers’ ready meals – especially at the premium end – has probably eroded the prestige of Marks & Spencer’s offer and undermined shoppers’ willingness to put up with higher prices.

Similarly, high-footfall locations now typically have a plethora of good sandwich shops, whether independents or multiples such as Pret A Manger. The M&S sarnie, once a lunch-box staple, faces more competition than ever, emphasising the need for constant innovation in lunchtime food.

Marks is also out of step with its grocery peers because it has no online food business. Although company insiders have dropped hints that an online food operation is being investigated, Rose said last week that it is “not a priority”. “It’s hard to make it profitable,” he argued.

The trial of branded products may eventually lead to an e-tail opportunity, however. JP Morgan analyst Richard Chamberlain says the brand experiment is “a step in the right direction in broadening M&S’s range to increase basket size – which is why M&S can’t offer a comprehensive online shop.”

GROWTH OF FOOD SPACE
This financial year, Marks & Spencer will increase square footage by 5.5 per cent. Space given over to general merchandise will rise 4.5 per cent, but the amount devoted to food will increase 7.5 per cent.

The continued expansion of food space comes on top of the 8.7 per cent delivered last year, much of it from the opening of Simply Food shops. Lauded for its convenience and quality, Simply Food is a winning formula, but success has come at a cost. M&S always said it would tolerate a certain amount of cannibalisation by Simply Food from full-line stores. The acceptable limit was 10 per cent, but it has reached about 12 per cent. There has been some speculation that the impact of Simply Food has been worse than expected – a notion flatly rejected by Rose last week.

Many Simply Food stores have not been open long enough to feature in like-for-like comparisons, but concerns remain. Panmure Gordon analyst Philip Dorgan says: “We find the financial effects of the Simply Food expansion bewildering. If Tesco had said two years ago, as M&S did, that it was prepared to accept negative like-for-like sales because it was expanding a new format rapidly, the City would have been horrified. M&S investors were too obsessed with the recovery in clothing to care.”

ECONOMIES OF SCALE
Marks might be famous for its food but, set against the big grocers, it remains a small fish. Last year, M&S generated food sales of£4.25 billion – less than a third of Morrisons’£13 billion and not much more than a fifth of Sainsbury’s£19.29 billion.

Despite its reputation, M&S lacks the scale of the giant supermarkets. While this has allowed it to develop a distinct and premium offer, it has also limited M&S’s options as a grocer. That is why, although it came to nought, the idea of Marks & Sainsbury’s gained such traction as the supermarket group was thrown into play last year.

Similarly, M&S’s trial of branded products is designed to enable it to compete more effectively. The project has been launched in an attempt to make food shopping more convenient for M&S customers, by saving them another journey to a separate grocery store to pick up well-known brands. What M&S may also have been acting to address, of course, is that shoppers who were going to other grocers for their main shop were skipping out the extra journey to M&S for a few special items.

While M&S will never be the biggest, if it can ensure it remains one of the best it should survive among the supermarkets. Planet Retail analyst Bryan Roberts says: “Scale’s not so much a problem while they’re 100 per cent private label, because they have very significant scale with their suppliers. It could be more of an issue with brands, because M&S will be small [compared with the biggest grocers].”


ROSE’S VISION
Marks & Spencer’s stated ambition is to be “the destination shop for quality food” and to bump up its market share from 4.3 per cent at the last year-end to 5 per cent. It aims achieve its objective by offering “outstanding quality”, “better value” on everyday staples and “continuing to lead on innovation”. From now on, the emphasis will be on doing all that faster and capitalising more fully on M&S’s acknowledged strengths, as well as addressing basic problems such as availability.

Rose admits that the rising cost of living has driven some food spend away from his stores and that 40 per cent of the problems experienced at the food division are of the retailer’s own making. He believes that John Dixon’s lengthy experience at M&S’s food division makes him the right man to accelerate momentum because he has a deep understanding of both M&S shoppers and the heritage of innovation at the business.

In the short term, there are likely to be more promotions such as the dine in for two for£10 offer, which Rose says appeal to M&S shoppers. “We were mobbed when we put that on,” he said last week.

Despite the profit warning, Rose remains convinced that M&S is “a strong business in a weak market”. Many would argue that has not been the case in food of late. But, with a new man in charge, Rose is convinced that M&S can hold on to and expand its place at the table.