Having heard high street stalwarts John Lewis, Next and M&S report since Christmas, what lessons can be learnt about retailing trends?
The chief executive change announced by Marks & Spencer is the big topic of the day and, although Marc Bolland’s departure is said to have been planned since last summer, it is very hard to escape the fact that it has been announced on the back of the news about dreadful general merchandise sales at Christmas.
But M&S is the third of the big high street stalwarts to have reported on Christmas trading, after Next on Tuesday and John Lewis Partnership yesterday, so let’s put management issues aside (with the caveat that Next and John Lewis enjoy much more stable management regimes than M&S) and look at the broader issues.
One obvious lesson we have learnt from the news this week is that food retailing is a tougher place to be than non-food and, although the so-called ‘premium’ food segment is outperforming the beleaguered supermarkets in the middle ground, even within premium performance is mixed.
‘One obvious lesson we have learnt from the news this week is that food retailing is a tougher place to be than non-food’
M&S boasts that its food sales outperformed the market by 300 to 350 bps and, although that still only resulted in modest 0.4% like-for-like sales growth in the 13 weeks to December 26, they claim that over the six weeks to January 2 (the same period that Waitrose reported on yesterday), like-for-like sales were up as much as 1.9%. But Waitrose like-for-likes were down 1.4% over that period, with their online grocery sales only up 7.9%.
Waitrose is strong in the ‘quality food’ segment of the market, but it is still a supermarket business, with all the competitive pressures and food price deflation that that entails, even if it is not performing as badly as Asda and Morrisons. By contrast, M&S Food has a strong convenience store base and has the ‘let’s get something special for Christmas’ market pretty well cornered.
Moving on to non-food, the next lesson to learn is that retailers need to have a strong online presence, but even within online the pressures on performance are increasing.
In terms of logistics, Next Directory is still a very well organised and highly profitable business, but its days of heady growth in the UK seem to be over. There were some issues with range and product availability at Christmas and business was lost by not discounting pre-Christmas, despite the adverse impact of the mild weather on fashion sales. However, the formidable lead that Next Directory once enjoyed in next-day delivery options has been eroded as the competition has caught up.
‘The formidable lead that Next Directory once enjoyed in next-day delivery options has been eroded as the competition has caught up’
Over the 60 days to December 24, Next Directory sales were only up 2% and even that level of growth was boosted by the fast-developing International business.
By contrast, M&S online general merchandise sales were 21% up in the Christmas quarter (to December 26), although that must be judged to be a bit feeble, given that the comp was as soft as -6% (on the back of the problems with the new warehouse a year ago). John Lewis online sales were also up 21%, as it happens, but from a much, much higher base.
The problem for M&S is that online sales penetration in general merchandise is so low, at 15%, with the result that even the better online growth it had wasn’t enough, despite soft comps, to offset the slump in its like-for-like store general merchandise sales of well over 8% in the period. M&S’s overall general merchandise like-for-like sales were still down as much as 5.8%, which was ‘ugly’ and a big disappointment (even if the outcome for the 14 weeks to January 2 wouldn’t have been quite so bad).
At John Lewis, like-for-like store sales were also negative over the last six weeks, despite the strong pick-up in electricals sales, but the 3% decline wasn’t as bad as feared and because online is now up to a remarkable 40% of total sales, the online growth was enough to swing overall like-for-like sales growth into a very healthy 5.1% at John Lewis for the period.
Of course, top line is vanity and bottom-line is sanity, as they say, particularly at John Lewis, and the other big theme that has emerged this week has been the importance of cost and margin control in protecting profits.
‘The other big theme that has emerged this week has been the importance of cost and margin control in protecting profits’
Despite disappointing sales, Next was able to say “good control of margins, costs and stock, along with healthy clearance rates means that we expect profits for the full year to remain within our profit guidance of £810m to £845m”, even if City consensus profit forecasts drifted down 2%. And because M&S claim to have done less discounting in general merchandise than they had expected to before Christmas, they were able to say “we now expect general merchandise gross margin to be at the top end of the guided range of +200 to +250bps. And, as a result of tight control of costs as well as lower volume growth, we have improved our operating cost guidance from +4% to +2.5%”.
It is a shame that John Lewis never seems able to control operating costs as well as its peers, but at least it doesn’t have hundreds of stores to run with all their associated costs. And Next very shrewdly moved into the retail park market many years ago.
M&S had added to its food store capacity by opening a lot of Simply Food units, but its high street store portfolio has barely been touched. And if online sales are accelerating as fast as they appear to be in the non-food market, an early conundrum for new chief executive Steve Rowe will be how he can quickly start to cut general merchandise store capacity.
- Nick Bubb has been a leading retailing analyst for more than 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank