M&S remains a great retailing brand and it has survived a lot of mis-management over the last 20 years.
M&S remains a great retailing brand and it has survived a lot of mis-management over the last 20 years. That’s is more than can be said of such luminaries as Sears, Storehouse, Great Universal Stores and Woolworths (older readers may remember those now defunct groups…).
But it is symptomatic of the slow decline in M&S’s relative status within the sector that its market capitalisation of around £5.5bn has gone nowhere over the last 20 years and that Next will soon overtake it in size terms (just as Tesco, Kingfisher, Sainsbury and Morrison’s have done).
With the final results today, there has been a lot of attention on how far M&S has fallen short of the long-term sales targets set out by the new chief executive Marc Bolland in his strategic plan back in November 2010. But a slide from a similar M&S presentation, some 12 months before that, also sticks in my mind. At the infamous M&S Strategy Day in October 2009, where the senior directors effectively had to pitch for the chief executive job, the late lamented Stuart Rose pointed out how M&S’s very cyclical profits record contrasted with the nice steady profits growth of a large unnamed competitor (which was obviously Tesco) and he said one key aim was to get M&S to grow its profits in the same way.
Well, jump forward to May 2012 and, ironically, Tesco isn’t such a great example anymore, with their UK problems now denting that fabulous long term profits graph. But M&S profits still go in fits and starts, up a bit and then down a bit, whilst other retailers simply press on. A more interesting contrast today would be with Next, which always delivers top-of-the-range profits every year and double-digit EPS growth, combined with fantastic cash generation.
M&S seem strangely proud of the fact that they just about held underlying pre-tax profits in 2011/12, in “a challenging economic environment”, but without some impressive work on the operating cost base by new finance director Alan Stewart (cutting the planned growth back from 5.0% to just 1.5%), profits would actually have been well down over the last year, given the lacklustre sales performance.
Of course, cutting costs is a necessary but not a sufficient way of growing profits over the long-term, as top-line sales outperformance is always the best route to success. So the admission today that M&S will fall well short of its target to grow UK store sales (by £1.0bn to £1.5bn by 2013-2014) is embarrassing and damaging. Having grown UK sales in total by just £135m in Year one, and with Year two clearly off to a bad start, it was perhaps inevitable that M&S would rein in that Year three sales target, but they need to do a lot better.
M&S seem to be relying on a pick-up in the UK economy to even reach their revised UK sales targets, but, even if they do, it is unlikely to do much to shift the profit base of the business, as operating costs are now creeping up again. The danger is that M&S profits could flat-line for two more years and, barring an improbable “hockey-stick” jump in Years four and fiveof the long-term plan set out in November 2010, that would leave investors wondering if M&S picked the right man to be the new chief executive.
But one important lesson from the success of Next is that management stability really does count: the top team at Next under Simon Wolfson has been amazingly stable, whereas at M&S the management always seems to be chopping and changing. The volatility in profits at M&S is not unconnected with that management instability over the years, so it is too soon to call for more change at the top. Bolland deserves the chance to show that he can yet get things moving forward.
Unfortunately for M&S, the world is not standing still. Retailing is a dynamic industry and new players and channels are emerging to further challenge M&S’s position. And it is hard to avoid the view that M&S is simply fighting too many battles on too many fronts and trying to do too many things: revive the UK stores, grow home and beauty, grow online, grow overseas etc etc. Would you invent today a retail format that equally combines upmarket food with mid-market non-food?
About Nick Bubb
Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.