Walk into your local Marks and Spencer (M&S) and you could be forgiven for thinking you've stepped into a discount retailer. Many of the stores are looking shabby and tired. The lighting is harsh and the fixtures are dated. The layout is chaotic, with frumpy clothes jammed onto hangers, akin to Primark or TK Maxx, rather than John Lewis or Hobbs. Quality and customer service seems to have fallen, but prices have not. In one City outlet, the food hall spills into women's lingerie, which means that when looking for a pint of milk, the unsuspecting shopper can unintentionally find himself surrounded by lacy brassieres and silky underwear.
And so it is that M&S, a British icon, is once again suffering a serious image problem. So much so that questions have been raised as to whether the company can ever be the force in retailing that it once was - or even regain its crown as largest general retailer by market capitalisation, lost to Next last week.
Weary investors, who have seen their shares take a beating over the years, are themselves wondering why management appears incapable of stemming the streaming outflow of customers, particularly young women. Some, such as David Cumming, a fund manager for Standard Life Investments, one of the largest shareholders, have given chief executive Marc Bolland nine months to sort out clothing if he wants to keep his job.
A not so rosy legacy
Of course, M&S's current problems don't mean the company's days are numbered - it's still a retail behemoth, with 11.7 per cent share by value of the UK clothing and footwear market and 3.8 per cent of the food market. And, despite its status as a stalwart of many investors' portfolios, problems have been a way of life at Marks and Sparks for decades - it's got through them before and most likely will do so again.
Take the autumn of 1998, when poor trading figures and weak consumer demand sent the share price tumbling 23 per cent, sinking the company into a period of stagnation until 2004 when – several chief executives later – Sir Stuart Rose was parachuted in to turn the retailer around and fend off a hostile bid from Arcadia chief Philip Green. Back then, shareholders celebrated the gallant defence to avoid selling off the company on the cheap - now, with rumours beginning to circulate that the Qatari sovereign wealth fund is considering an £8bn bid for the retailer and a stuttering plan to revitalise the business, they'd probably welcome a painless exit.
It's often argued that the company's current issues partly stem from this era. Yes, shoppers returned under Sir Stuart's tenure, while the share price rallied and shareholders were also pacified by whopping returns of cash. But, as Maureen Hinton, retail analyst for Verdict points out, while former chief executive Sir Stuart Rose is widely attributed as the man who breathed new life into the brand - and temporarily won the hearts and minds of its legion of loyal shareholders - these measures didn't amount to sustainable long-term changes to solve the company's underlying issues. Sure, the financial crisis hit all retailers badly, but in M&S's case it exposed weaknesses from which it has never fully recovered - the cut dividend was never fully restored and the shares haven't moved much, the result of sluggish sales and profit growth.
"When you look at what happened in the end, Stuart Rose didn't do such a great job," says Ms Hinton. "While he made lots of good changes to the stores and kept people caring about M&S, the danger now is that people have stopped caring and customers are transferring their loyalty. Everything now depends on what happens over the next year."
Change proves elusive
But, says Ms Hinton, the group is "stuck in a rut" and the jury is out on whether it can rise again, or is simply doomed to a stagnant future until another predator comes knocking (see boxout, "Is M&S really 'in play'?"). She believes one of its fundamental problems is in its creaking monolithic structure, a big clunky organisation where the pace of change is excruciatingly slow, largely irrespective of who is at the helm, making it difficult to keep up with competition. "M&S has a public profile so any major overhaul is difficult to achieve," she says. "It needs to be smaller and more nimble with a better view of what kind of company it wants to be."
Kate Calvert, a retail analyst for Cantor Fitzgerald Europe, agrees that M&S must work towards a slimmed down, more focused business. She says there are deep-set cultural and structural problems which have impeded growth and are largely down to a lack of foresight by previous managers. "You always had an impression of fiefdoms within M&S that need breaking down and that is happening. But it's also part of what has inhibited M&S and caused it to fall behind," says Ms Calvert.
Neil Saunders, managing director of retail analyst Conlumino, supports this view. While he concedes that M&S is changing, he says the structure is still set up to serve the old interests of retailing 10 to 15 years ago. Because the groundwork was not put in earlier, Mr Saunders does not expect any material change for at least another year or two. "It seems M&S is inwardly focused rather than understanding the market and customer," he says. "In many ways it's rather like the civil service, with the structure and mentality of a big organisation, when what is needed is the thinking of an entrepreneurial organisation."
However, Mr Saunders isn't so critical of the Sir Stuart Rose legacy, pointing the finger at the current management for failing to build on the groundwork that Sir Stuart put in to move M&S in the right direction – sharpening the clothing offering, changing the store layouts and developing womenswear. "Marc Bolland has not set out clear and compelling direction, and the market doesn't seem to have confidence in him. Things have got worse and conditions have become tougher."
The Bolland defence
That's maybe a little unfair on Mr Bolland, who has continued to implement the strategic plan originally outlined by Sir Stuart and his team in 2008, Project 2020, as well as pursuing a number of initiatives of his own.
To his credit, Mr Bolland has steered a cleanup of M&S's numerous sub-brands, relaunched the brand in France with a new Champs Elysees store and a transactional website, introduced new food products and unveiled a UK store refurbishment programme. He has ushered in a new team, too - the appointment of online guru Laura Wade-Gery from Tesco to sort out multi-channel was touted as a coup when announced in 2011, as was the capture of Jan Heere from Zara-owner Inditex to head up international expansion. Indeed, if M&S could achieve even a fraction of the Spanish retailer's global success or Tesco's online might, it would be well on the way to achieving its multi-channel aims.
But nearly three years into Mr Bolland's stewardship, and so far that huge investment in stores, people and products - including £738m of capital expenditure in the last financial year alone - hasn't translated into the thing that really matters: profit growth. The extra £1bn in operating profits some analysts believed Project 2020 could deliver by 2014 have proved elusive. In fact, underlying pre-tax profits have barely moved since 2009, while operating profit margins and return on capital employed have both been squeezed.
Mr Bolland has often repeated the mantra that M&S is on the way to becoming a thriving "international multi-channel retailer". Actions, though, speak louder than words, and many believe that what M&S needs and isn't getting is a radical and fundamental rethink.
"That means ripping up the rulebook and starting again," explains Mr Saunders. "It needs someone with tremendous confidence and force of personality to push that through. Marc Bolland doesn't seem to be forcing change and until someone shakes up womenswear, M&S will continue to be lacklustre in its performance. We must see a material change by the end of this year at the latest." They are waiting, it seems, for bigger ideas, and ones that differentiate the company from its industry rivals, all of which are pursuing similar strategic growth agendas.
Getting the basics wrong
John Stevenson, a retail analyst for Peel Hunt, believes shoppers are shunning M&S because they want excitement in stores, but instead they're faced with a sea of trousers and can't find what they want. "The business needs someone at the top who has clothing and front of house flair," he adds.
Such merchandising issues have, arguably, resulted in a year riddled with bad news for M&S. Falling general merchandise sales, a flat dividend and declining profits have been exacerbated by justified complaints from angry shareholders that women's clothing is boring and the stores are a mess. One attendee at the annual meeting in July criticised Per Una, saying most of the clothes looked like "recycled versions" from the previous year.
The latest trading update covering Christmas did little to suggest that all is well in the M&S clothing department, which saw a 6.8 per cent fall in like-for-like clothing sales in the first quarter. Performance should really have been better as previous year comparisons were weak, yet figures still fell short of expectations, with overall like-for-like sales of general merchandise down 3.8 per cent.
Many analysts now believe the future of M&S depends on the success of its autumn and winter ranges, the first collection from new clothing chief and former Debenhams and Jaeger boss Belinda Earl after the defection of Kate Bostock to ASOS in January. But this is being launched into a stiff retail headwind, if comments from Lord Wolfson at Next and Debenhams' profit warning are any indicator - already rumours are circulating that clothing and homeware sales remain under pressure. Next week's trading update will provide the real litmus test.
Competitors shaping up
There's also the changing retail landscape to which M&S has had difficulty adapting - competition has become much stronger, more diverse and arguably more relevant to the modern shopper than M&S's current offerings. That has seen M&S's clothing market share quickly whittled away from the 15 per cent it held in 1996.
Consumers have become much more global, no longer feeling loyalty towards national brands or caring about the 'quality' that M&S has built its reputation on. Value retailers such as Primark, New Look or TK Maxx have sprung to the fore, offering cheap 'fast' fashion with ever-changing lines to keep shoppers perpetually interested. While M&S's international ambitions are laudable, it needs to be mindful of overseas retailers targeting UK shoppers, too. It's now just as easy for British shoppers to buy from American or European stores, such as LL Bean or Zara, that offer great service, good prices and excellent quality of the type M&S was once noted for.
The advent of the internet and high-speed broadband has also revolutionised shopper behaviour in a relatively short space of time - look back at an M&S annual report from 1997 and the word 'online' is not used once. That's indicative of the complacency that has allowed rivals to steal a march on M&S in transforming themselves into multi-channel retailers. John Lewis, for example, has well designed stores, an established internet shopping website and even uses Waitrose as additional pick-up points for deliveries. Next has overtaken M&S as Britain's most valuable clothing retailer, thanks partly to its strong multi-channel business.
A strong online offering is also fundamentally important when trying to extend the brand globally. Online-only retailer Asos is attracting young fashionistas across the globe with its hip designs and reasonable prices in a way that was thought impossible through the internet just 10 years ago. Asos has relentlessly improved delivery prices and service and even offers shoppers the option to collect and return clothes from their local convenience stores - its strategy is proving so successful that it's having to build out additional infrastructure in markets such as the US and Australia to streamline its operation to ensure the very highest standards of customer service.
Online specialists are also encroaching into M&S's core market - take N Brown for example, which services a similarly mature demographic to M&S. More than half of its business is now conducted online, belying the idea that older shoppers are less inclined to shop on the internet. By comparison, less than 6 per cent of M&S's sales can be categorised as multi-channel.
The net effect is that older customers are no longer loyal and are not being replaced by younger shoppers in the kinds of quantities the retailer needs to support its vast number of stores. This is putting M&S at a competitive disadvantage, as online shopping means retailers don't need as much space - bad news for a company that spent much of the 1990s and early 2000s expanding its store base. It's still adding new stores, too, but has said that it will now spend £200m less on estate expansion over the next two years than previously planned as a result of the market's rapid shift to multi-channel. Meanwhile, successful multi-channel operators such as John Lewis and, to a degree, Debenhams are still building stores on the basis that they remain geographically under-penetrated.
Space race
That means that, while it is a balance sheet asset in some respects, M&S's large freehold estate is also something of a millstone around its neck. Many of its wholly-owned sites are large properties in small town high streets, some of which it leases from its own pension fund. These real-estate holdings are expensive to manage and means its store base isn't nearly as flexible as that of, say, Next, whose average high street store lease is short.
"M&S is in quite a difficult position," says Mr Stevenson. "You want an estate you are able to flex in line with how multi-channel develops, a business that defines its product and can create its own path and grow through self-help. When you have huge estate like M&S, you can't to that." That's a view supported by Ms Calvert. "The internet is making the world faster, so you have to be fresh and ready with new vibrant ideas," she says. "Not having the flexibility in infrastructure to do this is a disadvantage and makes it hard to drive a business. It puts M&S behind the curve and means it has a lot of catching up to do."
Property was touted as one of the attractions that has reportedly attracted overtures from the Qatar Investment Authority. However, the slow decline of Britain's high streets means it is not the prime property it once was - and, in many cases, without M&S as the occupier it may not be quite as valuable as its balance sheet valuation would suggest.
