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Troubling times for Marks and Spencer

The high-street chain is facing a tough 2018 as its food business continues to contract
January 18, 2018

I bet Marks and Spencer (MKS) wishes that Prince Harry’s fiancée Meghan Markle had worn its black jumper on her first official royal engagement at the start of last December as opposed to last week. That way, Christmas sales might have looked a little better for the high-street chain.

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General merchandise sales have been in steady decline for some years now, and chief executive Steve Rowe won the top job with the charge of turning the division’s fortunes around. But, more worryingly, the bad news is in fact coming from the food division, which was once considered the backbone – and cash cow – of the entire business. That segment registered a sales fall of 0.4 per cent over the third quarter and festive period, worse than the 0.1 per cent decline reported in both the first and second quarters.

This was down to inflation, which pushed M&S costs higher – as it has for many other retailers. The difference is that M&S – already considered to be a ‘premium’ food retailer – can’t push prices up much further for fear of alienating any remaining customers. That’s in contrast to many of the UK’s main supermarkets, which have used inflation as a reason to re-calibrate prices from the drastic lows seen during the last recession. In fact, ahead of Christmas, M&S was forced to cut prices on food to help shift stock before the big day. However, management maintains that seasonal lines proved popular with its customers and that tighter budgets, rather than quality or general appeal, were to blame for sluggish sales.

The fact that clothing and home sales took a 2.8 per cent nosedive hardly seemed to register with much of the market, so commonplace is bad news from that part of the business. It blamed a poor start to the Autumn/Winter season as mild weather during October delayed customers’ winter purchasing decisions. It didn’t help that third-quarter numbers hit the market the same day as Boohoo.com (BOO), which managed to double sales over the same time-frame. One might argue that the two serve very different customers; the latter is specifically aimed at trend-obsessed teenagers with limited pocket money.

The big question is, how is M&S going to turn things around this year? Household budgets remain under pressure, inflation continues to rise and wages aren’t appreciating at the same rate. During a year when customers are unlikely to find any spare change rolling around in their pockets, how is the high-street chain going to convince them to part with their cash for yet more clothes or even ‘treat’ food?  

Well, they might not. Instead, Mr Rowe’s approach appears to be making M&S a meaner, leaner organisation. It’s clear he thinks the store estate is far too bloated, and rumour has it more store closures (surplus to the ones already announced last year) are on the cards. Analysts at Peel Hunt say they expect further pain in food as prices are to re-set there. That might pep up the top line, but poses a threat to margins and thus near-term profitability. Long-term investors might remember when this tactic was tried – successfully – at the start of the last recession. The brokerage doesn’t expect margins to be squeezed quite as heavily as in 2008, but it can’t assert it won’t be ugly.

As for clothing, analysts are cautiously optimistic – to coin a favourite corporate phrase. Revenues grew both in-store and online over the weeks leading up to Christmas, and full-priced products performed well in what management calls “a very promotional market”. Suffice to say, the company did not participate in Black Friday. This echoes similar noise from high-street compatriot Next (NXT), whose aim to sell more items at full price and move away from aggressive promotions also appears to be working.