The Demise of Marks and Spencer

There have been a number of posts here in Financial Regulation Matters concerning the British High Street and the demise of some of its institutions. Whilst Marks and Spencer – a company which traces its roots back to 1884 – is certainly not on the brink of disappearing, it has been reported today that Marks and Spencer (M&S), for the first time since the FTSE 100 was launched in 1984, will be demoted on account of its failing fortunes. In today’s post we will get to know the retailer in more detail in the hope of, potentially, coming to an understanding of what has gone wrong for this High Street stalwart.

In 1884, the Belarussian Michael Marks opened a penny bazaar in Leeds. After some initial success, he entered into business with Tom Spencer in 1894, who invested £300 in the fledgling business which combined Spencer’s accounting accuracy with Marks’ flair for buying and selling. The concept of selling everything for a penny took off, so much so that by 1900 M&S had over 36 Bazaars and 12 High Street stores. However, in the early 1900s both founders had passed away, leading to an entrenched legal battle for control of the company. Ultimately, in 1907, Michael’s son Simon (the future Baron Marks of Broughton, of Sunningdale in the Royal Country of Berkshire) acquired control of the business from Tom Spencer’s executor. Simon would go on to lead the company through continued successes, even during the WWII era in which a number of its stores were damaged, rationing hit its business, and its scientists contributing to the War Effort by way of helping with the rationing strategy. The company had started to develop a foothold in the quality garment business, and through the 1970s and 1980s had started to make a name for itself in the field of high quality food. In the 1970s, an organisational shift occurred with the positioning of Marcus Sieff as Chairman. He had emphasised the importance of developing a close bond with its workers, something which has become synonymous with M&S and still portrayed by staff today, with it being proclaimed that ‘they really look after you’. At the same time, M&S began its attempts to expand globally, with ventures developed in Canada, France, and the US in the late 1980s. However, none of these were to become major successes.

Yet, the retailer was continuing to be successful in the British marketplace. With a very different retail environment surrounding it in the early 2000s, none other than Sir Philip Green had put together an £11 billion package to purchase the group, but negotiations failed. However, with hindsight, the Financial Crisis-era took its toll on M&S, with a series of store closures and strategic reconfigurations coming since the downturn in the late 2000s. In 2016, former head of food provision, Steve Rowe, took the job as CEO and immediately set about putting together a new plan for the retailer, especially in the light of the very different trading environment surrounding it since the Crisis. Rowe had identified that there were a number of problems facing the retailer, including an ‘aging customer base and dated stores’ for its clothing arm, and food halls that were too expensive. In response, the retailer sought to stock more of its popular clothing lines (with availability being cited as a particular issue) and also increase the sizes of its food offerings to tempt families to shop in the retailer’s food halls. That strategic revolution is still taking place, but a number of factors are piling up against the retailer.

The retailer announced this year that its plan to close 110 stores was ‘not finite’ meaning even more could be at risk. Shareholders have supported this restructuring plan as a necessary move, particularly as the retailer wants to make more than £350 million in savings in the coming years. However, shareholders have been less pleased with the deal for M&S to purchase Ocado, the online grocery retailer, which saw M&S purchase 50% of Ocado for £750 million and which will facilitate the delivery of M&S food products to British homes from the end of 2020. Steve Rowe had announced that ‘we think we have paid a fair price’, but that did not stop the share price falling by 10%. Whilst onlooking analysts have suggested the deal makes sense, the price has been called into question on account of Ocado not yet making a profit from food sales, and the inherent risk of entering a new marketplace (for M&S). Yet, perhaps one of the biggest factors affecting the future of the retailer is its reputation and, as is being reported today, it is likely that tomorrow will see that reputation take a massive hit. The BBC have reported today that the company will be demoted from the FTSE 100, an index of Britain’s largest listed companies. Retail experts have been noted as declaring that ‘symbolically, falling out of the FTSE is just another milestone in the slow-but-steady decline of what used to be a great British institution’. The BBC notes how the company’s demotion to the FTSE 250 has been expected and that, when viewed in comparison with its competitors like Next (who have a market value of £7.9 billion as opposed to M&S’s £3.6 billion), it is clear to see why the demotion is taking place.

There may be a number of reasons for the decline, and reasons which may suggest at the potential for M&S to salvage its position. The company does need to be modernised, but it is questionable whether it can shake its tag of being for older generations. It is surrounded by younger and fresher retailers like Next, Primark, and a new breed of retailers who are making serious grounds like Boohoo. On the food front, the deal with Ocado has the air of a make-or-break deal for the retailer. If it takes off, then it is likely that the retailer will focus the majority of its energy on capitalising on that momentum. However, it is fails to take off, the company will be in serious trouble. It is that realisation which is the most concerning of all – that the company is depending on one particular aspect so much. The only other solution is to match its movement with regards to store closures and simply just downsize – the question then becomes whether its shareholders will accept such an institution being happy to play second fiddle to other retailers. One suggests that they will not be, which puts M&s into a precarious position whereby they are chasing victories for the shareholders. This is probably not the marketplace to do that, especially with the brutality of the High Street in the recent era. The High Street suffered a massive loss when BHS folded, but losing M&S would be much more impactful.

Keywords – retail, UK, Business, Marks & Spencer, @finregmatters