How Stuart Rose Put the Spark Back in Marks…
By Jon Ashworth, The Business, London
Jan. 11–Back in the heady days of 2000, Marks & Spencer screened a now-notorious television advert featuring a full-figured woman running up a hill in Somerset discarding her clothes as she went. Standing naked on the summit, she cried: “I’m normal!”
It was an attempt by M&S to demonstrate that its clothes were tailored for average women rather than catwalk waifs — and it failed dismally. All the campaign achieved was to show how far M&S had drifted from its core customers. For the group’s management, isolated in regal headquarters on London’s Baker Street, it was a moment of hubris that was to set the tone for what lay ahead.
M&S was back on television screens this Christmas, and what a difference six years makes. The James Bond-esque commercial featured catwalk models, including Twiggy and Lizzie Jagger, travelling to Lapland for a party with Shirley Bassey. They kept their clothes on.
Trading figures released this week confirmed that M&S was one of the winners in a mixed Christmas for Britain’s retailers. British sales in the 13 weeks to 30 December were 5.6 percent higher than in the comparable period in 2005, an excellent performance.
Market share in food grew to 4.3 percent; in clothing to 10.5 percent. This is a remarkable turnaround on just three years ago, when profits had collapsed and perhaps the most famous British High Street brand looked set to fall to a hostile takeover bid.
The credit for M&S’s comeback belongs to Stuart Rose, the one-time M&S management trainee who was parachuted in as chief executive in May 2004. A millionaire in his own right, pocketing £25m (E37.3m, $49m) from the sale of Arcadia where he was previously chief executive, Rose had the self-assurance (and the personal financial security) to take on what many regarded as “mission impossible”.
M&S was on the receiving end of a putative 400p-a-share bid from Sir Philip Green, the brilliant, pugnacious owner of Bhs, the department store chain. It was Green’s third crack at the prestigious M&S name.
Rose, who was enticed out of semi-retirement by Paul Myners, M&S chairman at the time, lost no time putting his stamp on the company. He struck back at Green with a three-year recovery plan, including proposals to return £2.3bn to shareholders. M&S, he pledged, would concentrate on its 11m core customers (mainly women in the 35-55 age group), cutting product lines and brands. “Our key task is to sell more clothes to core customers, who I think have been neglected,” Rose proclaimed. He announced plans to shut down loss-making stores as part of a cost-cutting programme aimed at saving at least £250m a year. The trendily self-indulgent (and costly) Lifestore concept in Gateshead was among the casualties.
Two-and-a-half years later, Rose has delivered on his pledge to “give M&S back to its customers”. He confirmed this week that M&S was well into its recovery phase, having hitherto resisted using the “R” word. M&S has had six successive quarters of sales growth. “We have now delivered growth in all areas of our business, thus completing the first part of our recovery plan,” Rose told investors. “We remain on track to further drive and broaden the business.”
This week’s trading update built on strong figures released before Christmas, when M&S unveiled pre-tax profits up 32.5 percent at £405.1m in the half-year to 30 September. Group sales were 11 percent higher at £3.9bn. Adjusted earnings per share were up 30.7 percent at 16.6p. M&S could make £1bn for the full year — a milestone that would mark a return to the group’s glory days under Sir Richard Greenbury, chairman and chief executive from 1988 to 1999.
The M&S share price, languishing at 360p at the time of Rose’s appointment, hit a 12-month high of 750p on 4 January. A year ago, the shares were trading at 500p. M&S’s market capitalisation is now around £12bn, more than double what it was three years ago. Its enterprise value, which includes debt, is £15.6bn. It makes Green’s 400p-a-share offer look meagre, though he would argue that he could have squeezed even more value from the business.
As a further indication of how M&S has thrived under Rose, it emerged this week that 12,000 M&S employees, mainly store staff, are set to make between £1,000 and £45,000 each from share-save plans as a result of the rise in the company’s share price.
Rose cuts a suave figure, with his tailored suits and Hermes ties; but the smooth image belies a man with a firm grasp of the numbers. The son of a civil servant, Rose joined M&S as a management trainee in 1972 and worked for the company until 1989. Upon leaving, he took a succession of high-profile jobs, becoming chief executive of Burton Group in 1994, then taking the helm at Argos, the home catalogue company. After a stint as chief executive of Booker, he joined Arcadia as chief executive in 2000, turning the group round and selling it (to Green) within two years for more than £800m.
In taking the top job at M&S, Rose followed a succession of hapless senior managers, starting with Peter Salsbury, the insider who succeeded Sir Richard Greenbury, and culminating in the woeful double act of Luc Vandevelde and Roger Holmes.
For years, M&S was notorious for a culture of arrogance which trickled down from the boardroom. When directors went to visit a store, staff and managers lined up outside as if greeting a royal visitor. Rose, too, visits stores, but he turns up unannounced and chats to shoppers and staff alike. This air of informality has won him respect and done much to break down the stuffy M&S culture; he’s also garnered much-needed information about market conditions.
Rose initiated his M&S revival with a promise to control costs, streamline buying practices (suppliers were made to accept tighter deals) and cut bureaucracy, starting with M&S management.
The board, once a roll-call of the great and good of British business, was pared to 12 non-executive directors and three executives: Rose; Steven Sharp, in charge of marketing, store design and development; and Ian Dyson, finance director. “We sit here and we take decisions very fast,” Rose said. “We’ve cut out the jaw-jaw.”
He was anxious to avoid the proliferation of products that has confused M&S customers in the past. Stock commitments were reduced by 35 percent, or £1.3bn, in 2004-05. Overstocking is now considered a sackable offence. Opening price points — cheap products intended to get people through the doors — have increased from 10 percent when Rose arrived to 25 percent. Clothing prices have been slashed and are now competitively priced. The results have begun to flow through in the past 12 months.
Having consolidated its position, M&S has moved into “drive” phase, seeking to improve product and customer service while modernising stores. Years of underinvestment have left many looking tired and dilapidated.
By the end of this year, more than 70 percent of M&S’s floor space will have been refurbished, replacing shabby shopfloors with sleek new interiors. Capital spending will rise from £570m in 2006 to £800m in 2007-08. There are plans to redesign flagship stores in major cities, including Edinburgh and Liverpool. M&S wants to increase net space by 15 percent-20 percent over the next five years. Years of stagnation left M&S over-spaced in town centres and under-spaced in out-of-town retail parks.
Rose has spearheaded a big expansion of M&S’s Simply Food stores, criticised when they were introduced in 2002 for cannibalising sales from main M&S branches. The sceptics have been proved spectacularly wrong: while 10 years ago, M&S’s clothing sales outstripped food by two to one, both sides of the business are now equal (each generates sales of £3.6bn) and the Simply Food concept has taken on a new momentum. Rose wants to double (or more) the number of Simply Food outlets to 400, with a further 200 outlets on BP petrol station forecourts. He also intends to stretch the M&S brand, venturing into areas such as the sale of LCD TVs, DVDs, iPods and laptops, following in the footsteps of Tesco, Wal-Mart and Sainsbury. Contrast that with the conservatism of the previous M&S regime which stubbornly refused to accept rival credit cards even if it meant turning business away.
A third plank for development will see M&S developing its brand overseas, where it operates about 220 outlets, most of them franchises. The franchise network extends across Greece, Hungary, India, Indonesia, Philippines, Romania, Singapore and Turkey. The first M&S franchise opened in Geneva last year and new openings are planned in Russia, India and Dubai. Abroad, M&S only owns its own stores in Hong Kong and Ireland.
Overseas expansion represents huge potential for M&S; it must be careful not to botch the opportunity. Investors have not forgotten the lessons of 2001, when M&S closed its wholly-owned chain of 38 stores in Europe, with the loss of almost 3,400 jobs. In France, which bore the bulk of the closures, M&S workers took to the streets (the stores closed anyway).
The European shops were supplied from UK depots, resulting in an unwieldy cost base and leaving little room for manoeuvre on pricing. In 2001, M&S made a loss of £34m on European sales of £285m. In the half-year to end-September 2006, international retail made an operating profit of £40m (up from £30m in the same period in 2005) on sales of £281.5m. By comparison, British M&S retail generated an operating profit of £409m on sales of £3.6bn.
A major problem for the company is that its presence overseas is negligible next to European competitors such as Spain’s Zara, which has 1,230 of its 2,700 stores, mainly company-owned, outside its home market. Overseas organic expansion requires adequate supporting infrastructure and this will take time to do properly; it will also make more sense over time for the company to own more of its own stores. M&S needs to take a close look at its property portfolio, in Britain and overseas.
Rose pledged this week to continue building on M&S’s nascent website, the company’s biggest “store” with more than 9m hits in the run-up to Christmas. The website is being relaunched this spring; this is an area where the company still has a lot of work to do.
City analysts are right to be cautiously upbeat on M&S’s prospects, while noting a tendency among non-food retailers to over-invest at cyclically inappropriate times and on the basis of shaky economics. Tony Shiret, analyst at Credit Suisse, argues that the M&S recovery has principally been about “making size count”, initially through unilateral price cuts imposed on suppliers. This was reinforced by a major increase in low price, high volume products and a reduction in the range of products on offer.
Clothing has been taken down-market, while food has gone upmarket; but more time will be needed to see how far this strategy can be pushed, with Tesco on one side and Waitrose on the other. More positively, continued sales momentum for the group as a whole are set further boost profits while improved logistics in the buying process will lead to further growth in profit margins, all great news for shareholders.
If it all generally bodes well for the future, Rose is too cautious by nature to trumpet his achievements. He has in mind the experience of Vandevelde, who in November 2003 declared that M&S was “well beyond the recovery phase”, only to be ousted as chairman five months later.
Rose and his tight-knit executive team are well aware that excellent results create their own challenges. M&S will come up against significantly tougher comparatives in the current financial quarter. If that is the downside of success, Rose is willing to accept it.
With the recovery at M&S well in hand, shareholders should start to ask questions about “life after Rose”. M&S’s cheerleader turns 58 in March and has said that he would like to stay in the role until at least 60. He has also said that his succession will be an orderly affair; but investors cannot be too careful.
For now, M&S remains focused on rolling on new formats in its stores while exploring ways of broadening the business. Such a strategy certainly makes far more sense than TV campaigns featuring naked women running up hills. But as Rose would concede, in today’s ultra-competitive retail market, it ain’t over ëtill the fat lady sings, and she has barely began exercising her vocal chords.
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