The challenges facing Marks & Spencer’s new chief

April 3, 2016 by admin
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He’s the new king of the high street. On Saturday Steve Rowe takes over from Marc Bolland as chief executive of Marks Spencer and inherits one of the biggest jobs in British retail.

Rowe, who has spent 25 years at MS, must stop the rot at the high-street grand dame where clothing sales have been falling for three years. And it is not just discerning consumers who need to be won over. Rowe, who ran the retailer’s clothing and homeware business, will face the City for the first time on Thursday when MS is due to report on another weak quarter for its clothing business.

During his six-year tenure, Rowe’s predecessor dragged MS into the 21st century, modernising its ancient supply chain and embracing the internet. But while its food halls throng with shoppers, clothing is still the problem child. There are a number of issues Rowe must address, but in some areas Bolland has left a good legacy.

The to-do list

MS watchers think Steve Rowe needs more outside help to reconnect with the chain’s shoppers. Photograph: Stefan Rousseau/PA

Fashion

When Bolland took over in 2010, MS clothing and homeware departments were bringing in annual revenues of £4.1bn. By 2015 that figure had fallen to £4bn as positive write-ups in the fashion press failed to translate into sales. The torpor means confidence in MS’s part-time style supremo Belinda Earl is waning. Last autumn Queralt Ferrer, formerly of Zara owner Inditex, was promoted to become the first director of design for womenswear, lingerie and beauty. But MS watchers think Rowe needs more outside help to reconnect with the chain’s army of middle-aged and increasingly disenfranchised female shoppers. “You need a head of clothing a la Kate Bostock [who left in 2012] who gets it, really gets it,” suggests one former MS executive.

Price

Value for money is key to the MS’s older clothes-buying customer base, but industry surveys estimate the retailer’s prices are 20% adrift of mid-market peers such as Next and Debenhams. Analysts say this lack of competitiveness (coupled with being too uncool even for the over 50s) is behind ongoing market share losses. MS’s UK clothing share has been shrinking for more than four years with the market leader now at 9.9%, down from 11% in 2010. The pricing problem is felt most keenly in its “value” ranges. “MS’s lowest-priced polo shirt starts at £15 versus Next’s at £12,” says RBC Capital Markets analyst Richard Chamberlain. “This seems quite a wide gap.”

Availability

Did you get your hands on that A-line suede skirt as modelled by Alexa Chung at London fashion week last year? Or the pink oversized “duster” coat that had store phones ringing off the hook in 2013? No? You are not alone. MS has managed to turn fashion hits into misses by quickly running out of popular sizes. Rowe’s buyers need to get better at predicting bestsellers and then back their choices by placing orders big enough to satisfy demand from shoppers.

Stores

MS has been around for more than 130 years and has 852 UK stores to prove it. According to RBC’s Chamberlain, the retailer needs a more aggressive property strategy: “We think MS can improve the productivity of high-street space by accelerating the pace of high-street store closures – particularly where customers can pick up click and collect orders at a Simply Food nearby – and converting space from general merchandise to food,” he says.

Weak consumer confidence

This is beyond Rowe’s control but confidence underpins retail sales and Rowe’s first year is shaping up to be a bumpy ride as Brexit jitters affect spending. Next boss Simon Wolfson recently cut its sales forecast, warning 2016 could “be the toughest we have faced since 2008”. Official data shows clothing shops already mired in their weakest sales run since 1991 so Rowe needs a backup plan for a possible downturn.

The positives

A Simply Food branch of Marks Spencer. Photograph: Oli Scarff/Getty Images

Food

This is not just any food business. This is the MS food juggernaut which has clocked up 25 consecutive quarters of like-for-like sales growth. Rowe can take some of the credit as he was running the upmarket convenience chain for three years after Bolland promoted him to the board. The Simply Food chain has defied the odds to outflank discounters Aldi and Lidl as its own-label brand and innovative products, such as Prosecco-flavoured crisps and hybrid dip “brusselmole” seen at Christmas, helped protect its premium position.

Supply chain

Bolland has pretty much completed the thankless multibillion-pound investment begun by Lord Rose to bring the retailer’s creaking warehouses and IT systems into the 21st century. Instead of more than 100 warehouses the retailer now has a handful of mega distribution centres to move stock around the country. It also has an all singing, all dancing website in place of the one run by Amazon. Computers at its hi-tech distribution centre in Castle Donington initially said no but at last count internet sales were growing at a respectable 20.9%.

Sourcing

In 2014 Bolland hired expert rag traders Neal and Mark Lindsey to revolutionise how it buys clothing. Better sourcing would unlock profits, he said, with one MS insider describing the sourcing opportunity as “profound”. The brothers, who have previously worked for Next, are showing early results after severing long-standing supplier relationships and cutting out the middlemen from deals. This culture change is lucrative but also risky: shoppers will revolt if quality suffers while jettisoning trusted partners, which could compromise high ethical and sustainability standards further down the line.

International

The retailer now pursues a “no frills” franchise model to expand overseas rather than the expensive empire building of old. It made a humiliating exit from the continent at the turn of the century but has since re-entered several markets, including successfully selling British food to the French via its Simply Food chain. Bolland may have done the groundwork but the weakness of MS’s clothing ranges, coupled with currency headwinds and geopolitical strife, resulted in international profits halving at its interim results. Nonetheless analysts see it a long-term winner.

Plan A

Prior to the financial crisis green was the new black as companies competed to launch environmental initiatives. Most fell by the wayside during the recession but MS stuck to its guns, with Bolland throwing his weight behind its Plan A programme to become the “world’s most sustainable retailer”.