Marks & Spencer Analysis

FINANCIAL ANALYSIS OF MARKS & SPENCER

Introduction

Global retailer Marks & Spencer is the United Kingdom's premier clothing, food, and financial services retailer. The company's commitment to value, service and quality began in 1884 when Michael Marks, a Russian born Polish refugee formed a partnership with Tom Spencer, a former cashier from the wholesale company IJ Dewhirst, which later on became Marks & Spencer. During this 120-year journey, Marks & Spencer has continuously evolved and is known as one of the biggest retailers in the world today.

Marks & Spencer moved in food business in 1931 and initiated financial services business in 1985 with their charge card. The group has around 68,000 employees and serves 15 million customers per week1.

Marks & Spencer's biggest tangible asset is its store portfolio which comprises over 600 stores worldwide, out of which 451 operate in the UK and 217 in 30 territories across the globe. Some of the stores that operate in the UK have been structured as "Simply Food" which cater to customer demand in convenient locations. In its international portfolio, Marks & Spencer has 8 wholly-owned stores in Hong Kong and 11 in Ireland. The remaining are franchised stores spread across Asia Pacific, Europe, Central Europe, Middle East, and Central Asia.

1Marks & Spencer Annual Report 2006. http://www. 2marksandspencer.com

2. Strategic Analysis

Marks & Spencer Board comprises of the Chairman, Chief Executive, one executive director and four on-executive directors. Collectively, the Board is responsible for the success of the company. Through the Chief Executive, the Board delegates to management the overall performance of the company through the setting of clear objectives, building long-term management capability and ensuring that the business is managed in conformity with the business principles.

Marks & Spencer is into food, clothing, household items, and financial services business located in the UK with some wholly-owned and franchised operations worldwide. 49.9% of business in the UK is derived from food sales which accounts for 3.2% of market share1. Food sales were up 2.4% in 2005, however, in 2006 food sales were up by 7%. Marks & Spencer's significant international presence contributed 9.1% to the Group's pre-tax profits in 2006. Most of these profits were a result of strong food sales. Food comprises of a big chunk of M&S retail business.

M&S food has a sound reputation for outstanding quality and innovation. The secret of successfully-driven food business is the balanced combination of the skills of buying teams, food technologists and suppliers1. Marks & Spencer was the first retailer in the world to appoint a team of food technologists to address quality and safety3. M&S focuses on four main areas in food, namely, fresh, healthy food; special celebration products; authentic ready meals; and exceptional quality food like Aberdeen Angus steaks. M&S successfully markets its food products through powerful advertising. M&S has been a pioneer in initiating additive-free food products for its diet-conscious consumers. M&S is the only major retailer to have met the British Retail Consortium's salt reduction targets1.

In clothing business, M&S continues to be the UK's leading retailer by both value and volume. Year 2006 experienced a boost in clothing sales and

1Marks & Spencer Annual Report 2006. http://www. 2marksandspencer.com

market share performance, increasing in volume terms with 9.9% share as continued buying of clothing resulted from a better product and pricing terms. During the first half, performance was affected due to adjustments in clothing ranges and prices. However, sales picked up in the second half. Year 2004, as reported in annual report 2005, saw a declining clothing market with clothing sales down 3.1% as compared to its previous year.

Home business saw a 0.8% increase on last year and followed a clear strategy of providing great value and simple ranges supported with a much better catalogue and online offers. Home business had a transition year in 2004 with sales lower by Ј21.4%at 407.6 million.

Marks & Spencer's financial services arm, M&S Money, was sold to HSBC in November 2004. However, the company entered into an agreement with HSBC whereby M&S will continue to receive income derived from the financial services business1.

Tesco, competitor of M&S, reported a net profit of Ј1.57 billion for the year 2006. Total sales enjoyed a surge of 31.9% at Ј1 billion. Non-food sales grew by 13%, clothing sales grew by 16% in a difficult market. Tesco Personal Finance reported an operating profit of Ј205 million, a growth of more than 50% over last year3.

A buying academy was set up by M&S in 2005 to manage the buying department. This was to ensure a tight control over all aspects of buying. Weekly targets were set to control inventory levels at every part of the supply chain and to reduce inventory for products depicting falling demand. Regional sourcing directors were recruited to focus on a single approach to direct buying. Various measures were taken to improve the supply chain. For example, regional offices were established in Turkey and India to coordinate the supply function. Moreover, M&S also set up a stock planning function to coordinate budgets and reduce the risk of overbuying and under-stocking1.

1Marks & Spencer PLC-Retailing, Global Market Information Database, Euromonitor International, 2006.

2Marks & Spencer Annual Report, 2006

3Tesco Annual Report 2006.

In the face of low inflation, M&S has been challenged by other supermarket chains in terms of price reductions on basic commodities. In order to stand against its competitors, M&S requires more concentration in non-food sales.

M&S's major competitor, Tesco, has managed to reap profits through their price-cutting strategies coupled with increasing non-food sales. Price is the most significant element of market positioning. Tesco is known for its aggressive discounting whereas M&S belongs to a higher priced group of retailers1. M&S emphasizes