Positively dissatisfied
What's next for M&S?
Things are going well at M&S, and that is great to see after such a long period of doldrums and false starts. Sales are up, and crucially both the food and clothing divisions seem to be gaining market share. A retail turnaround is underway, led by what is obviously a very strong and united management team.
This recovery is particularly important to those of us who care about High Streets more generally. Many stories of hollowed out town centres over the last few years have included the line “even the M&S has closed” and the more the business can find its way again, even with a different shape of retail footprint, the better for retailing and consumers more generally.
And yet. I didn’t make up the title of this week’s post myself, it is a phrase borrowed from M&S CEO Stuart Machin as he expresses the fact that the job for M&S is not yet done. For evidence that he’s right, let’s take the 5 year share price chart above and turn it into a 10 year share price chart:
Suddenly the peaks and troughs of lockdown and recovery are put into a bit of context - this is still a shadow of the retail powerhouse it once was.
So what should this dissatisfied leadership team focus on next?
We should start by acknowledging what is already going well. In both divisions of the business, ranges have been rejuvenated and are resonating well with customers. In Clothing, the focus is on narrowing the range and improving scores on quality, value and style and there is good evidence of that strategy working not least in a marked increase in full price sales mix, telling us that there is less unsuccessful stock being dumped at a discount.
In food, the focus has been on getting the right balance between high quality and well presented product ranges and keen pricing. There is emerging evidence of growing market share overall and in particular of more larger baskets being bought in store which suggests that that is working.
More than anything, what you get from these current successes is the sense that M&S is run by excellent retailers again. The stores look good, promotions are effective and it is particularly noticeable to me as (mostly) a Food customer that the Food offering is now at least as good as Waitrose whilst being noticeably cheaper.
If the current recovery of M&S is about getting the retailing basics right, though, then what are the issues the team (and those of us observing the business) should continue to worry about, and which should form the backbone of ‘Phase 2’? I’m absolutely an outsider to the business, but if I was going to attempt any kind of list, here are a few points that leap out to me from their recent results:
Food growth is coming from a big increase in smaller baskets which I suspect means the growth is in their convenience franchise outlets rather than in their main stores. Growth in their own stores is likely to be lower than the headline 14.7% growth the division reported overall, and if it is much lower than that then it will represent a performance below inflation. The team will need to make sure that they are connecting with customers in their main Food outlets, not just growing the franchise channel.
Clothing, on the other hand, seems to be generating its growth from a smaller number of transactions offset by a larger average basket size. That’s potentially a good thing, particularly given that the decline in transactions is smaller than the overall fall in footfall most retailers are seeing, but the proof of the pudding is whether the increased basket size is driven by customers buying more or better items (positive) or is just the result of general price inflation. In the latter case, the risk is that as the middle-England customer continues to get squeezed by mortgage rates, it gets harder to sustain the performance.
The online offering still feels like it has a way to go. We are now nearly a decade on from the infamous £100m website revamp which must represent the high (or low) point of businesses throwing money at technologies they don’t understand, but even this far on from that debacle online penetration has some way to go for M&S, particularly when the significant and apparently increasing returns rate is factored in.
Data remains a big opportunity - for me, the Sparks initiative has never really landed fully and the language in the results statements and investor presentations has a decidedly “lots still to do” feel about it. The business is only a few years on from some spectacular ranging failures in its clothing business where it felt like they only ever had size 6 and size 22 in stock, and it has come a long way since then, but leveraging data across its business is a huge opportunity to improve its operating margins still further as well as representing a new opportunity to connect with customers.
Ultimately, generating cash will become a key focus too. Over the years, it has constantly amazed me just how much capital expenditure the M&S business seems to suck up, usually to fund whatever turnaround is currently going on. The current (very successful) store repositioning activity is continuing to drive that. In its last full year results, M&S nearly doubled its capital expenditure to over £400m with the result that it generated almost no net cashflow at all. The first 6 months of this financial year saw almost the same. A business generating over £12bn in turnover and with over £2.5bn in debt needs to generate better cashflow than that, and so getting to the point where the investment eases back and returns arrive is going to be a key milestone.
However long the ‘worry list’, though, M&S is at the beginning of what looks like a terrific turnaround.
I’m also heartened by the fact that that turnaround has begun with the customer, the proposition and with good basic retailing. That has to be the foundation of any lasting retail operation.
Positively dissatisfied, though, is a good way for any leadership team to be, and there is no question there are some tough challenges ahead for the business.
What’s the lesson for the rest of us? Are we also channelling that ‘positive dissatisfaction’ and considering what the next iteration of change for our businesses looks like? There is a danger for anyone leading a business that once you’ve written the positive headlines for your results release you start to believe your own spin and declare victory too early. Like the M&S team, we should all regard our businesses as unfinished, because they always are.