The latest trading update from Marks & Spencer Group PLC (LON:MKS) provided plenty for the market to chew over on Wednesday, not least because of the weak performance of its food business.
The FTSE 100-listed retailer, which is undergoing a painful restructuring, including the closure of 100 high street stores, saw its UK like-for-like sales fall by 2.2% in the first half to September 29, reflecting a largely expected 1.1% decline in clothing and home sales and a surprise 2.9% drop in food sales.
M&S’s first-half total revenue dropped to £4.9bn, down from £5.1bn a year earlier, with clothing and home sales down 2.7% and food sales down 0.2%.
The group said food sales were dragged lower by the timing of Easter, price cuts and the removal of “complex and confusing” short-term promotions, which the company said it had become too reliant on in recent years.
M&S had attempted to compete with the bigger food retail players by reducing prices on 100 everyday lines, however, this transition to “trusted value” hit food sales and the group said it expects this trend to continue in the lead up to Christmas.
Quality reputation to live up to
In a note, Russ Mould, investment director at AJ Bell said the removal of short-term food promotions, strategically, “looks to be the correct decision, up to a point.”
He added: “Marks & Spencer needs to live up to its reputation of quality products while also being more competitive on pricing. However, one has to wonder if there is a risk in the business swinging the needle too far towards budget territory.
“For example, you can now get a packet of chocolate biscuits in Marks & Spencer for a mere 75p which puts it in competition with mainstream supermarkets.
“Surely that threatens the appeal of its higher priced, premium products as customers may just plump for the cheapest option – in essence Marks & Spencer’s value range could cannibalise sales of its other ranges.”
Mould said: “Value doesn’t always have to mean low prices. A Marks & Spencer customer needs to feel they are getting great value for the price they are paying, and that still applies if they are paying slightly more than they would in Tesco for a product that is also better quality.”
Little improvement expected in sales trajectory
On its outlook for the year, M&S said in today’s statement that trading conditions remain challenging, adding that “headwinds from the growth of online competition and the march of the discounters remain strong in all our markets.”
Helal Miah, investment research analyst at The Share Centre noted: “The forward-looking statements don’t seem to provide too much encouragement either with the group saying that it is ‘expecting little improvement in sales trajectory’ as online competition hots up and discounters march ahead.”
The analyst pointed out that M&S’s restructuring also includes broadening the family appeal in food, which he said “listening to the Chief Executive’s discussion of this on the Today programme this morning, seems to mean taking on the more traditional food retailers such as Tesco and Sainsbury.”
Miah added: “This may not play so well with investors as moving down the quality scale would just increase competition and it’s far from certain that M&S could challenge them.”
Criticism of M&S easy
Thomas Brereton, retail analyst at data and analytics company GlobalData, also pointed out that M&S is no longer able to prop up its wilting clothing & home division with good performances in its food business.
He said the marginal decrease in food revenue (-0.2%) was deceiving due to 22 new food-store openings, as the like-for-like sales fall of 2.9% revealed a much deeper problem in retaining customers as other grocers continue to lure shoppers through price cutting.
“But,” Brereton added, ”while criticism of M&S is easy with results like this, the money spent on transformations shows that the retailer intends for the next three to five years to be a period of rapid change.”
He said: “Changes over the last few years are beginning to bear fruit, with M&S embracing the online channel quicker than many of its competitors – 20.4% of UK Clothing and Home revenue is now online.
“But while Rowe’s plan of leaving ‘no stone unturned’ in the pursuit of revamping all M&S divisions is the right one, it remains to be seen if investors – and shoppers – will afford him the time required to make the much-needed changes.''