Marks & Spencer is no longer special

Allister Heath
FOR a supposed retail guru, Marks &amp; Spencer boss Sir Stuart Rose is not doing well. His firm is underperforming Tesco, J Sainsbury, Morrisons and Alliance Boots, among others. Yesterday&rsquo;s grim full year results show that the firm has a lot of hard thinking to do. Its product and pricing mix still isn&rsquo;t quite right; it has been forced to slash margins to prevent a further slump in sales; and the old Rose magic, which transformed a slumbering, declining giant into a thrusting, contemporary retailer no longer seems enough to make it stand out.<br /><br />That, ultimately, is the main problem: M&amp;S is no longer special. Despite a 40 per cent collapse in adjusted pre-tax profits and a one-third cut in its dividend, it still makes a higher profit (&pound;604m) than the much faster growing J Sainsbury (&pound;545m), which also happens to be twice as large. But the days when M&amp;S was uniquely profitable appear over for good, and even Rose cannot reverse that, for all his charm and mastery of fashion.<br /><br />M&amp;S still has a clothing market share by value of 10.7 per cent, more than anybody else (but just 5.3 per cent online); but the competition, from Tesco to Primark, is catching up. &nbsp;Food has been hit badly, confirming the firm&rsquo;s niche status, with a share of just 3.9 per cent, down from 4.3 per cent &ndash; despite promotions and extra Simply Food stores. The proof that Rose hasn&rsquo;t completely lost his grasp of what sells is his higher lingerie share (25.2 per cent, up from 24.8 per cent), in an area that has never been more competitive and fashion-driven. But none of that is really enough any more to give M&amp;S the earnings, margin and valuation premium it once enjoyed; and it has still not found a way of making money from the new, austere zeitgeist, for all its two meals for &pound;10 successes.<br /><br />The problem is not so much that Rose as executive chairman has too much power, as the corporate governance junkies would like us to believe; it is that his cost-cutting and growth strategies are underwhelming, he has no clear succession plans (though it is looking good for Ian Dyson, finance and operations chief) and he needs to redefine what M&amp;S stands for and its positioning in the market.<br /><br />Yet Rose is right to continue to increase retail space; it rose by 5.6 per cent in Britain last year and will go up another 3 per cent this year. The key format driving this growth is Simply Food; Rose now operates 668 stores totalling 14.9m sq ft. Refurbishments are also continuing apace; again, this is the right strategy. Just one fifth of the portfolio still requires a makeover. M&amp;S Direct is also continuing to grow well, albeit from a low base, with total web sales up by 51 per cent to &pound;324m. It remains on-track to deliver &pound;500m of sales by 2011/12; the firm should have done much more online much sooner &nbsp;but at least that strategy is now right.<br /><br />International revenues increased by 25.9 per cent to &pound;898m, with 32 new store openings, taking the total to 296 in 40 countries. International sales are meant to grow from 8 per cent of the total to 15-20 per cent; if anything, this is insufficiently ambitious. Every spare resource should be diverted into growing overseas, given how tough it is domestically for the firm.<br /><br />Rose is unlikely to go down that route; he doesn&rsquo;t seem to know what to do next. But unless someone comes up with an obviously better plan than Rose&rsquo;s, his job will be safe for now.<br />