APPENDIX A

DOES M&S HAVE A FUTURE?

The country's most famous retailer Marks & Spencer's big store in London's Kensington High Street has just had a re-fit. Instead of the usual drab M&S interior, it is now Californian shopping mall meets modernist chrome and creamy marble floors. Roomy walkways and designer displays have replaced dreary row after row of clothes racks. By the end of the year M&S will have 26 such stores around Britain - the first visible sign that the company is making a serious effort to pull out of the nose-dive it has been in for the past two years. Things have become so bad that M&S, until recently a national icon, is in danger of becoming a national joke. It does not help that its advertisements featuring plump naked women on mountains - the first-ever TV ads the company has produced - have met with an embarrassed titter; nor that, last week, the BBC's Watchdog programme savaged M&S for overcharging and poor quality in its range of garments for the fuller figure.

As the attacks grow in intensity, so do the doubts about M&S's ability to protect its core value: a

reputation for better quality that justified a slight price premium - at least in basic items, such as underwear. It is a long time since any self-respecting teenager went willingly into an M&S store to buy clothes. Now even parents have learned to say no. Shoppers in their thirties and forties used to dress like their parents. Now many of them want to dress like their kids.

M&S's makeover comes not a moment too soon. Compared with the jazzy store layouts of rivals such as Gap or Hennes & Mauritz, M&S shops look like a hangover from a bygone era. The makeover aims to bring it into the present. People tended to join M&S straight from college and work their way slowly up the ranks. Few senior appointments were made from outside the company. This meant that the company rested on its laurels, harking back to 'innovations' such as machine-washable pullovers and chilled food. Worse, M&S missed out on the retailing revolution that began in the mid-1980s, when the likes of Gap and Next shook up the industry with attractive displays and marketing gimmicks. Their supply chains were overhauled to provide what customers were actually buying - a surprisingly radical idea at the time.

M&S, by contrast, continued with an outdated business model. It clung to its 'Buy British' policy and it based its buying decisions too rigidly on its own buyers' guesses about what ranges of clothes would sell, rather than reacting quickly to results from the tills. Meanwhile, its competitors were putting together global purchasing networks that were not only more responsive but were not locked into high costs linked to the strength of sterling. In clothing, moreover, M&S faces problems that cannot be solved simply by improving its fashion judgments. Research indicates that overall demand for clothing has at best stabilised and may be set to decline. This is because changing demographics mean that an ever-higher share of consumer spending is being done by the affluent over-45s. They are less inclined than youngsters to spend a high proportion of their disposable income on clothes. The results of M&S's rigid management approach were not confined to clothes. The company got an enormous boost 30 years ago when it spotted a gap in the food market, and started selling fancy convenience foods. Its success in this area capitalized on the fact that, compared with clothes, food generates high revenues per square metre of floor space. While food takes up 15% of the floor space in M&S's stores, it accounts for around 40% of sales. But the company gradually lost its advantage as mainstream food chains copied its formula. M&S's share of the British grocery market is under 3% and falling, compared with around 18% for its biggest supermarket rival, Tesco. M&S has been unable to respond to this competitive challenge. In fact, rather than leading the way, it has been copying rivals' features by introducing in-house bakeries, delicatessens and meat counters. Food sales have been sluggish, and operating margins have fallen as a result of the extra space and staff needed for these services. Operating profits from food fell from 247m in 1997 to 137m in 1999, while sales stayed flat.

Perhaps the most egregious example of the company's insularity was the way it held out for more than 20 years against the use of credit cards, launching its own store card instead. This was the cornerstone of a new financial-services division, also selling personal loans, insurance and unit-trust investments. When, in April this year, M&S eventually bowed to the inevitable and began accepting credit cards, it stumbled yet again. It had to give away around 3% of its revenues from card transactions to the card companies, but failed to generate a big enough increase in sales to offset this. Worse, it had to slash the interest rate on its own card, undermining the core of its own finance business. And this at a time when the credit-card business was already becoming more competitive, with new entrants offering rates as low as 5%. If shrunk to its profitable core, M&S may become an attractive target for another big retailer. At the moment, however, while its food division may be attractive to the likes of Tesco, the clothing side represents a daunting challenge. Why take the risk now, when the brand may be damaged beyond repair?

Question

1. Identify the main factors affecting the demand for M&S product
2. Analyze the weaknesses and threats on the demand side of M&S, relating these to controllable and uncontrollable factors.