MARKS & SPENCER PLC

1

In 1985, Britain's best-known retailer was the
subject of a gusher of a book: Marks &
Spencer: Anatomy of Britain's Most Efficiently
Managed Company. Nowaa!s, an! book on
the 115-!ear-ol foo an clothing chain woul
nee a new title. Comedy of Errors is "ore like
it.
Businessweek # 18.1$.99
Introduction
%arks & '(encer )lc *fro" now on %&'+ is an international retailer with ,18 locations
across -. countries. /he grou( sells clothing, footwear, gifts, ho"e furnishings an
foos uner the 't. %ichael trae"ark in its chain of 09. stores in the 1nite 2ingo".
3((ro4i"atel! half of the grou('s o5erseas stores are franchise to local (artners. /he
grou( also owns the clothing retailer Brooks Brothers an the 2ings 'u(er %arkets
chain in the 1nite 'tates of 3"erica. 6irect "ail hel(s %&' "eet the core objecti5e
of (ro5iing custo"ers with wier, easier access to their (roucts such as ho"e
furnishings, flowers, ha"(ers an wine. /he financial ser5ices co"(rise of o(erations
of the grou(s financial ser5ices co"(anies (ro5iing account cars, (ersonal loans, unit
trust "anage"ent, life assurance an (ensions. 7etailing accounte for 989 of fiscal
0$$$ re5enues an financial ser5ices, .9.
/he co"(an! was alwa!s consiere to ha5e a great "anage"ent su((ort that hel(e in
its growth. But the last !ears, %&':s "anagers see" to fail on their strategic ecisions,
leaing the grou( to lower an lower sales an (rofits. /he share (rice is also ro((ing
an shareholers feel insecure for the future *figure 0+.

Group structure and financial performance
/he grou(:s (erfor"ance "easures for the !ear ene at -1 %arch were isa((ointing
*figure-5+. /he return on e;uit! ratio an the earnings (er share were <ero as the
co"(an! ha onl! =1.-" (rofit this !ear. >or the sa"e reason, the i5ien co5er was
also <ero. ?ast !ear the i5ien co5er was 1,$( as the co"(an! (ai the shareholers
all its (rofit. >or oing so the co"(an! ha to cut the i5ien fro" 1.,.( to 9,$(. /his
!ear the co"(an! (ro(ose the sa"e i5ien e5en though it ha al"ost no (rofit.
/he grou( re(orts the results of three o(erating i5isions: the 12 7etail, the
International 7etail an the >inancial 'er5ices.
12 7etail i5ision
/he 12 7etail i5ision, the largest of the o(erating i5isions, is itself sub-i5ie into
se5en business units, each re(resenting a efine area of "erchanise: @o"enswear,
%enswear, ?ingerie, Ahilrenswear, Beaut!, Bo"e an >oos. /he first si4 business
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/his case stu! has been written b! Ceorgios 2aralio(oulos an Driol 3"at, 6e(art"ent of Econo"ics
an Business, 1ni5ersitat )o"(eu >abra *Barcelona+. 'o"e ata relating restructuring costs ha5e been
forecaste b! the authors of this case.
1
units are re(orte as FCeneralG, an footage is allocate between the" e(ening on
e"an an seasonal factors. /he s(ace allocate to the largest single business unit,
>oos, is relati5el! infle4ible.
>inancial results in the 12 7etail showe a fall in both sales an o(erating (rofit. /he
reuction of the a5erage selling (rice of general "erchanise b! a((ro4i"atel! 0.59
cou(le with a ecline of so"e 1.59 in the nu"ber of units sol, contribute to the
o5erall fall in general sales.
>IC17E-1: 'ales an o(erating (rofit (er area *!ear ene -1 %arch+
'ales D(erating (rofit
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0$$1 0$$$ 0$$1 0$$$
=" =" =" ="
Group otal 8$,5., 8195.5 .8,.$ 5.-.$
!K Retail 809-.9 8.80., --..8 .0$.1
International Retail
Euro(e
Aontinental Euro(e 085.$ 09..- *-..$+ *--.5+
Irelan & Euro(ean
franchise businesses
08-.- 081.- 00.8 18.,
North 3"erica
Brooks Brothers ..8.1 -95.5 0$.0 ,.9
2ings 'u(er %arkets -1-.1 0,-., 11.9 11.1
>ar East 11$.1 1$1.0 ,.. *..8+
"inancial Ser#ices -8-.1 -8..8 98.- 115.9
International 7etail i5ision
/he International 7etail business consists of three broa geogra(hic areas: Euro(e
*incluing Irelan but e4cluing the 12+, North 3"erica an the >ar East. /he
International 7etail results inclue those of %&':s franchise businesses, which, at -1
%arch 0$$1, o(erate 105 franchise stores in 08 countries. /he Euro(ean International
7etail can be i5ie into the Aontinental Euro(e an the 7e(ublic of Irelan an
Euro(ean franchise businesses. In North 3"erica the grou( o(erates two businesses,
Brooks Brothers an 2ings 'u(er %arkets. 3t -1 %arch 0$$1 Brooks Brothers trae
in 001 stores an 2ings 'u(er %arkets ha 0, stores. >inall! in >ar East the grou(
o(erates 1$ stores in Bong 2ong.
0
Before ta4es an e4ce(tional ite"s "ae (reo"inantl! to (ro5ie for the costs of cor(orate
restructuring, announce on 09 %arch 0$$1.
0
3ll co"(an!:s businesses in this i5ision (erfor"e better this !ear co"(are to last
!ear, with the e4ce(tion of Aontinental Euro(e:s %arks an '(encer stores which
increase their losses.
>inancial 'er5ices i5ision
/he co"(an! offers financial ser5ices such as account cars, (ersonal loans, unit trust
"anage"ent, life assurance an (ensions.
/his !ear the co"(an! starte acce(ting creit cars in its stores an sales transactions
on the %&' charge car fell fro" 089 of total sales to 009. /he o5erall i"(act on
charge car (rofitabilit! was reuce b! the inter-co"(an! recei(t fro" 12 7etail of
=18.0 " an a reuction in o(erating e4(enses.
S$are$olders disappointment
Bere is an o5er5iew of last !ear:s news an e5ents that woul be of the interest of an!
(resent or future co"(an!:s shareholer.
In late %a! of 0$$$ %&' announce the cut of its i5ien for the first ti"e e5er as it
re(orte a shar( fall in (rofits. @ith a letter to all shareholers
-
, the e4ecuti5e chair"an
?uc Hane5ele aske shareholers to be (atient as the new "anage"ent transfor"s the
grou( fro" a traitional retailer into Ia "ulti-channel retailer with uni;ue custo"er
unerstaningI. @e cannot co"(ro"ise our future in5est"ent ca(acit!, he sai. Be
(ointe out that the total i5ien (a!out re(resents the grou(:s entire (rofit for the !ear
0$$$, but sai that it "eant that the co"(an! woul not nee to borrow to co5er the
i5ien.
/wo "onths later, %arks & '(encer )?A's e4ecuti5e chair"an ?uc Hane5ele sai
that fi5e "onths into his new job he is J"ore con5ince than e5erJ that the co"(an!
will turn aroun, but stresse shareholers will ha5e to be (atient as there are no ;uick
fi4es.
3ressing 1,.$$ shareholers an 8$$ guests at the retailer's annual "eeting,
Hane5ele aske to be juge o5er a three-!ear (erio. Be sai his "ission was to
eli5er sustainable growth. "You must recognise it will take some time to acie!e tis
growt and translate it into added !alue"" But Hane5ele a5oie an! (ro"ises of
%&' returning to its historic le5els of (rofitabilit!. "# can't and # won't gi!e you a
forecast of future profit le!els""
Bis wors, though, were not enough to a((ease so"e shareholers. "$y as te %oard
in te main got &pay' increases( )ey a!e failed*" sai one to lou a((lause, an
ae: "# %lame +eter Sals%ury largely" ,e is te cief e-ecuti!e"" /he shareholer
aske Hane5ele to get 'alsbur! to sa! if he felt he eser5e his (a! increase last !ear.
Bowe5er, the chair"an refuse - "# tink it would %e unfair for +eter to answer tat
.uestion""
In a largel! goo-nature annual "eeting the t!(ical the"e of "ost other gri(es was
%&'' (ercei5e failure to be selling what its custo"er want. "# rater feel most of your
directors are sitting in i!ory towers on Baker Street looking at %alance seets and not
wat te customers want*" sai one. 3nother eclare: "M&S gi!es te impression its
%uyers a!e no idea ow many people in tis country are o!erweigt and are not
%eautiful""
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% & ' has 0.88,.-8. thousans of shares owne b! .$-.8., shareholers.
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/he shareholers isa((oint"ent an failure of (re5ious !ears strategies was translate
into the announce"ent of a new %&' to( "anage"ent tea", at 'e(te"ber 18 of 0$$$.
E4ecuti5e chair"an ?uc Hane5ele assu"e the res(onsibilities of Ahief E4ecuti5e
fro" )eter 'alsbur!. )eter 'alsbur! resigne the boar an left the co"(an!.
Ne5ertheless, two weeks after shares in %&' i((e below =0 for the first ti"e in its
histor!.
In5estors ser5ice co"(anies ratings were not (ro"ising, as well. Before the en of the
!ear, %oo!:s owngrae the co"(an!:s senior ebt rating sa!ing that the owngrae
reflecte its e4(ectation that the "anage"ent:s (lan to restore %&':s franchise ;ualit!
//will face significant callenges in te igly competiti!e 01 retail en!ironment* and
tat te company2s financial measures are unlikely to reco!er meaningfully in te sort
term//"
/hree "onths later, at %arch 09 of 0$$1, ate of the announce"ent of %&' wie-
ranging strategic re5iew, 'tanar & )oor ratings agenc! lowere its long-ter" ratings
on %&' to K33 "inusK fro" K33K an (lace its long an short-ter" ratings on the
co"(an! on creitwatch with negati5e i"(lications sa!ing that the grou(:s (erfor"ance
continues to isa((oint.
>IC17E-0: %&':s share (rice e5olution
.

>IC17E--: %&' )?A 3nal!st 7atings
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%ulte4.co"
a5erage brokerage
reco""enation
is Moderate Sell.
Recommendations Current 1 Mont$ A%o 2 Mont$s A%o & Mont$s A%o
.
Cra(h taken fro": www.he"scott.co"
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Cra(h an ata taken fro" www."ulte4.co"
.
'trong Bu! - 1 1 0
%oerate Bu! $ $ $ $
Bol 9 9 9 8
%oerate 'ell - 8 8 8
'trong 'ell 9 8 8 8
%ean 7ec. -.8- -.8- -.8- -.,5
%ean 7eco""enation Aon5ersion /able
1.$ L 'trong Bu!
1.1 thru 0.$ L %oerate Bu!
0.1 thru -.$ L Bol
-.1 thru ..$ L %oerate 'ell
..1 thru 5.$ L 'trong 'ell
Ne' Group Strate%( and Structure
>ollowing a wie-ranging an etaile strategic re5iew of its business, the Boar of
%&' announce in %arch 09 of 0$$1 significant changes to the Crou( strateg! an
structure. /he highlights of this new (lan are:
a+ /otal focus on 12 retail
/he Ao"(an! will return to selling onl! own bran (roucts an brans e4clusi5e to
%&' so it can guarantee custo"ers the ;ualit!, 5alue an ser5ice the! ha5e co"e to
e4(ect. Aentral to the reco5er! (lan is the eli5er! of significant i"(ro5e"ents in
(rouct a((eal, a5ailabilit! an 5alue thereb! rebuiling the relationshi(s with core
%&' custo"ers.
7eco5er! (lan for Alothing
/he Ao"(an! has (lans to regain the confience of its custo"ers in the ;ualit!
an fit of its clothing. It will shar(en (ricing b! rebalancing the (rice architecture,
e4tening the range of entr!-(rice "erchanise an co""unicating this clearl! to
custo"ers.
E4(ansion in growing (rouct areas such as >oo, Bo"e an Beaut!
%&' >oos continues to (erfor" well an has earne custo"ers' trust for (ro5iing
;ualit!, inno5ation an con5enience. /he business is a ke! (latfor" for future growth
an the Ao"(an! is consiering o((ortunities to e4(an its reach through new locations
an selling channels.
/he Bo"e business is growing strongl!, with ho"e furnishings an gifts the fastest
growing (rouct areas. Beaut!, albeit relati5el! s"all, is also growing ra(il!. Both of
these areas offer (ro"ising o((ortunities for e5elo("ent an will be e4(ane.
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3cceleration of store renewal (rogra""e
3ccelerate 'tore 7enewal )rogra""e: %&' will accelerate the rollout of the successful
ele"ents of its new conce(t for"at uner a (lan to refurbish "ore stores faster an at
lower cost. /wo-thirs of its retail s(ace *10$ stores+ will be co"(lete b! the en of the
co"ing financial !ear, benefiting the "ajorit! of %&''s custo"ers.
%ore intensi5e use of s(ace
'elling s(ace will be reallocate to higher growth (rouct areas to "a4i"ise returns (er
s;uare foot. In total, 8$$,$$$ s; ft will be reallocate within the !ear to areas such as the
new Alothing range su((lie b! Ceorge 6a5ies, Bo"e, 5$ new Beaut! 'ho(s, an -$
new Aoffee 'ho(s.
Being closer to the custo"er
In orer to be "ore custo"er oriente, so"e stores in big cities will be o(ene 0. hours
(er a!. B! other han, 105 stores in the 12 will be "oernise in orer to create a
"ore atracti5e, eas!-to-sho( en5iron"ent for our custo"ers. /hese stores re(resent two
thirs of total 12 stores. %oernisation in5est"ents will a"ount 1$$ "illion.
@ith all changes, the co"(an! e4(ects to raise the o(erating (rofit in the 12 b! 1$9
a(ro4i"atel! *.$ "illion+ (er !ear.
b+ Halue realisation, cost cutting "easures an closure of loss-"aking businesses
In orer to focus all its efforts on the reco5er! of the 12 business, %arks & '(encer
intens to i5est or close non-core businesses an assets, subject to consultation with its
e"(lo!ees.
Intention to close Aontinental Euro(ean subsiiaries e4ce(t the Irish ones
/he Ao"(an! intens to close its loss-"aking business in Aontinental Euro(e *>rance,
Cer"an!, Belgiu", /he Netherlans, ?u4e"bourg an '(ain+, affecting so"e -,-5$
jobs. /hat business was not a success. In the last three !ears it has lost nearl! =1$$
"illion, with a loss of =-. in the last 10 "onths. /he stores were too big an the
co"(an! han:t (ro(erl! unerstoo the "arkets before in5esting in the".
/he Ao"(an!'s business in the 7e(ublic of Irelan is growing fast an (rofitabl! *=00,8
"illion in (rofits in 0$$1+, therefore %arks & '(encer re"ains fir"l! co""itte to this
business.
/he buget of the sales (rice of these sales is =.5$ "illion, without consiering the
e4ce(tionel charges of the restructuring, which ha5e been inclue in the )&? of 0$$1.
B! other han, uring the !ear 0$$0 there will be so"e aitional e4ce(tionel charges
*=08,. "illion+ in connection with the iscontinue o(erations.
'ale of (rofitable Brooks Brothers an 2ings 'u(er %arkets in the 1'
8
/he co"(an! also intens to is(ose of its two (rofitable 1nite 'tates businesses,
Brooks Brothers an 2ings 'u(er %arkets. /hese o(erations o not (ro5ie an
a((ro(riate (latfor" for future international e4(ansion b! %arks & '(encer.
/he bugete (rice of these sales are =55$ "illion an =0,5 "illion res(ecti5el!.
>ranchising of business in Bong 2ong
/he Ao"(an!'s 1$ stores in Bong 2ong will be sol to beco"e a franchise. /he buget
of the sale a"ounts to =11$ "illion. /he franchise business, s(anning -$ countries an
o(erating with a((ro(riate for"ats an strong local (artners, continues to be successful.
Intention to close 6irect catalogue business in 12
%arks & '(encer intens to close its loss-"aking catalogue business incluing a
eicate call centre an fulfil"ent centre, with about 89$ jobs affecte in total.
3lthough the joint Alothing an Bo"e catalogue will be iscontinue, %arks &
'(encer is co""itte to "aintaining its e-co""erce web site:
www."arksans(encer.co", as well as a Bo"e brochure an a range of ser5ices
incluing flower eli5er!. ?ast !ear losses of the irect catalogue unit ha5e a"ounte
=-8,8 "illion. /he bugete cost of closing this unit is =-5,5 "illion an has been
inclue in the )&? of 0$$1.
7elease 5alue fro" al"ost half the (ro(ert! (ortfolio
/o reuce the ilution fro" the relati5el! low returns fro" (ro(ert! in5est"ent, %&'
intens to release 5alue fro" al"ost half of its e4tensi5e (ro(ert! (ortfolio *,8 stores+.
/hat "eans that the co"(an! will rent instea of owning the (ro(ert! in which it
o(erates. /he! are going to use the sale an lease back t!(e of financing. Dwnershi( of
stores in (ri"e locations will be retaine to "aintain "a4i"u" o(erational fle4ibilit! as
well as ca(turing future increases in ca(ital 5alue. /he bugete (rice of these sales are
=-.8 "illion.
Aost cutting
/o reuce the costs of goos sol using less su((liers an using foreign su((liers,
"ainl! fro" 3sia. 3t (resent 12 su((liers re(resent ,$9 of total (urchases. /his 9
will be reuce till 059. /his "easure will allow to reuce sales (rice an to increase
(rofit.
/o reuce general an a"inistrati5e costs at the hea;uarters, where -5$ jobs will be
reuce.
@ith all this cost cutting "easures, %&' (lans to increase the o(erating (rofit b! =1$$
(er !ear.
c+ I"(ro5e ca(ital structure
@orking ca(ital reuction
3nother set of "easures will (ursue to reuce the in5est"ent in in5entories b! 1$9.
/hat "eans a reuction of =9$ "illion.
,
7eturn =0 billion of cash to shareholers b! the en of %arch 0$$0
/o create a "ore efficient ca(ital structure an i"(ro5e the (otential for a faster rate of
earnings growth %arks & '(encer intens to return =0 billion to shareholers b! the
en of %arch 0$$0. /he release of 5alue fro" al"ost half the co"(an!:s (ro(ert!
(ortfolio an the sale of international subsiiaries will finance this ecision. >ollowing
the return of cash to shareholers, %arks & '(encer will retain the financial strength
an fle4ibilit! to fun future growth.
3inancial #mpact
/he benefits to traing (rofit fro" the closure of the Euro(ean subsiiaries an the
changes to 6irect will be about =5$" in a full !ear. /hese "easures will gi5e rise to
e4ce(tional charges in the current !ear of =05$ " to =-$$ ", in aition to the =.0"
alrea! announce at the co"(an!:s Interi" results for the cost of satellite closures in
the 12. 'o"e two thirs of the =05$ to =-$$ " will be cash ite"s co5ering closure
costs an future traing losses.
#mpact on +eople
@hile recognising the i"(erati5e to strea"line Crou( o(erations, the Boar of %&'
e4(resse its unerstaning an regret for the (ainful effect this will ha5e on the (eo(le
in5ol5e. /he total nu"ber of roles irectl! affecte b! the changes announce are
esti"ate to be as follows:
Business 3rea )otential 7euction in 7oles
Aontinental Euro(e --5$
6irect 89$
Bea Dffice -5$
/D/3? .-9$
Ao""enting on these e5elo("ents ?uc Hane5ele, Ahair"an an Ahief E4ecuti5e,
sai: ")ese canges put in place a clear* toroug and urgent plan for reco!ery %ased
on te 01 %usiness" At te eart is a determination to restore an un.uestioned
reputation wit our customers for .uality* !alue* ser!ice and inno!ation" By creating a
simpler more focused organisation we will %e a%le to get on wit wat we do %est* to %e
%etter positioned to deli!er faster reco!ery and* in time* sei4e new opportunities %ot in
te 01 and a%road" $e are confident tat %ot customers and sareolders will %enefit
as a result" $e recognise tese canges will %e painful for some of our people" $e !ery
muc regret tis %ut te decisions a!e not %een taken ligtly" )ey are essential to
%uilding a stronger future for Marks & Spencer""
Hane5ele concee that with the benefit of hinsight he shoul ha5e taken raical
action earlier. "#t is always easy in indsigt to say /ad # known si- monts ago wat #
know now* yes # would a!e done it earlier/" But it does take time to understand
torougly te strategic strengts and weaknesses of a company of te si4e of M&SJ he
sai.
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)!ESI*NS
5" 3rom te point of !iew of an analyst:
i+ Ientif! the "ain strengths an weaknesses of %&' )lc.
ii+ @hich strengths an which weaknesses o !ou belie5e that the strateg! (lan
announce the 09
th
of %arch of 0$$1 took "ore into accountM >orecast a
)&? an a Aash >low 'tate"ent for the !ear 0$$0.
iii+ 6o !ou agree with these "easuresM
6" 3rom te point of !iew of an in!estor:
i+ @oul !ou in5est in shares of %&' )lcM
ii+ @hat woul !ou o if !ou alrea! were a %&':s shareholerM
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