M&S lacks simple solution

Despite the City’s relatively positive response to Marks & Spencer executive chairman Sir Stuart Rose’s salvage formula in the face of the worst Christmas sales in a decade, analysts say the high street retailer has a lot of work to do to ensure its chain of Simply Food stores returns to anything near its early runaway success.

According to sector experts, M&S’ decision to close 25 of its premium convenience stores should come as no surprise. Analysts were predicting in October that  Simply Food, Rose’s hitherto success story, would be more vulnerable to the economic squeeze than any other food retailer, including the likes of Waitrose (MW October 16. 2008).

It’s a far cry from the heady days of just a few years ago when high-end luxury food retail became the jewel in the M&S crown, with Rose proclaiming 2005 the retailer’s “year of the chocolate pudding”. Rapid expansion followed in 2006, most notably into petrol forecourts via a franchise agreement with BP, as well as converting 28 old Iceland stores.

Today, eleven of the announced Simply Food closures are former Iceland stores, a sign, according to Verdict senior analyst Malcolm Pinkerton, that perhaps M&S let the early success of the stores “go to its head”.

Pali International analyst Nick Bubb agrees: “Simply Food can work in the right areas, but it has cannibalised the core business and M&S has made mistakes on some locations,” he says.

The closure of 25 stores out of 350 can hardly be described as a death knell, although all come from M&S’ 177-strong wholly-owned portfolio. Some say it is a sign that the retailer has woken up to the need to respond to ever-darkening economic skies.

Come dine with me

The Dine In promotion, which offers a meal for two plus a bottle of wine for £10 at the weekend, has been popular and, according to one source close to the retailer, driven substantial new sales. Rival Tesco even rolled out a copycat format for its Finest range, retailing at £9.

But for some, such initiatives are not good enough. “Simply Food sells itself as a more premium shopping experience – convenience but only for treats and luxury food,” says Pinkerton. “This offer is much easier for the consumer to strip out when they’re tightening belts. The main problem is the M&S offer has become tired. It hasn’t offered any new ranges or products for a long time.”

While rival Waitrose publicised its “best ever” Christmas trading, M&S saw its like-for-like third quarter food sales drop by over 5%. At the end of April 2008, food accounted for £4.2bn of revenue. Analysts believe there is room for M&S to offer more choice via a hierarchy of products that offer “good, better, best” range of options. And the retailer has already stepped up to promote its cheaper Wise Buys range, with national press ads appearing last week.

However, M&S is not conceding this is a retreat. It says it plans to open 20 more franchise Simply Food stores this year and three wholly owned stores. “It is a successful format trading in a very competitive market; inevitably some locations or formats don’t work,” says a spokeswoman.

Its nearest competition has been equally bullish about sticking to its pre-recession expansion plans. Mark Price says the second Waitrose convenience store will open in Clifton, Bristol at the end of the month, and, although he won’t be drawn on numbers for this year ahead of a forthcoming announcement, he adds that he expects “many hundreds will open over the next few years”. His aim is to double Waitrose’s size over the next decade and the convenience store project is part of a strategy that also involves mid-sized “market town” stores. Rather than replicate the same model as Tesco Express, Simply Food and Sainsbury’s Local, Waitrose is banking its hopes on an emphasis of fresh food and bigger than average convenience stores.

Even as consumers trade down their shopping for cheaper options, leading to a sharp rise in the fortunes of budget retails such as Aldi and Lidl, both M&S and Waitrose believe affordable luxuries will prove important.

Historically, in times of recession people have still wanted to lighten their woes with the odd treat, and it is this tendency the retailer is hoping will provide a shot in the arm to the Simply Food brand according to one insider. M&S believes the full effect of people choosing luxury food at home to save on eating out has not yet been felt, and that effect will be felt most on the M&S food bottom line.

But Rose admits M&S needs to respond to the changing mores of its customers, and says it will “try to ensure the customer who respects what we do with our quality value and innovation in food still thinks they are receiving value for money when they come to us”.

As for Simply Food cannibalising sales at M&S, Rose admitted last May that, while it was difficult to accurately predict, he believed it was running at “around 12%” just above their 10% target, but that it was their goal to “grow total food in the short to middle-term”.

Having pointed the finger for food strategy problems during last week’s analyst conference at his former head of food Steven Esom, whom he poached from his role as managing director of Waitrose and then sacked after less than a year, there is a sense Rose must stop blaming and start innovating. “M&S needs to be able to keep customers justifying the premium they’re paying by ensuring it’s delivering whatever is exciting the consumer,” says Nick Coulter, Numis Securities retail analyst.

It is not the first time M&S has faced criticism and promised a back-to-basics approach. In July 2004, Rose – fending a third takeover offer from entrepreneur Philip Green – announced a package of reforms including halting the roll-out of smaller Simply Food stores, saying his aim was to give M&S “back to our customers”. He promised a simplification of the company, the UK’s biggest retailer, to focus on its core retail side. Years later, buoyed by an increase in marketing investment, M&S and its “This is not just…” “food-porn” ads became a toast of the City.

Now, and amid a 20% decrease in its marketing spend, it must do so again. M&S executive director of marketing Steve Sharp points out there is still a quarter to go before the end of the financial year and is confident promotional activities are “pointing out newness and innovation to our customers”.