How M&S never recovered from record breaking profits
As a new season of quarterly reporting is upon us, we will probably see some record breaking results by successful retailers. As fantastic as the streaks of great results are, sometimes they can be misleading.
Business can seem to be in a great place from the standpoint of revenues and profits. However, those record breaking numbers can be achieved in many ways. Some of them are more sustainable in the long term than the others.
One example of a once great retailer who used to break records in the UK, but has never recovered from one record breaking growth streak is the famed department store chain Marks & Spencer.
M&S and the spectacular 1990’s
In her book “The rise and fall of Marks & Spencer” Judy Bevan does a great job of illustrating how M&S became such a great retailer and how they eventually got blinded by their own greatness. Until it was too late.
By the spring of 1998 M&S sales were improving at a pace no one could imagine. As chairman at the time Richard Greenbury is quoted by Bevan as saying “We couldn’t believe it. We thought we were geniuses.”
In 1997 M&S had become the first Brisith retailer to reach annual profits of more than £1 billion. The pinnacle of the M&S glory years were reached in the spring of 1998 when the company reported sales of a bit more than £8 billion and the staggering profits of almost £1,2 billion. This was more than double what the countries biggest retailer Tesco was managing to achieve. However, in terms of revenues Tesco was double the size of M&S. According to Bevan only Walmart was able to generate more profits than M&S. Walmart was the biggest retailer in the world with almost 15 times more sales than M&S.
The company was revered from all sides of the business press. It was the source of several Harvard Business School case studies and the chairman Richard Greenbury was constantly named as one of the most important business people in the country.
When the success is at it’s biggest the threats are always present
However, as the fame of M&S grew ever bigger, problems started to brew behind the scenes. Three things especially influenced the nascent decline of the business.
Firstly, the quality of stores and operations started to degrade as M&S picked up speed in opening new stores. With the mounting pressure to reach the hallowed £1 billion mark in profits, more and more store refurbishments were postponed leaving many stores looking rather dated. The company also started to cut back on its investment to training the staff. As the store footage increased, the less trained staff were left to cover ever bigger area per employee. This all led to a gradual decline in the staff morale.
Secondly, customers noted this decline in operating standards and staffing. The traditionally rock solid M&S customer satisfaction started to become volatile. Also the customer tastes had started to shift and M&S was not recognising that.
Thirdly, the competition noted the changing sentiment of the customers. Many competitors had struggled severely during the previous recession, but during towards the end of the decade they had started to gain traction. At the same time new competitors arrived to UK.
The competitors were small compared to M&S and thus it was all too easy for the management to disregard all mentions of competitors. However, with the growth of Next, hypermarket clothing (Asda, Tesco…) and the new fast fashion upstarts Zara and H&M, the competition was becoming an issue.
As the profits grew, the M&S share price also grew similarly. At it’s peak in the late 1997 M&S was valued at £19 billion, almost double to the valuation of the country’s biggest retailer in terms sales, Tesco.
Good things tend to come to an end
As Howard Schultz more than a decade later realised with the crisis at Starbucks, the problems start building up very gradually and from multiple sources. The problems are difficult to identify as they start gathering momentum. When the problems are noticeable, they tend to be rather big and serious. Same happened to M&S.
By the early 1998 M&S share price had started to decline. In the fall of 1998 the mounting problems suddenly became clear for everyone, as M&S reported its half year results. Instead of growing, the profits were down 23 %.
It was the first serious profit drop since the World War II.
Bevan cites the M&S chairman Richard Greenbury as saying that “It’s a bloodbath out there on the clothing front … business has fallen off a cliff.”
That cliff might have come as a surprise to many outside M&S (even for some within the company), but nevertheless it had been approaching for a long time. The top management of the company just ignored it for too long. Unfortunately the profits at M&S have never recovered the levels of the late 1990’s.
The company is today only a shadow of the mighty retailer it used to be for decades.
This is unfortunately a dynamic that has happened all too often in the business world. Often a company that is hallowed by the business media more or less suddenly starts to degrade. This all seems to come out of nowhere for outsiders. Many insiders know that the problems had been brewing below the surface for a long time.
Enter Tesco
As M&S started to dwindle, Tesco became the darling of the British business media as it continued its spectacular rise. Eventually Tesco became one of the biggest retailers in Europe by the end of the first decade of 2000’s.
However, eventually Tesco also fell into the same trap as M&S. The gradual decline of the Tesco empire occurred a bit more than 10 years after the collapse of M&S. There are surprisingly many similarities between these two companies. Just as the crisis as Starbucks was made of very similar ingredients as within the M&S and Tesco growth stories.
As Terry Leahy (one of the main architects of the rise of Tesco) stepped down from the leadership role, his successor Phillip Clarke was unable to turn around the fortunes of Tesco. Contrary to the M&S turnaround, the second attempt by Dave Lewis was a success and Tesco has managed to grow back to its role as the biggest retailer in the UK.