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M&S patches up 'consumer love affair' for merrier Christmas

By James Davey

LONDON (Reuters) - British retailer Marks & Spencer is close to having both its food and general merchandise divisions "firing on all cylinders" and expects a better Christmas after poor clothing sales hit last holiday season, according to its food business head.

While the 130-year-old firm's general merchandise (GM) division - clothing, footwear and homewares - has posted 12 consecutive quarters of declining sales at stores open over a year, its food business has delivered 19 straight quarters of like-for-like sales growth.

"This business hasn't had foods and GM firing on all cylinders together for a long time. I think we're very close to having a position where both the food and GM businesses are working positively," Steve Rowe, executive director of food, told Reuters in an interview at the firm's London headquarters.

"There's a love affair between M&S and the consumer, and when you upset your lover, sometimes it takes longer than you think it's going to take for them to forgive you," said Rowe, a 25-year M&S veteran.

While the food business was continuing to win market share with a strategy to specialize more and focus on quality and innovation, he said there were also "really good positive signs" coming out of womenswear, its biggest clothing segment.

"I don't think we'll have a poor Christmas (in GM)," he said. "We all believe it is time to deliver."

Under Marc Bolland, CEO since 2010, M&S has posted three straight years of profit decline despite spending 2.4 billion pounds ($4 billion) to address decades of underinvestment.

Analysts do, however, expect profit to rise significantly over the next three years.

M&S's food business is outperforming the wider British grocery market - which is growing at its slowest rate for over a decade - and contributed over half of total group sales of 10.3 billion pounds in the 2013-14 year.

The firm does not split out food's profit contribution, but analysts estimate it generates about 35 percent of UK profit, reflecting lower margins and higher operating costs than in general merchandise.

DIFFERENTIATION

M&S, which trades from 809 UK stores, 763 of which sell food, has a strategy that sets it apart from Britain's so called big four grocers - Tesco , Wal-Mart's Asda, Sainsbury's and Morrisons - which are being hurt by the rise of discounters Aldi [ALDIEI.L] and Lidl[LIDUK.UL].

Tesco and Morrisons have both issued profit warnings, while upmarket Waitrose [JLP.UL] has also cautioned that its period of unprecedented investment will affect profits.

"The biggest single lump (of trade) is coming from the middle and moving to the discounters, but we're gaining from the middle, and so are Waitrose," said Rowe.

M&S, which has 4 percent of the UK food and drink market, has not suffered the same pressure from discounters, because it sells mainly own-label produce, so only 10 percent of its food catalogue is directly comparable with the core product of the big four.

Consumer trends of shopping around, buying little and often and wasting less are also playing to M&S strengths, given its estate of 459 Simply Food convenience stores, a large proportion of which carry a much bigger range of products than the smaller convenience stores of the big four.

Some 41 percent of M&S's customers "shop for today" - buying produce to consume on the day of purchase. That compares with about 25 percent at the big four.

Rowe noted that 67 percent of consumers who shop at M&S also shop at discounters.

"People are happily going in to buy some basic items from Aldi and then coming to us for their top-up items," he said.

"If you want something special, you don't go to Aldi or Lidl. If you want to make sure your turkey at Christmas is the best, you come to me," said Rowe, pointing out that M&S sells one in four turkeys sold in the UK at Christmas.

M&S is also differentiating itself from the competition with its product innovation - about 20 percent of its product range changes every year.

On items that M&S cannot differentiate on, such as bananas and cucumbers, it will match the market on price. But in areas where it can differentiate, it competes on quality, not price.

Unlike rivals, M&S has not brought down the price of a 2 pint carton of milk to below 1 pound.

But, says Rowe, its milk sales have not declined. "Why? Because my milk has more vitamin D and less saturated fat - deliberately."

"The race to the bottom helps no one ... You can always make stuff cheaper, but normally it involves removing something.

"We pay more money for our beef than other people do. Why? Because I know where it comes from. I know the field it came from. I know who its parents were."

The importance of provenance - his own father Joe was an executive director at M&S until 2000 - and pride in product make Rowe more than just a passionate advocate for the firm.

He would one day like to lead it, he said.

"The best retailer probably in the world, in my opinion, a company I've worked for and loved for 25 years, of course I'd love to," he said.

"Who wouldn't?"

(Reporting by James Davey; Editing by Will Waterman)

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