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Marks & Spencer is scrabbling to find tens of millions of pounds of extra cost savings after guerrilla discounting by competitors forced it to slash clothing prices in the run-up to Christmas.
The UK’s biggest clothing retailer was faced with a serious problem as the mild autumn weather sapped demand for winter coats and rivals such as Debenhams ran seemingly non-stop promotions. M&S said that hard-up Britons had seized on offers such as 25% off cashmere knitwear but discounting had eaten into profit margins.
Marc Bolland, chief executive, said it had been a “highly, highly, promotional” market and insisted that M&S’s price cuts were tactical, not a sign of distress.
M&S still expects annual profits to be in line with market forecasts of nearly £700m. the shortfall caused by the discounting will be made up by clamping down on rising operating costs, with a renewed efficiency drive to shave about £30m from store and head office running costs – a budget that has already been chopped by £60m since the beginning the financial year. Bolland said the company would become more efficient and he was not “talking about big redundancies”.
Last week the fashion group Next also blamed weaker than expected sales at its high street stores on its rivals’ widespread discounting.
Special offers helped M&S’s clothing like-for-like sales to finish up 1.1% in the 13 weeks to 31 December, although higher prices masked a fall in the number of units sold. But trade was much worse in homewares, where underlying sales tumbled 13.3% – a decline that M&S blamed on its decision to stop selling electrical goods such as TVs and iPods.
Bolland denied that new designer collaborations with Marcel Wanders and Sir Terence Conran had flopped, emphasising that enlarged ranges would launch in the spring, although prices for the Conran range would be cut by 30%. together, general merchandise like-for-like sales were down 1.8%.
The shares closed up nearly 3% at 317.7p, which Richard Black, fund manager for L&G UK Equity Income, said was because the market had “breathed a sigh of relief” that the sales figures were not worse.
Deep discounting lured shoppers to Debenhams, where like-for-like sales, excluding VAT, jumped 5% in the five weeks to 31 December. over the 18 weeks to 7 January, like-for-like sales were level with last year. Analysts had expected a decline of up to 3.2%, and the shares jumped nearly 9% to 62p.
Debenhams drives profits by investing some of its gross margin in price cuts and promotions. its chief executive, Michael Sharp, said its trading strategy was a “pragmatic” one: “We have not chased sales to the detriment of margin. Our focus is on cash generation – we don’t sit there and look at a product that is not selling. We could see that knitwear and outerwear was not selling at the rate we anticipated, and if it was happening to us it was happening to others … at some stage the market would have to deal with an overstock.”
M&S was rescued by a stronger than expected performance by its food business, where like-for-like sales climbed 3%. Reporting disappointing figures on Monday, the supermarket group Wm Morrison blamed cash-strapped shoppers cutting back, but there was no sign of that at M&S, where Britons bought 6m packs of its party food, with pork and mustard mini sausages and pork crackling straws, as well as indulgent desserts such as salted caramel profiteroles, among the bestsellers. Party food orders were up 15% boosted by the ability to lodge them online. Customers had saved money elsewhere so that they could treat their families to a “special Christmas at home”, said Bolland. he added that 600 new products had helped attract shoppers, although seasonal fare also sold well, with M&S shifting 33m mince pies.
The success of M&S’s food business at Christmas points to the “two nations” divide identified by analysts at Kantar Worldpanel as the mortgaged middle classes benefit from low interest rates and pack the aisles of upmarket stores such as Waitrose, while lower-income households head to the “hard discounters” such as Aldi and Lidl, leaving retailers serving the middle ground getting squeezed.
