Simply Food store openings to accelerate growth

Simply Food store openings to accelerate growth

Marks and Spencer's first-half results paint a picture of a company divided. One the one hand, its food business is performing well, with rising like-for-like sales and improved profit margins. On the other, general merchandise continues to struggle, booking lacklustre sales and lower margins. With a swathe of plans to accelerate food growth, that side of the business looks ship-shape. However, a question mark hangs over whether its non-food performance is turning a corner. Katy Askew reports.

Marks and Spencer booked a 3.6% increase in sales to GBP4.9bn (US$7.86bn) this morning, with gains underpinned by a 5.3% rise in total food sales.

This strong result in a down market would suggest M&S is getting a lot right on the food front.

Speaking to analysts this morning, CEO Marc Bolland emphasised that the firm has been working to improve availability and choice in its food halls. Ranging efforts have centred on product density, and there are further opportunities to bring new products in store, Bolland suggested.

The company has focused on developing its food ranges and innovation in its private label offering over the past year and its strong private label offering has provided the group with a point of difference.

Shore Capital analyst Clive Black praised the group's move to bring a full food range in store." We warmly welcome M&S seeking to offer its full food range in more stores... Food availability remains a priority, where management is on-track to deliver c5% improvement, with greater depth of coverage," he wrote in a note to investors.

The company also has a strong line-up of new food products that it is planning to roll out for the key Christmas trading season, Bolland revealed. "We have 800 food lines around christmas, of which 230 are new food lines - new innovations," he said.

These efforts, Bolland continued, have resulted in an uplift in customer satisfaction levels.

"We saw a strong performance from food... I feel very confident about that," he observed.

The company's food business was also able to boast an uplift in profitability. During the half, food gross margins appreciated 50 basis points. For the full year, M&S said that it anticipates gross margin to grow by 30-50 bps. "Food gross margin will be ahead of the guided range," the company said in its update to the market.

Marks and Spencer also has plans in the bag to expand its food focused business further still. While the company indicated that it intends to cut capital expenditure next year to circa GBP550m following a period of capital intensive "heavy lifting", the group emphasised that it is still pushing ahead to grow food sales.

At an M&S food event earlier this month, the group unveiled a significant expansion of its Simply Food network in the UK through the opening of around 150 stores over the next three years. M&S has 427 owned and franchise Simply Food outlets across the country. 

The move is being made to "further enhance" its specialist food positioning and reduce drive times to access M&S food stores.

"Around 49% of the UK population is outside a ten-minute drive to an M&S Simply Food store and ten minutes is key to loyalty. This [investment] is about targeting an opportunity with the right footprint in the right locations. From next year, 30 stores will have opened in the UK. All will be located on the edge of towns and mainly driven by BP," Steve Rowe, executive director of M&S's food operations, told attendees.

The company is also growing its food business internationally. The bastion of the UK high street has signed a deal to open Simply Food stores in Paris under a licensing agreement with Relay. The first outlet is set to open its doors in 2014 and Relay is expected to open around ten stores in and around Paris by 2018.

It is clearly full steam ahead for Marks and Spencer's food arm. However, the struggling general merchandise unit is generating the majority of headlines.

"In terms of revenues if not perception, M&S is now more a food company than a clothing retailer," Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers, observed. "Within the lower margin food area, sales continue at a decent clip... However, the traditional general merchandise area continues to be the centre of attention."

M&S saw weak trend in general merchandise continue in the half, with total sales up just 0.4% and like-for-like revenues down 1.5%. The company has been hit by competition from the likes of cut-price rivals Primark as well as competition from growing online sales in this category. It has also struggled with a perception that it is somewhat old fashioned and out-of-step with current fashion trends. And, while management suggested that initiatives to update its image - including the much lorded relaunch of its womenswear range - are beginning to turn the corner, there is little evidence of improvement on the top line.

If sales aren't moving in the right direction, it is also fair to say that margins are also headed south in general merchandise. Margins dropped 100 bps in the period as M&S focused on improving product quality.

Bolland said the company was attempting to shift its clothing offering from a "good, better, best" tired system to focus more on "better, best". While this quality focus comes as M&S's answer from lower price high street alternatives, the company has, as yet, been unable to pass costs of this investment in quality down the chain to customers.

The ongoing woes impacting general merchandise prompted Investec analyst Kate Calvert to describe the group's latest result as "a tale of two UK businesses".

"While food continues to perform well, there is little evidence of a womenswear turnaround," she wrote in a note to investors.

Overall, M&S has outlined a strategy that will see it become a multi-format international retailer. The company is developing an e-commerce business that will be working off its own platform in spring 2014 and multi-channel sales increased by 28.5% in the half, outperforming the market by around 12%. While M&S has so far stopped short of introducing an online food offering, this too represents an opportunity to improve the reach of its food offering.

The retailer's food business is outperforming the UK market and it is clear that consumers are responding well to the growing assortment in its food halls and the increase in food-focused Simply Food outlets. It is also leveraging the opportunity to expand on an international scale.

However, for the turnaround at M&S to be dubbed a success, the group must deliver an improved general merchandise result. A house divided cannot stand.