Marks & Spencer, the venerable English retailer, has been dogged with problems in recent years and attention has now turned to the performance of its luxury food division with some forecasts predicting massive cutbacks. Dave Robertson investigates.

The M&S logo is probably the most famous brand on the British high street but the company has seen profits slide as customers have moved to more innovative and responsive clothing retailers. By comparison the food division, which specialises in premium packaged products, has always dominated the top end of the UK food industry and has maintained this stranglehold despite pressure from the major supermarket chains.

However, there have been rumours that all is not well in the food division and some analysts have called for a radical overhaul of the entire operation.

The situation has not been helped by the departure of Justin King, formerly M&S’s food director, to run rival Sainsbury’s. Guy Farrant, the food trading director, was appointed “interim” food director at the start of November and the company is understood to be on the lookout for other candidates. Whoever ends up as food director, whether it is Farrant or an external appointment, it is clear that they will have plenty to get their teeth into.

Convenience is king

M&S’s food operation is split between departments in the high street stores and standalone “Simply Food” convenience stores. Simply Food was launched in 2001 as an attempt to make M&S’s popular food products available to a wider audience. Research had shown that half the British population was more than a ten minute drive from their nearest M&S food outlet, which was obviously restricting sales.

Like the other major food retailers, M&S decided that a convenience store network could help boost sales and the company now has 119 Simply Food outlets.

M&S has also signed a deal with Compass, the largest catering group in the world, to open Simply Food shops at motorway service stations. There are currently three and M&S chief executive Stuart Rose announced last week that six more would open in the next 18 months.

This deal suits M&S because it fits with the strategy of getting convenience stores into commuter belts and transport hubs – train stations, motorway service stations etc. It is also a good deal for Compass, which has been derided for the poor quality of product offered by motorway service stations. (Compass boss Michael Bailey admitted: “We have been accused of rip-off prices and crap service. M&S is not in that arena, so I believe this will make a difference to how we are perceived.”)

Food the saviour of clothes?

Rose has stated that he wants to open at least an extra 500,000 square feet of food retailing space by 2005/06. M&S needs this extra space because it will produce an estimated £500m (US$972.6m) in additional revenue, which will offset any further decline in the clothing sales as this division gets yet another revamp.

But the rollout of Simply Food has not been without its problems. The average customer is thought to be spending just £4 a shop, which would mean margins are thin. And because Simply Food is a “premium” convenience store – i.e. its products are at the top end in terms of both quality and price – the outlets have to be in “premium” locations. A number of the Simply Food outlets are paying incredibly high rents and one report last week revealed that M&S was paying £45 a square foot for some stores – more than twice what most rival convenience stores pay.

And sales have faltered too. Although the food division increased sales by 3.2% in the first half of 2004, like for like sales, which excludes growth from new stores, were down 2.1%.

Advertising campaign

So what is M&S doing to counter these problems? It has started with an opulent television advertising campaign that seems to feature every famous person in Britain, including actors Rupert Everett and Helen Mirren.

However, unlike other convenience stores, M&S cannot automatically resort to price increases to bolster the bottom line. A typical mini supermarket in a city centre bumps up prices by at about 4% compared with large out-of-town stores but M&S is already selling products at a premium so has less flexibility in its pricing options – there are only so many people willing to buy “Gastro pub fish and chips” for £7.

Instead the food division is trying to cut supplier costs by demanding discounts. Again this strategy can only be pushed a limited distance as M&S cannot risk diluting quality, which is its main sales feature.

Simply Food outlets up for grabs?

The company is also looking to get rid of some of the badly performing Simply Food sites, although the number up for sale is in doubt. A report two weeks ago suggested that half the stores were up for sale and that M&S had been holding talks with rival food retailers. If this were true it would be an admission of having made massive blunders in locating the majority of stores and would likely cost M&S millions to resolve.

The company says the report is completely inaccurate and given the trouble Stuart Rose has with M&S’s clothing division it seems hardly believable that he could afford to sell half the Simply Food division. What is worrying is that the company’s heady (even desperate) expansion plans for Simply Food could exacerbate any existing location problems.

Danger of cannibalising sales

One source close to M&S told “The company has extended its deal with Compass which somewhat discredits the idea that Simply Food is up for sale. But they will have to close some stores because they are too small or in the wrong locations. Simply Food is proving quite profitable and the main problem is that if a Simply Food store is put too near one of the main food/clothing stores it tends to nick sales from it. They need to get it just right.”

Because so much has so obviously been wrong with M&S in recent years, analysts have had a field day offering their opinions on what will cure the problems. Some analysts hate the Simply Food concept, ridiculing it for its high staff numbers, high costs and low per-customer sales. Others see Simply Food as the only way M&S can increase sales in the short to medium term while the clothing division is overhauled.

However, the complainers may have to learn to like Simply Food as Rose seems determined, for the moment, to make the convenience store concept work.

And the success, or otherwise, of Simply Food has wider implications as it is critical to the whole concept of luxury convenience stores in the UK and further afield in Europe and North America. If M&S fails it is hard to see how any company could make the idea work and consumers will be stuck with high-price, low-quality independent stores or their usual supermarket in mini form.