Never the same again? M&S has found digital religion at last, but can an 'omni-everything' mindset translate into a monetized customer base?

Tracking the digital transformation - or lack thereof - at UK retail institution Marks and Spencer (M&S) over the past few years has been a pretty thankless task. But now the 137 year old firm is finally a fully-fledged digital convert, the question is whether this Pauline conversion has come too late?

That was the elephant in the room this week when the retailer announced its latest shockingly bad results, plunging to an annual loss of £201 million and its analyst presentation materials admitted that among the company’s many “deep-seated issues” was the fact that it has been “behind the curve in digital”. All that is over with its new Never The Same Again strategy, it seems.

Food for thought

It has been a case of bad timing in recent years. Despite M&S Food being one of the few success stories in recent times, the firm stubbornly set itself against the shift to online grocery shopping, declaring that the way consumers engaged with M&S was different to the rest of the sector. That stance all changed last year with the launch of a joint-venture with Ocado Retail and a full-blooded commitment to online food shopping and delivery.

But even there, M&S seems cursed with missing the big moment. It was September before the Ocado service was up-and-running, over 6 months after the COVID-triggered online grocery shift around the world had peaked. That said, the Ocado relationship is paying off, with plans to increased capacity by more than 50% over the next 18 months in order to broaden national reach and expand the immediacy of the service.  M&S CEO Steve Rowe now says:

The acquisition of 50% of Ocado Retail was a transformational step. Through successfully executing the switchover from Waitrose in September of last year, we brought M&S Food online for the first time. Ocado Retail opens up huge opportunities for M&S by giving us access to the fastest growing channel of the market, which I believe will see a permanent increase in share of the market as a result of the pandemic. Importantly, this is through a sustainably profitable model, supported by the best technology and online distribution.  M&S regularly represents about half of all fresh sales on Ocado, reflecting the popularity of M&S products.

Mel Smith, CEO Ocado Retail, was one of the architects of the JV. It seems that the progress to date has surpassed her expectations:

Switching to M&S [from Ocado’s previous partnership with Waitrose] was an incredible undertaking, especially in the midst of a global pandemic. The switchover was a huge success. M&S sales penetration is over 25%, significantly above pre-switchover levels. We are rapidly expanding our capacity to reach more customers than ever before. In February, we opened a new automated mini Customer Fulfillment Center (CFC) at Bristol, the first to go live since our formation. Mini-CFCs bring the efficiency benefits of our automated fulfillment model to areas of lower population density.

We also plan to rapidly expand our Zoom immediacy proposition, with a minimum of 12 new sites being sought across London and major UK cities. These will fulfil more missions and give customers new ways to shop with us. This is just the start of what our incredible partnership will deliver for both our customers and shareholders. We have begun to explore opportunities for further collaboration across new product development, data and joint sourcing, and we will continue to work closely together to deliver growth for both M&S and Ocado. Our partnership has brought together the best of food and technology.

Omni-everything

But M&S Food is only one part of the company’s interest. What’s now on the cards, accelerated by the response to COVID, is a ramping up of digital and data-centric capabilities across all parts of the business. There has been progress made here, insists Rowe, pointing to the decommissioning of the corporate mainframe and a shift to cloud hosted platform for a customer data engine, both of which have enabled the relaunch of the firm’s Sparks loyalty program as a purely digital initiative. This, in turn, has driven 3.5 million new M&S app downloads. Rowe says:

Having a product engine is, of course, only one part of the story. One of my priorities as part of fixing the basics has been investing in our data and digital capability. We've built out a comprehensive customer data engine, transitioned our web platform to the cloud, and relaunched Sparks as a fully digital proposition through the M&S app. To capitalize on this, we created MS2, bringing together our online, digital and data teams to prioritize online growth and capitalize on our omni-channel advantage.

And it’s MS2 that’s going to carry a burden of expectation in the coming years if M&S is to build the digital-first future to which it now aspires.  Katie Bickerstaffe, Joint Chief Operating Officer, explains the challenge:

Over the past year, M&S.com delivered 53% revenue growth in UK clothing and home and had over 9 million active customers at year end and a bigger active customer base in the UK clothing and home business than any other omni-channel retailer. Despite large customer numbers, we're not yet number one in the market, giving us a huge opportunity for growth. Through MS2, we now have the ambition and real opportunity to push our online sales participation to well over 40% of the total clothing and home business over the next three years.

There are a number of stages mapped out to achieve this, she adds:

First and foremost, delivering the best online offer and supporting this with brilliant digital selling and maximizing our omni-channel advantage through our great service. Having the best online offer is all about sourcing, the best own label products and complementary brands which offer brilliant value for money and have strong sustainability credentials, and thinking online first, rather than aligning with the way the stores have historically traded. This means more focus ranges in our stores, with online options and sizes in some categories; working with the right third party brands, creating a halo effect; getting the sourcing model right in scale categories that Marks and Spencer is famous for, such as knitwear and lingerie, with test and repeat for seasonal fashion.

The relaunch of the Sparks loyalty program and the Marks and Spencers app are at the heart of first class digital selling. We have relaunched Sparks, which is free to join, as a digital membership scheme. It now has over 10 million members and has helped us to drive three-and-a-half million app downloads, putting the Marks and Spencers ecosystem onto your phone. For M&S.com, this creates better traffic efficiency. We know that our app customers have the lowest cost-to-acquire and have higher annual spend than any other.

For our customers, Sparks enables us to personalize the whole Marks and Spencers offer when browsing online or in store, based on our knowledge of their shopping habits over time. We have built new services into the app, such as book-and-shop in food, allowing customers to skip potential queues during the pandemic, and scan-and-shop,  enabling quick and easy contactless checkout. In-store services, such as video-powered retailing, allow customers directly to contact colleagues in-store, creating a contactless, but full service customer journey.

This has led to some very M&S successes, she notes:

As an illustration in [one] store during lockdown, we were doing around 70 digital bra-fits a week, with a higher average order value than our in store bra-fit. We are already planning more innovation on the app. In the summer we'll launch Sparks Pay, bringing the ability to pay directly at the checkout using a credit product developed with our partner HSBC.

My take

Rowe talks with all the zeal of a religious convert. Digital agnosticism is a thing of the past for M&S. The firm has omni-channel religion and it’s ready to evangelize to anyone who’ll listen:

Over time, 40%, 50% ultimately, of the business in UK will move online. We are well-positioned to play that. What levers do we press? First of all there is the sheer volume of customers and our customer base continues to grow. Secondly, the data engine and Sparks - there are more than 20 million customers on that data engine, it's one of the largest customer databases in the UK and within that we have real detail on ten-and-a-half million customers. We've got two-and-a-half million app users now, live and running, again a step change this year. And that personalized detail is really important.

That's undoubtedly true. It’s also a problem at present as despite having those millions of customers on file, they’re not currently monetized to their full extent. That’s the tricky bit and that’s what needs to be tracked over the coming months and years to gauge M&S’s prospects for survival. We've heard fine words before...

That said, Rowe’s evangelical enthusiasm is welcome, if belated, and does more, frankly, to inspire that the more downbeat words of M&S Chairman Sir Archie Norman, who, while supposedly talking up what he calls a “more aggressive” period of change for the firm, rather undercuts expectations by adding:

Although we have produced some indication as to what we expect during the course of the year, we have to recognize that none of us really knows, not just because the pandemic, [but] because a lot of what we've done in the last three years is untested and unproven. We hope we're going to be pleasantly surprised, but we'll see how it goes.

We will indeed, Archie, we will indeed.