All of us have got to run faster up the down escalator.
That’s the assessment offered by Archie Norman, Chairman of Marks & Spencer and a veteran of the retail sector, as he contemplates not only the fortunes of the iconic UK retailer, but also the wider macro-economic climate. His conclusion:
We are now in the consumer crunch period. I think we can already see that, I think it's been very well socialized. And actually, one thing people underestimated, customers have been hearing about this, they've seen it on their television screens for months now. What is less well ingested is the cost of doing business crunch. So right across retail, manufacturing, distribution, we're seeing rising cost of operating. It's not just wages - it's the energy cost, it's the transport cost, it's the packaging costs and so on. And some of that is still to come through.
M&S has some degree of protection compared to some competitors, he reasons, with the majority of customers being not as exposed to mortgage pressures, for example, due to their age. They also tend to have “slightly above average earnings”.
But none of this give M&S a ‘get out of jail’ card, he admits, noting that the firm’s cost of doing business has been too high. With that in mind, more changes are on their way to support the firm’s omni-channel ambitions. Norman cites three examples, beginning with store closures and openings:
I am very excited about what we're doing now with store rotation I know it sounds the old fashioned, the idea of opening great new stores and closing old ones, but for Marks & Spencer this is really powerful.
Secondly, moving volume into online. On average, and depending how you account for it - it's not an exact science - our online business is roughly as profitable as the store business. You could say it's more profitable. As we move more volume in it, it becomes more profitable.
And the third thing to say is that we've invested a lot of money into omni-channel data and the digital data engine. We'll translate that investment into driving sales. And actually, we do believe that we could end up in a market-leading position. We're positioned well ahead of many of our competitors in that respect and we're beginning to get there. So those are really exciting things.
That all requires investment in the right places. IT and M&S.com spend currently includes costs relating to technology replacement and upgrades in stores, website development and technology solutions for the supply chain infrastructure, and investments in digital capabilities across the group.
It’s necessary spend, says co-CEO Stuart Machin, citing the look and feel of the first of a range of newly kitted-out stores:
It's not just about the look of the store; the store is built in a more efficient way with improved technology throughout. From comprehensive use of RFID to self-service checkouts in clothing…Alongside this, we're also starting to unlock the substantial opportunity for improved efficiency across the clothing and home supply chain. This will be achieved through optimizing the flow of stock from source to shelf, and back through our returns process.
M&S has also closed its acquisition of food logistics provider, Gist, which has given the firm control of the end-to-end food supply chain for the first time, immediately removing around £25 million of management fees. It also, says Machin, enables M&S to drive productivity improvements and to invest in a fit-for-purpose supply chain network to support the future growth of the lucrative food business.
Mention of food inevitably brings up the partnership between M&S and Ocado Retail. While Ocado Retail revenue and contribution is down and basket sizes are smaller, the M&S brand consistently makes up over 25% of Ocado sales and has a growing share. But there’s work to be done, admits Machin:
Ocado Retail's proposition of market-leading quality, service and choice, underpinned by M&S Food, became diluted. Under a new leadership team led by Hannah Gibson, we're focused on restoring the core proposition. That starts with a new front-end website later this year and an improved collaboration with M&S Food for much improved combined offer for our customers.
When we announced the joint venture, we said we were bringing the best together and we're going to do just that. We see substantial growth and scope to the medium to longer term as we reset the customer proposition for Ocado Retail.
Despite all the cautionary notes, co-CEO Katie Bickerstaffe is keen to emphasize that progress is being made on the M&S omni-channel vision and its strategy to leverage data better to connect customers to M&S:
Over the past three years, we've made substantial investments in developing our ability to interact seamlessly with customers online and in-store, and enabling them to shop with us and have products delivered or returned when and where they like. We've created a single view of the customer through our customer data engine, containing a substantial volume of data and attributes relating to our customer base.
We've quadrupled the number of active app users to over 4 million. We've relaunched and grown our Sparks loyalty program to 16 million members, and invested in creating world-class data science capabilities across Marks & Spencer.
That’s come with a hefty price tag - a foundational investment of more than £200 million - but Bickerstaffe insists it's starting to deliver sales traction through increased personalization with a better online and in-store experience. That’s already driven over 30% of Clothing & Home sales online.
And there’s more to come, she says:
The objective of our digital development is to encourage customers to use more of our sales channels and services as customers with multiple digital relationships spend substantially more. Our ongoing development program in omni-channel retailing includes scaling the use of the M&S app, investing in an improved Click-and-Collect and returns experience, and increasing access to relevant third-party brands.
The M&S app is a good exemplar of the firm’s thinking, she adds:
The app already enables friction-free shopping on M&S.com, allows customers to spend and load best Sparks offers, provide Scan & Shop in M&S Food stores, and gives customers up-to-date recipe checks. Our objective is to double M&S app usage with a long-term goal of 10 million users. As a result of our growth, the app now accounts for around one-third of our Clothing & Home online sales. And while still small, Scan & Shop enables its use in store and food.
To drive further growth, we're working towards launching a single digital identity across all Marks & Spencer's related touch points from M&S.com to Sparks, to the bank, and eventually to include Ocado Retail. The goal is to make the M&S app a ‘super app’ that is indispensable to customers, whether they are shopping, browsing, buying and accessing our services, which means we can communicate personally to all our customers on a regular basis.
The app also helps us to deliver digital click-and-collect experiences, which means customers can now collect from store in less than one minute. And by leveraging the store estate, we've tested same-day click-and-collect within the hour. This capability provides additional capacity at peak times and will ease pressure on our future distribution requirements.
Greater personalization is another key objective, she adds:
While our customer data platform enables us to leverage data to create an omni-channel experience, it's also critical to personalizing our marketing to deliver increased frequency and spend. This will help us bridge the gap in our profitability to our key competitors. We're starting to generate substantial value from the customer data engine through personalizing offers and product recommendations, repeat purchase recommendations and using personalized language. For example, frequently brought together recommendations, which show products most typically bought alongside the product you've just added, have been worth an incremental £20 million of revenue to-date.
It's anticipated 20% to 25% of all of our digital interactions will be personalized this year, and personalization will generate more than £100 million of incremental revenue for our business. Sparks, our digital loyalty program, is an increasingly important part of this, which is the vehicle for delivering the very best of M&S to our customers, whether that's personalized promotions and offers, family days out or access to delivery, including through our recently launched Sparks Pass.
During the first half, we launched Sparks Pay within the M&S app, creating a digital credit account for our Sparks members, giving them more ways to pay and even more reasons to keep returning to Marks & Spencer.
We're quite encouraged. It might change as we go into the new calendar year, but all of our customer insights and data and listening groups are really saying our customers are looking forward to a good Christmas.
For a retailer whose digital capabilities were shockingly late to come to fruition, M&S has executed a strong omni-channel catch-up. From my own point of view, I use Ocado once a week to buy mostly M&S food and drink, while this year I’ve found myself using the wider online capabilities to buy clothing. One of M&S longstanding brand values was that the customer knew what they were getting in terms of cut and size. That’s translated usefully over to online where I feel confident that I’m going to get an item that fits.
Of course there’s still a lot of work to be done. The latest round of store closures announced by the firm leaves me nervous about the fate of my local branch. Time will tell on that front. But as a ‘warts and all’ progress report, M&S’s latest omni-update is encouraging in many ways.