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“Shopping may never be the same” warns M&S as it records 20% profit slump in Q1

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M&S: transformation to be sped up, but is it too late?
M&S: transformation to be sped up, but is it too late?
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M&S CEO says retail may have changed forever and points out that the company now sees how important online is as profits slump in Q1

Shopping may have changed forever, believes M&S CEO Steve Rowe said today as the retailer posted a 20% fall in pre-tax profits to £403 million from £511m in the previous year.

 

The retailer, like many others, has had one of the worst quarters on record following the lockdown. M&S says homewares and clothing are down 75% and even food, which usually helps prop the retailer’s figures up, dropped by 8.8%.

 

M&S added that lockdown measures, social distancing and lower consumer demand was "likely to continue through the year", adding that the coronavirus pandemic means that its performance over the next year is difficult to predict.

 

It is working on a scenario that assumes a sales hit of £2.1bn over the next year across clothing, home, food and international sales and that the pandemic has shown just how important online is – and that this will see an acceleration in the business’s transformation plan.

 

Rowe told the BBC: "The trend towards digital has been accelerated, and changes to the shape of the High Street brought forward. Most importantly working habits have been transformed and we have discovered we can work in a faster, leaner, more effective way."

 

Neil Wilson, chief market analyst at Markets.com, added: "Covid-19 has accelerated lots of consumer trends and it may just be the catalyst required to accelerate Marks and Spencer’s transformation into a 21st century retailer. In particular, it looks as though M&S has learnt just how important online is.”

 

However, this could be too late of a realisation, according to Sofie Willmott, Lead Retail Analyst at GlobalData. “It is positive news that the retailer is grasping the opportunity presented by the pandemic and learning lessons about how quickly it needs to react but as is often the scenario with M&S it is too little too late and it should have adjusted years ago like many of its competitors did.”

 

She adds: “If its online channel had been prioritised when digital sales were booming, it would have already shifted shoppers online and been able to reap the benefits now. Consequently, despite clothing & home online sales increasing by 6.4% in the past six weeks this has had very little impact on a business that is so reliant on stores, with total clothing & home sales down 75.0%.”

 

Can Ocado save the day?

While the news doesn’t look good, there are reasons to be hopeful, analysts suggest. Online food sales are strong and the tie-up with Ocado – due to take effect in September – is likely to be a fillip for the retailer. Ocado has seen strong performance in Q1 and makes M&S’s procurement of a 50% stake in Ocado’s retail business for £750 million look wise.

 

Joe Healey, Investment Research Analyst at The Share Centre, agrees. “Despite the tough year, where I believe investors will be taking optimism looking forward is on the food side. The acquisition of 50% of Ocado Retail is a valuable investment in online grocery and has the potential to transform M&S’ growth potential in this segment. We all know, particularly throughout this virus, how critical the shift to online has been for consumers, so this could be the boost it needed to start materially transforming the way consumers shop.”

 

Healey adds: “All in all, I think investors will be satisfied with the results today. The business has clearly adapted well to changing market dynamics, for example their online delivery exposure which has helped mitigate the negative effects of the crisis. Trading has remained relatively solid, meaning the Group exceeded their Covid-19 scenario cash-flow projection by £150m and the Group continue to evolve both product lines and innovations at a matching pace to societal needs. We do not currently have a view on the stock but it is clear that there a few more obstacles for the Group to navigate.”

 

However, GlobalData’s Willmott sounds a note of caution on whether even this can help the retailer going forward.

 

“Despite focusing on improving value for money over the past year, M&S is still perceived as somewhere to buy a special treat, food for tonight or food on the go,” she says. “For the majority of consumers, it is not a retailer to visit for a big weekly shop and as shopping habits have shifted this way given availability issues and desire to shop infrequently, M&S’ performance has not matched up other grocers’.”

 

Willmott adds: “In addition, its stores are not as conveniently located with many of its branches on high streets and in shopping centres which have experienced the steepest footfall declines.”

 

M&S has lots of new faces joining its leadership team over the next few months and their biggest priority must be online. In all retail sectors, online will continue to outperform with channel shift accelerating this year as a result of COVID-19, says GlobalData. In FY2019/20, its online clothing & home sales fell 0.2%, and it cannot rely on Ocado to drive clothing sales. Improvements must be made to its own website to try to entice shoppers and achieve some growth this year.

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