The Market Position of M&S - Case Study Example

Analyse and account for the market position of M&S which has adapted to recent changes in the economic climate effectively. Table of Contents Introduction 3 Marks & Spencer: a Brief Overview 3 Literature review 4 Discussion 7 Effect of recession on M&S 7 Changes Introduced in Response to Recession by Marks & Spencer 8 Future Outlook of Marks & Spencer 11 Conclusion 11 Appendices 15 Introduction The economic cycle or business cycle is subjected to different phases that include slump, recession, recover and boom. Companies face different market circumstances in different phases and they react accordingly. In order to sustain in the market, they have to adopt different strategies so that they are able to generate enough revenue. The global downturn during 2008-2009 is one of the worst recessions faced by the world economy. All the developed western countries like US, UK, France etc were badly hit by this global meltdown. Many companies of these developed nations were unable to cope up with the recession despite adopting relevant strategies and finally went bankrupt or were acquired by other companies. Lehman Brothers, Washington Mutual, Barnsley Building Society, Alliance & Leicester and Bear Stearns etc to name a few. This paper will attempt to ‘analyse and account for the market position of Marks & Spencer (M&S) which has adapted to recent changes in the economic climate effectively’. In order to meet the objective of this paper, a detailed analysis on M&S’s position during and after recession will be discussed. At first, a brief overview of M&S will be provided followed by a review of literature which will include the effects of economic cycle on business. It will be pursued by a discussion on M&S’s situation during the financial crisis. A business forecast of M&S is also provided. Finally, a conclusion will be drawn based on the findings of this paper. Marks & Spencer: a Brief Overview M&S is one of the leading retailers in UK that offers fast moving consuming goods and consumer durable products. This retail company is one of the oldest in UK, founded during the late nineteenth century. Currently, it offers a wide variety of products that includes clothing and home products and each week around 21 million people visit this retail store (M&S-a, “Company overview”). It has over 600 retail stores in UK, and internationally it has over 300 retail stores in more than 40 countries (M&S-b, “Where we are”). M&S has successfully created its brand value by implementing strong long-term strategies that focus on “Quality, Value, Service, Innovation and Trust” for the welfare of customers, stakeholders and society (M&S-c, “Our plan”). Literature review Both external as well as internal factors affect the strategies and the policies implemented by business. The external factors comprise of four main factors: political, economic, social and technological. Figure 1: The external Environment of Business (Source: Montana & Charnov, p.63) These external factors are part of the external environment of the business. They play a significant role in the success of business. Since the companies have no direct control on these factors, they try to collect all the possible information regarding them after conducting external environmental analysis (Cavusgil, et al., p.41). Apart from the external factors that lie outside the organisation, there are certain factors that are under control of the organisation and hence are called internal factors. These internal factors comprise of the human recourse, customer base, suppliers, financial resource possessed by the organisation and the organisational culture (p.121). Each of the external as well as internal factors has its unique effect on business; therefore whenever there is a change in any of these factors, the management needs to revive the business policies to retain the competitive position. Among these factors, economic factor is of great importance. As the nation passes through different phases of economic cycles, the management goes on modifying the corporate strategy. Different researchers analysed the data regarding changes taking place in the GDP of the nations to find out the cyclic movement of the economy. The below given diagram represents the periodic changes observed in the economy of US from 1870 to 1913. Figure 2: Kalman filter decomposition of US GDP cycles (1870-1913) (Source: Punzo, p.8) Scholars have conducted various researches to find out the relation between the economic condition of the nation and its effect on the businesses strategies followed by the management. In the year 1983, Smith and Miner found significant relationship between the firm’s growth pattern and its effect on the managers’ motivational level. They pointed out that the external environments has affected the business decisions taken by the management to improve the performance of the business in the long run (Da, p.3-4). In the year 2008, almost all the developed economies in West were engulfed by the economic recession. This change in the economic condition drastically affected all the industries and retail industry was not an exception. Figure 3: Volume changes for retail sales, GDP and private final consumption expenditure, EU-27 (Source: Newson, p.1) The above given chart indicates that with the onset of recession, the GDP in EU had started declining. This severely affected the performance of retail industry in 2008-2009. To counter the adverse effects of declining revenue and profitability, different retail companies introduced various changes in their corporate strategies. Discussion Effect of recession on M&S As discussed earlier, M&S enjoys a prominent position in the UK retail industry, and hence the recession phase in UK had its dire consequences on the financial as well as the market position of the company. As expected during a recession phase, the liquidity position of the company declined. The chart of the last six years current ratio indicates that not only did the liquidity position of the company declined but the risk of short term solvency also increased. During the recessional phase, the revenue of the company was reduced by 0.4% and sale in UK was down by 1.7%. In the same time, the operating profit was reduced by 29.4% as the cost of operation increased by 4.3%. Decline in the profitability of the company can be clearly analysed after examining the change in the operating profit margin in the last six years. Poor demand in the internal market coupled with poor purchasing power of the customers resulted in poor sale of M&S. The effect of this poor demand can be analysed after evaluating the inventory movement in last few years. The inventory turnover ratio of the company is showing a constant upward movement that reflects the accumulation of inventory in the stores. The chairman of Marks & Spencer, Sir Stuart Rose declared that the past recession of 2008-09 was one of the worst phases in the history of the company. The chairman accepted that in 2008-09, the profitability of the company declined drastically in UK due to poor sales and high operating expenses. In UK, the consumer confidence was low, and the future of the company appeared quite bleak. The UK garment industry is highly competitive where many big players compete with each other to expand the market share. Among them, J Sainsbury plc and Tesco can be considered as two strong competitors of the company. During the economic recession of 2008-09, the condition of these two companies also became dismal. As a result, the performance of the entire retail industry was poor during 2008-09. As compared to the developed nation, the effect of recession was quite mild in the developing nation. Though the revenue of different retail companies was declining in UK and US, their counterparts in Asia Pacific region succeeded in managing a moderate growth in sale. Changes Introduced in Response to Recession by Marks & Spencer During the recession of 2008/09, most of the UK companies suffered huge losses. However, at present, the UK economy is at its recovery stage. M&S had not been an exception to it. Table 1 depicts the income statement of the company in 2010 and it is compared with the last five years. As per the table, the profit after tax decreased during 2009 due to the financial crisis. However, in 2010, the company was able to regain its profit but at a slower rate. Table 1: Income Statement of M&S (Source: M&S-e, “Financial statements”) The management of the company took various decisions in order to maintain its flexibility in the face of recession. Stuart Rose, the Chairman of M&S claimed that during the recession period, M&S continued with its long term goal without changing its core values. He admitted that the growth was interrupted during 2008-09 but the market shares in its core areas were unaffected (M&S-d, “A platform of Growth”). His comments have disclosed that M&S was able to take up proper position according to the changes in the economic climate. Ian Dyson, Group Finance and Operation Director of M&S, was one of the key personnel who was endowed with the responsibility of taking necessary measures during the global downturn. Some of the actions taken by the management of M&S during 2008-09 have been given below (M&S-f, “Managing through the recession”). M&S increased its investment margins by making their customers invest in promotions and pricings. This helped M&S to increase the value for their customers at the same time retaining their loyalty. M&S reduced its cost structure by taking up a series of necessary actions to increase the profitability. It was able to reduce the underlying cost by 5.7% which led to a savings of £148m. Major costs incurred on staffs, distributions marketing and support were cut down without affecting its overall performances. M&S had reduced the capital expenditure by 34% in 2008-09 as compared to 2007/08. M&S closed down its 26 small and under-performing stores and focused on its potential and important stores so as to serve its customers in a better way. Investments were made only on those stores that were revenue earners. M&S concentrated more on its cash flow management and was able to reduce its debt of £2.5bn in 2008/09. M&S kept investing in its international market which was not that badly affected by the global downturn. M&S also invested in important functions like in IT, logistics etc. During financial crisis it had opened nearly 75 stores in high streets and retail parks that significantly contributed to its revenue generation. Future Outlook of Marks & Spencer In 2010, the company recorded a moderate growth in the profitability as the economic conditions are slowly improving in UK. The growth in revenue was mainly influenced by the expanding retail sectors in the developing countries of the Asia Pacific region. As for example, the retail sector of China and India is considered as one of the high potential markets by the international retail companies. At present M&S is trying hard to expand its presence in the developing markets, for which the company plans to undertake more mergers and acquisitions. The company is also collecting information regarding the local market demand in the developing nations so that the product range offered by M&S in these markets can be altered to suit the demand of the local people. In the light of the above mentioned initiatives it appears that the required changes introduced by the company will assist M&S to increase its market share in the international market. Conclusion Recession period makes the economy vulnerable by hitting its sore spots. The profitability of most of the industry declined drastically because of it. The financial crisis during 2008-09 was one of the worst that the economy had experienced so far. Companies faced incredible losses and many of them even went bankrupt. Nonetheless, it also proved to be a learning experience for the managements of the companies. The paper attempts to excavate the strategies that M&S adopted to sail through the difficult time. Though it was also a victim of recession and its market share and share value were drastically affected, the acumen of the management ensured that the company is able to surpass it all. They efficiently cut down the unnecessary costs without affecting its brand image. Its effort has borne fruits and now in 2010 as the company enjoys 4.6% growth in its profit after tax. Instead of being complacent, the company now seeks further growth by investing in potential market through mergers and acquisitions. Reference Cavusgil, S. T., Ghauri, P. N. & Agarwal, M. R. Doing business in emerging markets: entry and negotiation strategies. SAGE. 2002. Canzer, B. E-business: strategic thinking and practice. Cengage Learning. 2006. Da, Y. Abstract. December 5, 2000. The Impact of Economic Environment on Small Business Owners Perceptions of the Future. August 08, 2010. . M&S-a. Company overview. 2010. About Us. August 08, 2010. . M&S-b. Where we are. 2010. About Us. August 08, 2010. . M&S-c. Our Plan. 2010. About Us. August 08, 2010. . M&S-d. A platform of Growth. 2010. Chairman’s Overview. August 08, 2010. . M&S-e. Financial statements. 2010. Annual report and financial statements 2010. August 08, 2010. . M&S-f. Managing through the recession. 2009. Annual report and financial statements 2009. August 08, 2010. . Montana, P. J. & Charnov, B. H. Management. Barrons Educational Series. 2000. Newton, B. Recession in the EU: its impact on retail trade. 2009. Eurostate. August 08, 2010 . Punzo, L. F. Cycles, growth and structural change: theories and empirical evidence. Routledge. 2001. Appendices Appendix 1: Evolution of volume of retail sales and GDP (Source: Newson, p.2) Appendix 2: Retail and consumer confidence and the volume of retail sales, EU-27 (Source: Newson, p.3) Appendix 3: Evolution of the volume of retail sales – comparison of food and non-food items, EU-27 (Source: Newson, p4) Read More