International Retailing and Marketing - Marks and Spencer - Essay Example

Marks and Spencer PLC: An Analysis of International Retailing I. Introduction Dawson et al (2000: 343) remarkedthat "operating internationally for the major retailers had become, by early in the twenty-first century, the standard situation and is now not so much a key success factor as a key non-failure factor for large retailers." This report aims to determine whether indeed going global contributed to the success of prominent retailer Marks and Spencer. Firstly, a background history of the retailer operations will be given. Secondly, an analysis of its venture to the international mark shall be provided. Finally, it shall be determined whether this move realized the gains projected by the company and relevant factors that led to its success or failure shall be critically examined. II. Defining International Retailing A review of literature has provided a consistent definition of the term International Retailing which is "the operation, by a single firm, of shops, or other forms of retail distribution, in more than one country" (Findlaey and Sparks, 2000: p. 40; Alexander, 1997:p. 27). This definition encompasses several types of company schemes such as the Body Shop and Bally which operates their own stores and franchise arrangements; GIB, Vendex, Aeon and Ahold which operate separate chains of stores internationally; and the IKEA, Sogo and Toys R Us which operate a single chain. Every business move must be thoroughly studied before application and given the complex nature of retailing in an international setting, it would be prudent to conduct a study aiming to determine the necessary scheme to be adapted by the interested company. There are many methods for determining business environment such as the Political, Economic, Social and Technological (PEST) analysis which is mainly concerned on the operating environment and the Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis which considers also other competitors already present in the market. These analyses shall be used to determine strategies for a successful entry scheme. Retail companies can opt to establish presence by modes such as direct establishment of stores or franchising. Since any business is an on-going process of learning and growing, many retail companies find it necessary to incorporate strategic factors in their business plan along the way. III. Marks and Spencer: A Background Marks and Spencer PLC is a companyr, established in the late 1800s by a partnership and is currently one of UK's leading retailer of clothing, food, home products and technology. Last 2008, Tthe company employs more than 65,000 people with 339 stores in the UK and 155 stores franchised in 30 countries found in Europe and Asia. It is also involved in financial services such as loans, savings and credit cards. The company made news in 1998 as it posted a pre-tax profit of over than 1.15 billion pounds sterling but later suffered a downfall for several years until 2003. (MarksandSpencer, 2009a) The company operates primarily by producing high quality products carried by a recognized and valued brand name. Products are affordable but not necessarily cheap. The prevailing philosophy for advertising was only by word of mouth which was very powerful as many customers are likely to purchase in the shop favoured by those close to them. This method was also very cost effective as there was no need for expensive adverts. From its inception until 1998, it had the policy of sourcing only from British suppliers and thus endeared them to the British public. Marks and Spencer officially adapted and carried the brand 'St. Michaels' for middle age and young apparel distribution in its stores. Stores are mainly located centrally in capital cities and important venues so that critical mass (number or buyers) can be realized. M&S is in possession of several prime holdings around the globe and is using it to establish presence. The company experimented in internationalisation by exporting its 'St. Michael' line to other countries. It must be remembered that the company only labels the products and not produce them. The St. Michael exportation was geared towards 'testing the waters'. Briggs (1992) estimates that the company was exporting only 1, 146,000 pound sterling of merchandise in 1955. Internationalisation was driven by many factors but most of them are domestic. Company directors and management team considered the British market to be saturated and the only way to grow further was to establish overseas operations. The retail company was also very influential and an icon in British society that the Labour party then had plans to nationalise its operations. Internationalisation was therefore an instrument for diversification.(Davies, 1999: p. 65) Export partnerships developed into franchise arrangements where St. Michael importers, aware of the success of Marks and Spencer, bought the right to exclusively market the product and implement its business formats. By 1990, franchising enabled Marks and Spencer to develop its presence in 14 countries such as Israel, Philippines and Gibraltar with little political and economic risks. Other modes of entry such as acquisitions and joint-venture were also adapted by the company leading to 645 stores worldwide in 1996 with 56% located in the UK, Europe and Canada. M&S behaviour in internalisation fits into the service firm internalisation process modelled by Alon (1999) and McIntyre and Huszagh (1995) which states that retailers will prefer to have franchising and exporting arrangements in politically and economically risky markets and engage in more daring arrangements such as direct ownership and acquisition in countries where the purchasing power of the citizens are more. This latter behaviour was what the company did in its venture to Canada and the United States. In any case, the 2009 extent of its international operations covers the European and Asian markets as illustrated in Figure 1: Figure 1: International Operations (MarksandSpencer.com, 2009a) Until 1998, M&S employed more than 70,000 employees in more than 40 countries. However, the group suffered from years of loss and announced a strategy to focus on the UK market where they are very strong and withdraw from international operations. Thus began the closing, selling or franchising of M&S business interests in almost all of its stores abroad. Due to its decision to withdraw abroad and focus on its core UK businesses, Marks and Spencer withdrew ownership of 220 Brooks Brothers stores (men's apparel) and 25 Kings Supermarket in the US market, 18 stores in France and 10 in Hong Kong. (MarksandSpencer, 1999) IIII. Internationalisation: A Big Failure For many years, Marks and Spencer was considered to be a huge success story of the British retailing industry. In 1998, it had achieved retail sales of approximately 8 billion pounds sterling traded in over 500 Marks and Spencer stores in 30 countries all over the globe. It was also in possession of the Brooks Brothers and Kings Supermarkets in the US, a retailer brand in St. Michael and a UK financial services operation which made 1.15 billion pounds before tax profit. (Alon, 2005) Nonetheless, it became apparent by year 2000 that international stores representing 25% of M&S floor space and 17.2% of retail turnover was only contributing 1.25% of the before tax profits. Further investigation revealed that international stores contributed only 8.3% of pre-tax profits in 1997 which was the most profitable year for M&S. International stores were proving to be a burden as sales in these stores stagnated and led to a 1 billion pounds sterling loss for the company over three years and a sharp decline of share prices from 6.60 to 1.70 by October 10, 2000. (Alon, 2005) With all this in mind, M&S decided in March 29, 2001 to divest itself of the US and Japan Brooks Brothers clothing chain, the US Kings Supermarkets and Continental Europe M & S stores. Hong Kong M&S stores were also transformed from direct ownership to franchising. Plans were also announced that within two years, all international stores directly owned by the company were to be sold, closed or franchised. In the following sections, I will be showing how the company fared in its international activity. a. 3.2 Analyzing the Downfall of M&S stores. The 2001 downfall was not the first of M&S international activity failure. As was previously mentioned, M&S business started exporting products to retail partners in over 50 countries starting in the 1940s. Trade was beneficial and boosted profits but was weathered by various problems including inconsistent brand presentation as M&S products were sold in different guises, inconsistent import regulations, international competition and absence of contracts with retail partners. Export provided no avenues for growth and was eventually formalized through franchises by the 1990s. (Dunwell, 2003: p. 45) Marks & Spencer first official foray into a formal international store was in 1972 when the company became a major stock-holder and eventually owner for Canadian clothing retailers D'Allairds, Walkers and People's. Business grew from 135 stores from date of share purchase to 275 stores by the late 1980's. M&S introduced D'Allairds in New York on 1988 but was shut down in 1996. Unable to make profits and sustain its Canadian operations, M&S official made an exit in 1999 where all of its stores were either sold or shut down. (Bevan, 2001:p. 32) Marks & Spencer officially entered the US market in 1988 when it purchased trendy clothing chain Brook Brothers and Kings Supermarkets. The Brooks Brothers purchase was thought by the M&S directors to provide the British retailer and establish a foothold in Japan. Brooks Brothers was very expensive to acquire and cost the company 30 times its 1987 profits but it was seen to be value for money because it offered 21 joint ventures with Daido Worsted Mills in Japan, 3 US factories and a direct marketing operation. Kings Supermarkets offered 16 stores. Both stores never succeeded and were put up for sale by March 2001. The former was sold in November 2001 and the latter was divested in July 2002. Both were sold at the same value as it was purchased in 1988 indicating failure to increase the value of the stores. (Dunwell, 2003: p. 86) M&S invested heavily in Brooks Brothers and established 7 more stores but the expected returns and benefits from the expensive deal were not realized. Many factors brought about this state of affairs not least of which is the strong marketing and brand loyalty enjoyed by WalMartWal-Mart from its US customers. The returns when compared to the investments in making the highly exclusive brand more generally available were never justified thus leading to the collapse. (Findlay and Sparks, 2000: p. 78) For the Continental European market, M&S adopted an organic market entry strategy and began with Paris in 1975. The Belgium and Ireland retailing industry were entered in the late 1980s followed by Spain and The Netherlands in the early 1990s. By 1996, M&S had also established its presence in Germany. Business was slow and unproductive and by 1998, many stores in Germany and France were streamlined. Continental Europe was costing the company nearly 100 million pounds from 1998-2001 with 34 million pounds in the year 2001 alone. Hong Kong had its first M&S stores by 1988 and was surprisingly successful until the Asian crisis hit. The company was forced to withdraw from its 10 Hong Kong stores directly owned stores and resorted to franchising. (Dunwell, 2003: p. 87) b. 3.3 M&S Franchises Seeking to have more control of their exports and manage presentation standards, Marks and Spencer ventured into the franchise route. The 'St. Michael' franchise was initiated in the late 1980s and was present in 16 countries by the early 1990s. It was also considered as an alternative to the company owned stores which were not suitable for some international markets. They were not generally large scale ventures and exposure levels were different. By 1998, several franchises were revoked or withdrawn due to unprofitability and economic restrictions leading to closure and permanent market exit.(Alon, 2005: p. 105) c. 3.3 Reasons for Failure Several reasons were pointed out to explain the Canadian collapse. The primary motivation for the Marks and Spencer owners entered the Canadian market was to have a safe haven for their money and investments as Canadian policies were accommodating. However, they failed in adapting to the Canadian consumer preferences particularly on the different clothing requirements. They also adapted their British business model leading to Canadians feeling alienated by their products. The large price premiums on a brand which lacked meaning for Canadians further contributed to the failure of Marks and Spencer. In spite of the obvious reasons for stunted growth, Marks and Spencer directors seemed oblivious and were bent on pouring in more money to support the defective business model. (Alon, 2005) Marks and Spencer also appeared to have no specific strategy in approaching internationalism. No synergy and direction were made for the Canadian and US market while franchises were provided in random, small, developing and colonial countries. For example, Marks and Spencer established its first store in Asia in Kabul, Afghanistan where the culture and clothing requirements differed greatly from what the company had to offer. There was also an inconsistent brand format as Marks and Spencer adapted the St. Michael brand in its several of its international ventures. In many franchises, direction and presentation format were delegated to the franchisees. Marks and Spencer stubbornly stuck to its aversion of changing rooms and credit cards, non-reliance on advertising and marketing, buy only British policy and resistance to include out-of-town developments. (Alon, 2005: p. 102) Heavy reliance on the UK supply industry which worked positively for endearing Marks and Spencer to the British public worked against the company in the international scene. With the sterling very strong and other currencies devaluating, M&S products became very expensive when sold to other countries and were losing to competitors such as GAP and Inditex who were outsourcing. Several UK suppliers were also not ready to accommodate exporting their products and they required significant time and investment. France was also a failure for Mark and Spencer primarily because it did not suit the French preferences. Compounding this problem is the legislation of the French government which protected their labour force. As a consequence, expensive employment benefits and packages were required. High import taxes also drove the selling price of UK-sourced clothing. The proud British image of Marks and Spencer also did not appeal to the French customers. Eventually, they were forced to shut down all their French stores. Marks and Spencer was also late in realizing that it had not responded to the changing marketing strategies as it was comfortable in its middle-aged niche. British Home Stores (BHS) has grown to rival M&S while Top Shop, Next and The Gap targeted young costumers. As the young customers aged, they preferred to stick to these three brands rather than moving to M&S. The company failed to appreciate one of the basic concepts of marketing which is brand loyalty. With the innovative designs by local competitors for younger generations, M&S became associated with becoming middle-aged people and thus old-fashioned and unimaginative. Kings supermarkets and stand-alone M&S stores located in malls was also beaten by Tesco, a prominent supermarket chain when they adapted a strategy of selling clothes for children and adults in the same store where they buy their groceries. People gradually stopped going to Marks and Spencer. (Palmer, 2004: 1086) In effect, the international failure was due to management inability to provide a coherent, overall internationalisation strategy. While the company adopted a driving motto "Quality, Value, Service, Worldwide", there was no real commitment in realizing this as evidenced by the stubbornness to apply its British business model and sell purely British products. (Davies, 1999: p. 16) With the withdrawal of M&S stores abroad, it would appear that international activities were to be blamed. Much of the sales are generated in UK stores but much of the cost was being incurred in international ones. International activity was not profitable and was costing more than it produced. Hence, one can easily conclude that international stores were ideed causing the loss. Continuing International Business In 2003, Marks and Spencer began to establish international presence once again with locations shown previously in Figure 1. It has managed to improve international sales to 8% from the 1998 1.25% contribution as shown in Table 1. Figure 2: Sales Percentage by Geographical Area (Yahoo Finance, 2008) With the withdrawal of M&S stores abroad, it would appear that international activities were to be blamed. Nonetheless, a closer analysis would reveal that the failure can be attributed more to three factors namely: a) over-reliance on the British market, b) top management orientation and c) corporate culture. (Alon, 2005) In 1998, 85% of the sales and 94% of the profits came from the local UK market. Hence, a sharp decrease in profits should be reflected from decrease in UK sales. Indeed, this was the case for the 289 stores in UK then registered a 23% loss in profits. The buy British policy was also counterproductive as it limited production to British minds rather than take the opportunity of benefiting from innovation from other cultures. (Dunwell, 2003: p. 90) All of its management team were M&S employees. M&S believed that those who are fit to manage the company are those who have served them for many years. No outsider was allowed in the management position thus making it only inward looking with no desire to learn or incorporate ideas not cultivated by the company. (Bevan, 2001: p. 36) M&S also implemented a top-down command and control structure and had all prices, products, colours and designs approved from the top without due consideration to those closer to the customer. In effect, the internalisation of Marks and Spencer did not contribute to its success but this should be attributed more to the failure of management to implement new strategies and instead stick stubbornly to their British-only orientation. References: Alexander N, (1997). International Retailing. Blackwell Business, Oxford Alon, Ilan (1999). International Retailing. Springer: US. Alon, Ilan (2005). Service Franchising: A Global Perspective: Springer: US. Bevan, J. (2001). The Rise and Fall of Marks and Spencer. Profile Books, London, Briggs, A. (1992). Marks and Spencer 1884-1992, Octopus Books, London. Davies, G. (1999), "The evolution of Marks and Spencer", Service Industries Journal, Vol. 19 No.3, pp.60-73. Dawson J & Dupuis M. (2000). European Cases in Retailing. Blackwell Business: Oxford. Dunwell, G.T. (2003). Developing and maintaining stable and effective middle management in a foreign market: a case study of Marks and Spencer Hong Kong. University of Stirling, Stirling. Findlay, Anne & Sparks, Leigh (2000). Critical Concepts in Retailing. Taylor and Francis:Routledge. Marks and Spencer (1999). Financial Report. Retrieved July 16, 2009 at http://corporate.marksandspencer.com/financialreport/1999 Marks and Spencer (2009a).International Stores. Retrieved July 16, 2009 at http://corporate.marksandspencer.com/aboutus/where/international_stores Palmer, M. (2004).International retailing and divestment: the experience of Tesco. Journal of Marketing Management, Vol. 20 pp.1075-1105. Yahoo Finance (2008). Marks and Spencer. Retrieved July 16,2009 at http://uk.finance.yahoo.com/qs=MKS.L&d=t It can be seen that while the global presence of Marks and Spencer is extensive, the contribution it made with regard to sales was only 8% of the total. Read More