How the Recent Economic Downturn Affected the Marks & Spencer Strategy

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Table of Contents

Introduction
Literature Review
The “Five Forces” Framework
The Economic downturn and the Marks & Spencer Company in the U.K Market
Discussion
Conclusion
References

Introduction

Marks and Spencer is U.K company retail and has its headquarters in the City of Westminster. This company has more than 700 stores within the U.K and more than 300 stores in more than 40 countries across the world (Amel, 2009). The company engages in the selling of food products as well as clothing products.

In the year 1998, Marks and Spencer turned out to be the first U.K retailer to realize a profit of more than one billion pounds. However, a few years that followed, this company experienced a big crisis that persisted for a number of years. Following the crisis, this company has been in continual realignment of the management (Alon, 2000).

The company gained back its market share in the clothing sector and these followed the measures that were taken by the company during the 2004/2005 financial year (Amel, 2009). However, this achievement did not last for long because it was soon hit by the recent economic downturn (Amel, 2009).

The argument in this paper is going to be that, during the recent economic downturn, Marks and Spencer failed to put appropriate strategies in place which made them to lose customers to the competitors; as a strategy, they engaged in cutting down prices but failed to meet the changing customer demands and needs and this is what made them to lose customers to the competitors.

To support this argument, I am going to review the available literature concerning Marks and Spencer in relation to their strategy and the recent economic downturn and this will be followed with a discussion. Later, I will give a conclusion and some recommendations about the appropriate measures that need to be taken by the company.

Literature Review

Marks and Spencer Company has been in business for over a century has strived to be successful in its operations. The company began as a stall in the year 1884. It was Michael Marks that started it and it was located in Leads market. Alon points out that “the company stressed value and low price as a hallmark for development” (Alon, 2000).

By the year 1901, this business organization was able to acquire 35 outlets and also a new partner at that time by the name Tom Spencer. By mid 1900s, the entire stores of the company products were majorly given a private label which was “St. Michael” made by the British suppliers (De Nardia-Cole, 1998).

For several years, the mission of Marks and Spencer has been “to offer consumers quality, value and service” (Alon, 2000). The confidence of the company lay upon some operating principles in order to achieve the mission set. One of the principles was to develop long-term relationships between the company and its suppliers.

Another principle was to provide value “through a narrow merchandise selection at affordable prices” (Alon, 2000). The third principle was to support the local industry. The fourth one was to promote from within (The Economist 1998, p.68). The company’s fifth and last principle was to make use of a single brand name “St. Michael” for a larger number of the company’s products (Jardin, 1999).

These principles have enabled the company to achieve the support of the U.K producers, as well as the workers and consumers in the U.K. As pointed out in The Economist, “the sixth largest employer in the British manufacturing, the textile industry, with more than 354, 000 workers, owes a large part of its existence to Marks and Spencer” (The Economist 1998, p.57).

The company has given encouragement to manufacturers of textile products in the U.K. to keep their factories in the country (Buxton,1999). This has resulted in an improved check on the level of quality as well as increased flexibility in manufacturing and also in the distribution of products.

A description of this company was given by one British writer as “quintessential British institution, woven in the fabric of our national life, as firmly lodged in our psyches as furniture in the front room” (Financial Times 1999, p.10).

The “Five Forces” Framework

Marks and Spencer experiences the five forces in the U.K market at different levels which include; threat of new entry, the buyer power, the supplier power, the treats of substitutes and the competitive rivalry (Amel, 2009). These forces affect Marks and Spencer in a number of ways. Considering the threat of entry, the Marks and Spencer Company has a strong brand name and is well established in the market.

This may make it difficult for new firms entering the market. But in considering the clothing sector, the company may not be experiencing strong customer loyalty. Looking at the power of the buyers, this is high. The customers are offered with discounts in the supermarkets and they are also offered with online clothing websites. Following this, the buying power of the company’s customers has been made to become higher.

Considering the supplier power, the Marks and Spencer Company is taking measures to respond to the consumer trends; the company is opening up to foreign suppliers in order to broaden the range of suppliers that are there (Amel, 2009). In this market, there is high level of threats for substitutes.

For instance, the large competitor in the market, Tesco, has taken measures to segment their offers to the customers in order to sufficiently match the various profiles of the customers in the food segment. On the other hand, in the clothing segment, some of the retailers are offering high quality products at lower prices to the customers than Marks and Spencer.

Looking at the competitive rivalry, Marks and Spencer operates in a very competitive market place. The major competitors include Tesco, Next and John Lewis. These retailers have been able, on several occasions, able to adjust their products and offers in time before Marks and Spencer could take appropriate measures (Amel, 2009).

The Economic downturn and the Marks & Spencer Company in the U.K Market

There has been shrinking of the economy of the U.K for the six quarters which followed each other for the first time beginning from the 1950s, a time when the records began. The gross domestic product, which represents the value of goods as well as services produced within the country from all the sectors, “captures the state of the economy in one number” (Amel, 2009).

The official figures indicated that the U.K’s GDP as per the year 2009, between the month of July and September, was contracting at the rate of 0.3 percent, a figure that was below the one projected which was 0.4 percent (Amel, 2009).

The important role that the services sector plays in the U.K economy offers a background explanation for this decline. It is true that, the companies in the service sector, which generally account for about 76 percent of the country’s economy, were the most affected (Amel, 2009).

A number of factors which include increasing unemployment levels, credit tightness, and falling housing prices have had a great impact on the consumer spending and confidence. In addition, it is point out by the analysts that “the inflation rate in the U.K jumped from a five-year low to 1.5 percent in the month of October, the year 2009” (Amel, 2009).

However, the weakening of the pound served as an attraction of the tourism business. Indication has been given by consumer research that “the clothing expenditure is the first victim of the cutback” (Amel, 2009). While there have been great impacts on the spending and consuming patterns, the retailers have been under pressure to adjust their prices through offering discounts and promotion.

The retailers have decided to be engaging in the competitive price wars. The price reductions were remarkably high and this in turn brought down the level of profit margins which were already reducing (Amel, 2009).

Since the Marks and Spencer Company greatly depends on the U.K market (90 percent), the company is exposed to the difficult trading conditions to a high level. The economic downturn in the housing sector and increased food prices has taken a toll on the disposable income of the consumer and this in turn has brought down the level of demand for the non-food products.

The Marks and Spencer Company responded to this by cutting prices and as a result of this, the volume of the product sales as well as the value of these products reduced (Amel, 2009). In the financial year 2005/2005, Marks and Spencer experienced a great contraction in its sales, giving a reflection of hardships across all product areas. In the period that followed (2005/2006), the hardships were overcome (Amel, 2009).

This was realized through carrying out improvements in the operations. The company was now able to realize vigorous growth in the sales and profits and this even went on in the course of the financial year that followed (Amel, 2009). During the second half of the period 2007/2008, there was deterioration of the external environment following the economic downturn.

This brought great negative effects to the company during the period 2008/2009 and the company’s sales growth remained almost stagnant and the operating profits went down. There was mounting pressure on the margins during this period despite the fact that the company took an initiative to close 26 of its stores which were not performing well (Amel, 2009).

In the year 2009, the company went on bearing the marks of the economic downturn and its profits went down. For the financial year ended in the end of March 2009, the company’s profits increased by less than 1 percent to about 9 billion pounds.

There was a reduction in the net profit to 508 million pounds, a 38 percent decrease (Amel, 2009). A reflection increased sales is made by the revenue from the International Retail in Owned and Franchised and the U.K stores. The net income was counterbalanced by the reduced operating margins resulting from the increased operating expenses, higher finance costs, and reduced finance income (Amel, 2009).

During the recent economic down turn, Marks and Spencer Company’s retail food segment took a hit. It was reported that the “cash strapped” consumers were moving away from the costly, “ready cooked meals and thinking about buying the cheaper substitutes instead of the expensive, luxury ready prepared meal that is the mainstay of Marks and Spencer’s offering” (Davies, 2009).

This company’s biggest competitors such as Tesco do offer to their customers a variety of substitutes including a full range of “raw ingredients and cheaper ready meal substitutes” (Davies, 2009).

While giving out the half financial year’s results in June 2008, Domino’s reported that the sales that were made to the customers that were already there had contracted, but those made to those customers who were completely new had gone up by about 20 percent, as an increased number of wealthy clients, who would frequently dine out, engage in the adjustment of their spending practices (Davies, 2009).

It is pointed out that “Marks and Spencer did not have the flexibility like that at that time to be in a position to move the offerings they made” (Davies, 2009, para. 39). What would come out of this is losing customers because they opted to go to the company’s competitors. Getting back these customers when the economic times improve would not be easy (Davies, 2009).

Marks and Spencer needed to be more innovative in order to be able to keep up the demands of the customers that are ever changing as well as their changing needs so that they could avoid losing customers to the competitors (Davies, 2009). It was clearly established that during the economic downturn, the customers’ needs and demands must change.

This fact is supported by the argument that “your customers and their needs will undergo multiple changes as they adjust to the reality of a recession and the shape of the new world and beyond” (Davies, 2009). Following this, one of the challenges that are there is not to lose the existing customers where it has taken much time and effort to get to your rivals who might then seek to retain them for the long-term (Davies, 2009).

Another challenge is to set up a portfolio which is balanced in order to evade being exposed to large customer groups who have the same “recessionary pressures” (Davies, 2009). The third challenge is to be in a position to be sensitive and give a quick response to changing needs and demands of the customers as well as to the newly coming up segments (Davies, 2009).

Discussion

Marks and Spencer carries out most of its operations in the U.K and also in other regions abroad. This company used to be successful in its business and that is why it has been in business beginning from the year 1884 to date, making profits but at some point, its performance started to decline following ineffective management and putting in place inappropriate strategies (Alon, 2000).

However, during the fiscal year 2004/2005, the company made appropriate adjustments which enabled it to improve in its performance during the following fiscal year and even during the year that followed there after (Amel, 2009). But during the economic downturn, in the course of 2008/2009, the company’s performance was negatively affected again.

The company failed to put in place appropriate strategies to deal with the unfavorable economic situation to avoid a reduction in sales following a change in the consumer needs and demands. Such competitors as Tesco came up with a strategy that enabled it to diversify its products in order to meet the diversified customer needs and demands (Davies, 2009).

Marks and Spencer sought to reduce its prices as a strategy to retain its customers but this could not be effective because this affected the profitability of the company negatively. In addition, the customers preferred to be offered with desirable products that could satisfy their needs to the highest level possible at affordable prices (Davies, 2009).

Any company should seek to retain its existing customers and even be able to attract more new customers. Marks and Spencer needed to be more innovative in order to be able to keep up the demands of the customers that are ever changing as well as their changing needs so that they could avoid losing customers to the competitors (Davies, 2009).

It has been found that during the economic downturn, the customers’ needs and demands must change. Customers seek to buy products that they can now afford in order to meet the needs they deem to be very basic to them (Davies, 2009).

They should put in to consideration that different customers have different levels of income and during a recession, there are those who can go on maintaining the consumption and spending trends and those who change.

Even if these customers may have been loyal to the company for a long time, hard economic conditions can force them to switch to wide range of the products that are offered by competitors at affordable prices (Davies, 2009).

One of the weaknesses of Marks and Spencer that may have affected them during the economic downturn is lack of flexibility at that time to be in a position to move the offerings they made to the customers (Davies, 2009).

What would come out of this is losing customers because these customers preferred going to other companies such as Tesco. Getting back these customers at the time the economic downturn is over is quite hard and bringing them back could be very much more costly to the company (Davies, 2009).

Therefore, there is great need for the Marks and Spencer Company to take appropriate measures to bring up the level of its sales and profitability and also to be able to deal with the problems that come with economic downturn in the future. They should learn some few things from the competitors and seek to carry out their operations in an even better way.

Conclusion

During the recent economic downturn, Marks and Spencer failed to put appropriate strategies in place which made them to lose customers to the competitors; as a strategy, they engaged in cutting down prices but failed to meet the changing customer demands and needs and this is what made them to lose customers to the competitors.

Since the customer needs and demands do change during an economic downturn, it is not enough for any company to cut down its prices as a competitive strategy. There is need for the company to establish what the actual new demands and needs of the customer are in order for it to take appropriate measures to meet them. Marks and Spencer has been in business for a very long time.

By them losing customers to the competitors because of their lack of putting the right strategies in place is something that needs to be looked in to. More research should be carried out in order to establish why the company was not able to diversify its offerings to the customer and just relied on cutting down prices which made them to lose the competitive ground.

References

Alon, I. (2000), “Marks & Spencer: A case study in international retailing”. Web.

Amel, B. (2009), “Marks & Spencer case study”. Web.

Buxton, P. (1999), “M&S Chief Rejigs Retail Operation”, Marketing Week, vol.22, no.12, p.6.

De Nardi-Cole, Sarah M. (Eds.). (1998), “Marks and Spencer”, in International Retailing, Brenda Sternquist, Fairchild Publications, New York.

Davies, R. (2009), Recession: Key Questions for Business Survival and Growth. Web.

Economist, “Poor Marks”, (1998), p.68.

Financial Times, “Angst in Their Pants”, (1999), pp. 7-10.

Jardin, A. (1999), “St. Michael’s Evangelist”, Marketing, pp.25-28.

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