Highlights from the Marks & Spencer Q3 Christmas trading conference call with M&S chairman Sir Stuart Rose.
“The first thing just to say is I think actually we had a pretty robust third quarter. If i wanted to put it another way, not as bad as people had feared. Actually if you look at where we are, our traffic was in line with the market - customer traffic that is - our market share in clothing we believe has been held. Our market volume we believe has been growing particularly in childrenswear and in lingerie. Customers in food are coming back to us.”
Can you give us an idea where the head office cuts will come from?
Right across the board. Nobody will be immune we will be looking right across the business on a consultative basis over the timescale necessary identify. But Broadly speaking it will be 15%. Some [departments] may be 20%, some may be 12% but it will be 15% across the board and everybody will be involved.
Obviously you didnt have the pre-Christmas Sale days last year…
That is true. But equally last year we didnt have a recession.
On Christmas performance…
…Listen we had 56 million people come to our stores in the last 10 days. The population of Switzerland came into our stores on Tuesday alone, whether they were all speaking Swiss I don’t know. But that shows what you can do with this brand when you turn it on. And what we did with our kickstart to Christmas with our one-day Spectaculars was to say to our customers, “Look we are here come and see what we’ve got”.
In volume terms we probably sold as many clothes if not more than last year. We sold them for less price each, which is why we’ve had a margin hit. Actually my mailbag today, in terms of what customers got from us for Christmas, is more positive than I’ve had for three years.
Stock, are you pretty clean?
We entered the Sale with 15% less. And the Sale effetively finished this weekend. If you go into our stores now you’ll see the Sale is over. You’ll see we’re trading full price.
You believe M&S isn’t suffering any unique problems, it’s a high street wide issue…
I’m honest enough to say this. If times were good, as I’ve said before, we’ve still had a few things we’d like to do better. The bulk of what we’re suffering at the moment - 75%-80% [of it] -is what’s happening outside. But there’s always something wrong with your business - something I’ve done wrong, something we’re not doing quick enough, absolutely.
What do you think M&S stands for today?
It stands for absolute quality, value, service, innovation and trust. Half the population effectively come into our stores every week. It is absolutely what the retail high street is about. We are the largest market share holder in the three major categories. We’ve got 10%-11% of menswear, 10%-11% womenswear, which is twice as big as anyone else at least. We’ve got four times bigger than anyone else at least on lingerie - 25% of the market. We are number three I think in childrenswear and we were number five. [That’s] nearly 6% market share.
What are shoppers feeling about spending?
In volume and value we are the largest retailer of clothing in the country, which is symptomatic of why, since that’s the ultimate discretionary spend, when clothing suffers, we suffer too. And that’s why I was at pains to point out that our market share in value has been maintained and in volume has probably increased.
There are obviously customers who are very financially challenged, and they are being very careful about what they spend but equally there are customers out there that are financially challenged that are saying ‘I’d rather eat good quality and I’ll cut back on something else.”
Outlook for 2009…
The other bit of good news, and we must just reflect on this a little bit, is that although I believe it’s going to be tough for the rest of this year, as we go through each month of this year, with a combination of falling prices, interest rates etc, more cash will come into people’s pockets. The biggest single word that now needs to be addressed is the confidence word. Government has got to make sure that they keep sending the same message out constantly saying, “It will get better, it will get better, it will get better”, and people will begin to believe that. Because there is a fear factor about ‘is my money safe in the bank tonight?’.
The issue that we need to worry about is currencies and things which will affect us in terms of buying going forward and may affect people’s behaviour. But there may even be there a benefit because if less people go abroad on holiday this year, they may stay in the UK and eat more food and buy more clothes.
Will an interest rate cut tomorrow make any difference?
I think interest rates now frankly between where we are today and what might happen tomorrow will be marginal. I think whether the interest rates come down by another 1% it’s not going to make a lot of difference. I recognise it’s probably necessary for different reasons.
On Magic Knicker sales…
Do you know we sold enough Magic Knickers to take a quarter of a million inches off the waistlines of British women? Do you know we sold enough tights to have a pair of tights sold to every woman in England? We sold enough knitwear to clothe every woman [aged] between 20 and 80 in Greater London.
Why are profits going down then?
Because we’ve given it to them at a better price than we did last year.
Could you put this Christmas into context? Some people are saying it’s M&S’ worst Christmas. Is this the toughest period on the high street you have every seen?
Listen I’ve been in retail for 38 years. If you go back to 1973-74, around the time of all sorts of terrible things when there were piles of rubbish in the streets, that was probably about as bad. But it’s the sharpest downturn we’ve seen in the shortest time i.e. going from 100 miles an hour down to zero with the brakes on has happened much quicker than it’s happened before.
Yes it’s tough but I think equally we’ll probably bounce out of it just as quickly. If you say it’s the worst numbers we’ve had for some time - some newspapers today it’s saying they are the worst numbers for a decade - but a decade ago there wasn’t a recession so it is rather comparing an apple and a pear. I accept that there will be things that we’ve done in our business that are not right, that we need to fix. Equally we will do what we need to do to ride through what is a very tough economic climate.
How big a problem is it going to be for you if the pound stays at these levels?
It’s going to be difficult. The fact of the matter is that the Euro and the dollar have depreciated against the pound very substantially. The bulk of our goods in textiles particularly are bought overseas and the cost of buy has gone up. The opposite side of that coin is that we will be hopefully more efficient in the way we buy stuff and also that the cost of some raw materials that peaked last year is now dropping away again i.e. cotton prices etc, so that will be some mitigation. But it’s an issue that all retailers will have to face.
Will it be difficult for M&S to convince customers to pay full price in the year ahead, particularly when we come round to next Christmas?
Customers respond to value which is price times quality. There is no doubt that the combination of more bad news about the general economy and the shock interest rate reduction which frightened people about where the world was going, meant that for a period of time during late october/November people were frozen in their houses not going anywhere. We were not alone in seeing traffic drop enormously.
We sat down, as indeed I am sure Tesco, Debenhams and Next, and said ‘what are we going to do?’. Our method to kickstart our Christmas was to say let’s give the customers a treat, which was our one-day Christmas Spectaculars. It was so successful that we did another one. Once we’d done them the traffic started coming through at Christmas as we wanted it to. Tesco did what they do and they promoted heavily. Sainsbury’s did what they do and they promoted heavily. Next had a lot of hidden promotion and Debenhams did what they did. It worked for us. Next year, will be a different thing but clearly you have to take one year at a time. If you remember, four years ago in 2004 we had a Christmas Spectacular and we didnt repeat it in 2005.
Has the doom and gloom been overdone?
[Next chief executive] Simon Wolfson said yesterday “It’s not armageddon”. I dont think it makes a difference if it’s armageddon or recession. What makes a difference is how does the customer feel about the pound in their pocket. The answer is they feel a bit fragile and that goes back to my word about confidence. If there’s no really significant further bad news confidence ought to stabilise and then improve through the year. But i said earlier because prices are coming down people ought to have more cash in their pocket. But if we have another wobble, or another crisis or another bank catastrophe or something that comes out of the woodwork we don’t know about that will upset confidence again, that’s what it’s about. Our job is to trade through that.
Could there be more job cuts?
We as a business thought very hard before we came up with these proposals. We don’t like to potentially lay off 1,300 people. We think that we are doing the necessary right things. There are two parts - one is to take out 25 underperforming stores where they are just not doing enough business for us. And the second is to make sure we are mean and lean and taking a bit of pain in our head office functions.
A few retailers claimed they’d held profit margins, do you regret the 20% promotions?
Everybody does what they need to do. When they sit down in their offices to decide what they do they do what they do. Our job was to make sure we gave our customers a good Christmas. The fact is that in numbers and market share terms they [shoppers] came out. The fact that we had to sacrifice a bit of margin will stand us in good stead. We kept faith with them [customers] and they kepy faith with us. If the result was less revenue and less profitability well fine. We’ll build our margins back later.
With the currency issues, do you think prices will go up?
The answer is they ain’t going to keep going down.
Have the one day-Spectaculars, changed customer perception of your value offer?
Has it changed customer perceptions of what other companies do? Tesco turned themselves overnight into Britain’s biggest discounter. Probably they [customers] think M&S has woken up to the fact ‘we are a bit skint and they are giving us a treat’ and that’s what we’ve done. I dont think so at all. What would we do? Sit there and pretend that the world was flat and actually there wasn’t any problem and go on regardless of the global downturn. No. We did what we did and we did it in our way. I’ll tell you one thing, the turnout for us on those days was spectacular, which only proves that they[ the Spectaculars] had some effect.
Tesco aren’t in the same boat, they didn’t take 20% off everything?
First of all we dont do the same thing as they do. They were on nearly six weeks of 25% off all clothing before Christmas. That’s the funny amusing thing about this. Why is it when M&S has two days of promotion, everybody goes “Gosh, horror”, when everybody else has been on 13 weeks of promotion throughout the period. I don’t know why we get treated any differently.
Would you do it again?
In a heartbeat.
See right for links to exclusive Drapers interviews with retail leaders including Next chief executive Simon Wolfson about Christmas sales and the prospects for 2009.