Managing solo or merits support?

Kevin Crowley finds out how companies such as M&S are attempting to avoid the road to financial ruin
Commercial awareness
Politics and economics

They've been in and out of the papers since Christmas, and none of it has been good news. But how can ailing companies, like M&S, overcome their problems and avoid the road to financial ruin? Kevin Crowley speaks to management and retail experts to find out.

When Jeremy Paxman accused Marks and Spencer of causing "widespread gusset anxiety" among the British male population, he clearly hit a nerve. Web message boards, radio phone-ins and newspaper columns were awash with angry men feeling let down by M&S's failure to deliver in the pants department. It's a sensitive accusation at the best of times, but coupled with disappointing Christmas trading figures, Paxman's verbal jab was a hefty blow to the company's nether regions.

Since fending off a 2004 takeover bid from Sir Philip Green, owner of Topshop and BHS, M&S's chief executive, Sir Stuart Rose, has been widely credited with reviving the retailer's fortunes. However, its third quarter results released last month raised question marks over the sustainability of this comeback. Like-for-like sales fell 2.2%, compared with the same period in 2006, prompting the company's share price to plunge by a fifth. And although a downturn in the retail climate was partly to blame, the figures become bleaker when compared with rivals John Lewis and Debenhams, whose December sales grew by 8.6% and 2.2% respectively.

Philip Dorgan, retail analyst at stockbroker, Panmure Gordon, said: "These numbers, while clearly not great, are not a disaster for M&S. The question has to be to what extent this slowdown continues, deteriorates, or improves over the next six to 12 months."

Tackling slowdowns such as this is all in a day's work for Management Consultant Richard McKenzie, Senior Partner at OC&C Strategy. They advise businesses on how to improve performance, through statistical analysis and industry expertise. McKenzie, a former Politics, Philosophy and Economics student at Oxford, explains: "First off you need to find out how much a problem is self-inflicted and how much is due to the market. Then you can start asking the key questions. Is the company losing market share? Is it losing customers? To whom are they defecting and why? Also, you need to understand the fundamental drivers of a business before you can start giving practical advice. What are its goals for the future?"

Although graduates are unlikely to have these answers right away, management consultancies impart a high level of responsibility from the outset. "New recruits are unlikely to have a one-to-one with Stuart Rose, but they will be running analysis and providing support to companies straight away," McKenzie added.

Cotton, not cashmere

So how would a management consultant go about reforming M&S's strategy? Guarding profit margins rather than trying to increase sales revenues is the way forward, according to Fraser Ramzan, a retail analyst at Lehman Brothers.

He said: "While the group could improve operational execution, this is unlikely to make a material difference. It is clear from other retailers' Christmas trading statements that it was only those who focused on margin protection and higher average selling prices that met expectations. Meanwhile, those who sought to grow volume share in a slowing market, fell short of expectations."

Mr Ramzan added that clothing sales over Christmas performed better in the 'good' rather than 'best' quality products, suggesting that hard-up consumers are buying more cotton than cashmere. Having collected data to support this thesis, a management consultant would advise and work with managers to re-stock or re-price appropriately.

Another option would be to cut costs. Richard Hyman, managing director of specialist retail consultancy, Verdict, believes that High Street retailers will shed 100,000 jobs over the next two years in an attempt to fatten up their thinning profit margins. If, as he predicts, retail demand grows by 1.8% this year while costs rise by 4%, then retailers will have to drastically slash their outgoings.

"Their room for manoeuvre in the short term is very limited," he said. "You could simply buy less product but that will hit your sales. The two major costs any retailer has are labour and occupancy [rent]. Occupancy is based on long contracts, and landlords are not famous for taking leases back when times are tough. This leaves labour, or jobs."

Mr Hyman's prediction only represents 3.3% of the three million staff who work in the retail sector and, by his own admission, this would translate to "only a very modest saving". Therefore, other cost-cutting options must be considered.

Earlier this month, media reports suggested that M&S's food department was already looking at ways to reduce their suppliers' prices. One such supplier told the Daily Mail that the company was demanding up to 6.5% off its invoices, in addition to the 5% reduction over the past two years. Speaking to The Gateway, M&S spokesperson Clare Wilkes refused to confirm or deny the figures. She said: "We feel that after a period of significant growth in food sales, during which all parties have benefited, it is time to update our supplier terms. It is a complex review and there's no benchmark figure. However, it may well involve cutting costs."

All about strategy

But M&S is not solely focused on bolstering its profit margins to improve its performance. With 70% of its floor space already refurbished, the company's modernising programme is in full swing and on course to reach 90% by Christmas 2008. Although the profitability of such facelifts is often overstated by firms and analysts alike, it is generally believed that their benefits are incremental over the long term. Other strategic plans for the future include development of M&S Direct, the online store, and expanding its international presence in countries including Ireland, China and India.

Management consultants must be aware of what their client is already doing strategy-wise, the client's aims outside their particular remit and respect that they cannot turn a company around single-handedly, explains McKenzie:

"There has been bad advice given by consultants but it's usually when consultants become too involved, trying to run companies in place of its managers. We support and advise management, but we are not a substitute for it. It is in the long term health of a company for the management to remain ultimately responsible for the decisions it makes."

Just as no man is an island, no company is detached from its marketplace. As well as being able to pore over the finer points of cost-revenue spreadsheets, consultants must have an intricate knowledge of the market in which their client operates. And the High Street is no exception.

Consumer confidence

fter enjoying a relatively benign environment for the past five years, retailers are suddenly finding themselves facing dampened consumer spending, as M&S painfully discovered over Christmas. Energy bills have shot up over the last six months, with three of the six big suppliers raising prices by about 15%, and Scottish Power announcing it would match them just a few weeks ago. Along with a remarkably high level of indebtedness, (a recent KPMG study found that 22% of Britons are struggling to keep up with repayments) consumers' wallets are likely to be considerably lighter this year before they even hit the shops.

"Consumer expenditure could not keep growing as fast as it was without any commensurate shocks," said McKenzie. "What we're seeing at the moment is a lot of unwinding of what has gone on in the past five years. This is not a short term trend: there is no doubt that 2008 will be a tough year."

Although this view appears economically sound, due to the multitude of competing companies and positions within management consultancy, such a strongly-worded prediction rarely goes unchallenged. And Richard Lloyd-Owen, head of consumer business at Deloitte, disagrees with McKenzie.

"Over the course of the year consumer confidence will take a hit, but we think that any talk of a meltdown is an exaggeration of the facts," he said. "We don't think the slowdown will be huge because the key indicators - income and jobs - remain fairly strong, although people are worried about house prices. A number of people are exaggerating the impact of the sub-prime problems in the US and the credit crunch on the real economy."

Mr Lloyd-Owen also emphasised the risks to retailers outside the UK marketplace. He believes that many companies have enjoyed inflated profits over the last few years because they have switched their manufacturing bases to the developing world. Most of these factories are in dollar price countries, where the country's currency is pegged to the US dollar, allowing importers to cash in on the sliding dollar. However, these benefits would simply disappear, should the exchange rates stabilise.

As Mr Lloyd-Owen demonstrates, when analysing a company's performance, there is always another cause and always another effect. The consultant's job is to synthesise the facts and advise managers, who do not have the time and/or the expertise to push the company forward in a particular direction.

In the now-notorious email exchange last month, Sir Stuart brushed off Mr Paxman's jibe by turning the tables on the 57-year-old Newsnight presenter. "As people get older, they tend to need a bit more support - perhaps that's the problem," he wrote. However, as the months roll on, Sir Stuart may well look to revive his struggling business by buying in some support of his own.

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