Warning of tough times after M&S sales fall

Jul 3 2008 by Iain Laing, The Journal

STORE group Marks & Spencer has surprised the City and worried fellow retailers with a profit warning and a forecast of tough years ahead.

Despite its hugely successful turnaround in recent years M&S has admitted it is far from immune to the high street slump and yesterday reported UK like-for-like sales had plunged 5.3% in the 13 weeks to June 28.

The company posted annual profits of £1bn two months ago but saw shares fall as much as 21% in the FTSE 100 Index yesterday.

The update – a week earlier than expected – came as chief executive Sir Stuart Rose warned consumer confidence levels had “deteriorated markedly”.

M&S added that director of food Steven Esom, who joined from Waitrose just over a year ago, was leaving immediately after a “significantly weaker” performance from the food business.

The group’s sharp sales decline seen since the end of March represents an acceleration from the 1.7% like-for-like fall in the first three months of the year, as soaring food and fuel costs and sluggish wage growth adds to the consumer burden.

General merchandise has been hit by the tough conditions, down 6.2% on a same-store basis, although the group has managed to hold its share of clothing sales.

But food sales – 4.5% lower on a like-for-like basis – suffered due to increased promotions and competition from supermarkets, as well as “changes in consumer buying patterns” as customers trade down from M&S’s premium-end goods to cheaper alternatives.

Sir Stuart said the current slowdown was the “third dab of the brakes” seen since last November.

M&S has around 21 million customers every week but the chief executive said the economy was in a “very uncomfortable place”.

“Everybody is going to have to swallow hard and cut our cloth accordingly,” he said.

The sudden departure of Mr Esom came because the company wants to “increase the pace of change” in the food business, the group said.

In May M&S announced initiatives including pilots to sell branded food favourites such as Marmite and Heinz baked beans for the first time.

“We want to make sure that our business is fully equipped to meet the downturn, which is going to be longer and more hard-fought than first anticipated,” said Sir Stuart.

The City expects profits of around £870m but analysts lowered their forecasts following the gloomy update. Pali International’s Nick Bubb predicted profits would fall to around £800m this year. Other analysts voiced their fears over the company’s prospects and disappointment that the group’s recent investment in its stores had had little effect.

Seymour Pierce analyst Freddie George said: “We are reiterating our sell recommendation. There will inevitably be downgrades after this announcement.”

BOOM FOR DISCOUNT CHAINS

DISCOUNT food retailers are enjoying a boom as consumers reject premium brands to cope with the credit crunch, analysts say.

Marks & Spencer’s warning that food sales are down 4.5% on a like-for-like basis comes as discount chains Aldi, Lidl and Iceland report significant growth.

Aldi has announced it will be opening a new store in Britain every week to woo bargain hunters during the economic downturn.

The expansion plan was unveiled after the German-owned discount chain posted a record 20% rise in sales in the previous month, taking custom away from Tesco, Asda, Sainsbury’s and Morrisons.

Tesco has admitted that discount rivals such as Asda and Aldi were “having a moment in the sun“, with chief executive Sir Terry Leahy saying it was clear that shoppers were cautious and that household budgets were being stretched.

The shift comes as food price inflation reached 4.6% for the three months to April 20 – well above official overall inflation of 3.3% – based on the prices of 78,000 products compared to last year, according to market analysts TNS Worldpanel.

Paul Foley, managing director of Aldi, told trade magazine The Grocer: “What is happening right now is a jolt to people’s buying habits to swap grocery stores and to try something new.

“It is down to us whether we are good enough to keep the consumer, but if people believe they can get the same from us they won’t go back.”

He added: “In Germany, discounters occupy more than 40% of the market. I can’t think of any reason why that would not happen here.

“The credit crunch is an opportunity for us because more people will think about shopping with us, but we would be growing anyway.”

Discount outlets keep prices low by selling fewer than 2,000 products, as opposed to 30,000 in a supermarket.

In the past they have been shunned by more affluent shoppers who flocked to premium chains like Waitrose and M&S.

But with food prices rising at their fastest rate for more than a decade and soaring utility bills stretching household budgets, more shoppers are investigating cheaper options.

Asda and Tesco responded last week by announcing a price war in a bid to outflank their rivals.

Asda unveiled a range of goods for sale at 50p while Tesco declared a series of “inflation busting prices“ with price cuts of up to 50% on around 5,000 items.