We wrote recently how this year could be a turning point in the history of the British high street. It would be remarkable if a freak event on the scale of COVID-19 didn’t break many businesses in an industry that had already been struggling for years.
When the dust has settled, there will be lessons to be drawn from which firms survive and which don’t, whether that’s around degrees of leverage, diversification or other techniques to increase resilience. However you look at it, it will be the weakest that succumb.
Marks and Spencer’s fate will be of particular interest: the high street bastion has had a decade of woes, but is insulated to a large extent from the effects of lockdown by its food business. So while it recently announced 7,000 job cuts - 9 per cent of its workforce - as a result of COVID-19, one would not expect it to disappear entirely.
Unlike many firms, M&S will not need to change its strategic direction as a result of coronavirus, which has only exaggerated the predicament the company has been in for years: people want to buy its food but not its clothes.
What it may do is change the time frame of the strategy, which under CEO Steve Rowe has been to let the clothes and home retail business recede while expanding the food business, at the same time closing stores in unprofitable locations.
Food revenues have increased 19 per cent since 2014 - now representing nearly two thirds of its UK total - while clothes and general merchandise sales have fallen 21.5 per cent in the same period (to March 2020 - i.e. before COVID fully hit). This in turn has been weighing on profits, as its margins are lower in food than in clothes.
You have to step back and ask yourself how M&S got itself in this situation. Why does it have stores in the wrong places? Why don’t people want to buy its clothes? Why are so many sites split between food and clothes, when no other major retailer really does that?
The answer of course has nothing to do with COVID, and everything to do with decisions taken by M&S in the 2000s, 1990s and before. M&S’s current portfolio still to a significant degree reflects investments made when M&S clothes were a byword for quality, not tired obsolescence, and when city centre shopping was thriving.
It’s what every rational firm does - when something goes well, you do more of it, which is great until that thing no longer goes well. Sunk costs - and their associated fallacy - then mean you double down on trying to make it work, rather than exiting while you have the chance in order to focus on growth areas.
We become victims of our own success when we fail to realise that no success lasts forever, that fashions change and consumers age and technology disrupts, until it’s painfully obvious and therefore largely too late.
In this instance, M&S may well emerge stronger out of this and possibly subsequent restructurings. Time will tell, but Rowe will continue to need to be radical. He can only hope at this stage that he can convince investors, who’ve seen the firm’s value drop over 80 per cent in six years, to stay the course.
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