Will classic British brands Marks and Spencer Group plc and WM Morrison Supermarkets plc survive another century?
Marks and Spencer (LSE: MKS) makes much of its pedigree dating back to 1884. Sadly for traditionalists, the 21st century hasn't been kind as shifting consumer habits and the advent of online shopping and fast fashion have hit the retailer hard. Efforts by various management teams to turn around the flagging core clothing and home goods side of the business have flopped and international expansion hasn't proven to be a game changer.
The godsend, or at least stop-gap godsend, has come from food. While traditional grocers fret over lost market share and falling margins, M&S has built up food sales enough that they now account for the biggest chunk of group revenue. Falling general merchandise sales have also played their part as they dropped 2.7% on a like-for-like basis this past quarter while total food sales rose 4%. Worryingly though, like-for-like food sales remained flat, though, showing that M&S isn't immune to sweeping changes in the grocery industry and will have to turn around its core business if it's to survive another 132 years in business.
There's little evidence M&S has figured out how to reinvent its clothing and home business as stock woes, quality issues and a multitude of unstylish lines drag down customer loyalty and sales. It's too early to judge new CEO Steve Rowe's efforts, but his past job as head of the clothing division doesn't fill me with much confidence. Yet its not all doom and gloom as gross margins are expected to increase around 250 basis points this year, earnings have stabilised and are growing in the low-single-digits on the back of food sales, and a 4.3% yielding dividend is safely covered. This is all good news in the short term, but the long-term feasibility of M&S relies on reinventing its dreary clothes division and I won't be buying shares, no matter how cheap they look, until progress is made on this front.
Smart moves
M&S management should pay close attention to the woes of 117 year old grocer WM Morrison (LSE:MRW). Price wars amongst traditional grocers, German rivals and now online-only firms have seen margins collapse across the industry over the past few years. Morrisons answers to this problem have been quite smart: closing underperforming supermarkets, selling 140 of its local convenience stores, and teaming up with Ocado to deliver its groceries online.
Its latest, boldest, venture is a partnership with Amazon that will see Morrisons' fresh and frozen food delivered via the e-commerce juggernaut's fast growing grocery delivery service in the UK. Becoming a wholesaler for Amazon will certainly drive sales growth as the company is unique among rivals in manufacturing a significant amount of the food it sells. Looking ahead, working with Amazon may be akin to opening the gates and waving in that nicely-wrapped horse statue left by marauding Greek neighbours! But Amazon would have entered the UK grocery market one way or the other. By working alongside Amazon, as well as stabilising and growing its core business, Morrisons has had more success than rivals in securing its future for at least the medium term, if not another century.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
