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Marks off – Another bid for global expansion suggests M&S has not learned past lessons

22/04/2014

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

This wasn’t just any international strategy that was announced at the start of April – this was a Marks & Spencer international strategy. however, unlike a £10 three-course meal for two, say, or reliable underwear, international strategies are not something at which M&S has ever particularly excelled and so The Value Perspective was interested to see what the company was planning this time around.

Generally speaking, Marks & Spencer has a binary approach to international strategies – either it is looking to grow a lot as a business, in which case it has one, or other considerations are higher up the agenda than growth, in which case it does not. To be fair to the company, one arguable difference this time around is it has recently enjoyed some overseas success in France and other parts of Europe.

So Marks & Spencer has come out and declared its intention to become an “international multi-channel retailer”, which effectively translates as it looking to operate both websites and stores in what it describes as its “existing quadrant” – a generously defined top-right quarter of the global map, which manages to squeeze in Western Europe, Russia, China, India and the Middle East.

So some pretty populous countries and regions then and yet, while it still leaves the opportunities of north and South America, Australasia, Sub-Saharan Africa and Greenland for another day, it is tough to portray the strategy as one where Marks & Spencer has handpicked a number of key markets it can mine most profitably.

On a more positive note, the company’s plans involve the opening of 250 new stores between now and 2017, of which 60% will be franchised. That is a sensible move because franchising internationally removes much of the capital risk – in other words, it enables a business to leverage its brand in foreign countries without necessarily having to spend a fortune on property and supporting infrastructure.

Of course, that still means 40% of the planned expansion will not be franchised so Marks & Spencer will still have to commit a significant amount of capital to the venture – for example, on leases for properties or building back-office systems. These ‘costs of growth’, particularly in relation to leases, can be something retailers often overlook but – one way or another – it all needs to be paid for.

Marks & Spencer has already acknowledged that, outside of Western Europe, most of its targeted markets will require investment in their own infrastructure – for websites, supply chains and so forth – to the extent that it is not already there. Nevertheless the company’s aspiration is, by 2017, to increase international sales by 20% and grow profits by some 40%.

Insofar as Marks & Spencer will be making more use of franchising and joint ventures with local partners, this is probably one of the company’s better international strategies. Certainly, franchises have been an approach with which some up retailers – mother care being a stand-out example in this regard – have enjoyed some success.

For a long time, however, Marks & Spencer has been, at least to the eyes of The Value Perspective, a company that has been prone to prolonged bouts of questionable capital allocation – whether in respect of previous growth strategies abroad or in the significant amounts of money it has invested, and appears to be continuing to invest, in its up stores.

As such, and without wishing to dismiss this new programme before it has even got going, we do suspect investors who may perhaps have been looking for a degree of capitulation by management – or at least some recognition capital has not been controlled as tightly as it might – will not have been particularly cheered by the announcement.

Yes, Marks & Spencer has enjoyed some success in France – most prominently with its large store on the Champs-Elysees where it reports strong demand among Parisians for its Scotch pancakes and Devonshire scones. There is no reason M&S should not develop a profitable international presence over time but the value perspective fears the company remains reluctant to learn the lessons of its history and continues to hanker after rapid global expansion rather than focusing on what it has shown it does best.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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