Marks & Spencer Challenges Supermarkets With Big Food Stores

(Bloomberg) --

Marks & Spencer Group Plc plans to open more large food stores, shifting away from a strategy of expanding smaller convenience outlets as it prepares for an alliance with online grocer Ocado Group Plc.

The prospect of another costly store revamp as profit falls weighed on the U.K. retailer’s shares, which declined as much as 5.4% on Wednesday. Marks & Spencer said a 601 million-pound ($763 million) shareholder rights issue to finance the Ocado deal was fully underwritten.

Multiple shifts in strategy have sown confusion about the retailer’s plans. As Marks & Spencer opens new food stores with improved parking and a broader range, it has been moving to close other outlets that also sell clothing and housewares. The new approach marks a shift of strategy from a recent focus on expanding M&S Simply Food convenience outlets, some of which the company said it will now close, too.

“Our strategy is as much about rightsizing, relocating and new openings as it is about store closures,” Chief Executive Officer Steve Rowe said on a call.

The changes mark a greater push into Britain’s full-range grocery sector, which is already crowded, with the likes of Tesco Plc seeking to fend off new competition from German discounters Lidl and Aldi, while J Sainsbury Plc tried unsuccessfully to combine with Walmart Inc.’s Asda.

After a 10% decline in its annual profit, M&S also plans to pilot “a renewal brand format and modernization” program in some of its aging large stores. It said it needs to provide a more contemporary environment to encourage more people to buy its clothing and home products.

Mixed Results

The news came as the retailer reported mixed financial results, with profit falling for another year but coming in just ahead of expectations. Full-year sales fell slightly more than analysts predicted in the clothing and home business, but a bit less than they reckoned for the food unit. The Ocado fundraising will represent about 20% of M&S’s existing issued share capital.

The company has failed to keep up with the rise of e-commerce and wrestles with the crisis on the U.K.’s shopping streets, where Brexit has weighed on consumer sentiment. Marks & Spencer’s latest turnaround program is being led by Chairman Archie Norman and Rowe.

M&S currently has about a dozen larger food-only stores, ranging from 12,000 square feet to 15,000 square feet, and plans to open about 75 more. The company also has about 300 standalone food halls, most of them smaller.

What Bloomberg Intelligence Says

“More store closures as well as supply-chain changes are needed to revive the business.”
-- Charles Allen, BI retail analyst
Click here to view the piece.

Many of the big stores M&S is closing, which also sell clothing and housewares, are in downtown locations where foot traffic has been falling. Rowe said the new stores to be opened are aimed at pursuing “growth opportunities,” but won’t be hypermarkets -- suburban big-box sites like those operated by Tesco or France’s Carrefour SA.

The performance of M&S’s clothing and home division suffered because some of its most popular items sold out quickly and the company faced supply-chain snags, Rowe said. Results should improve in the second half of the year, he said.

To contact the reporter on this story: Deirdre Hipwell in London at dhipwell@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Marthe Fourcade

©2019 Bloomberg L.P.