Departments Store Industry in the UK

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Departments Store Industry in the UK Question 1 (250 words) ¨C (1) what are the key drivers of change affecting UK Department stores? – You should list at least 3 in order of impact; Identify the critical success factors (critical for a company to succeed) in this industry. – Text book used: Strategic Management by Paul Finaly, Prentice Hall replacing Hill &Jones. Strategic management Theory.

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6th Edition Answer: The UK departments store industry has faced intense competition over the last years due to new entrants in the clothing segment mainly from the superstores/multiples segment leaders such us Tesco (Largest UK Supermarket chain) and Asda (A Wall-Mart Company). In addition, cheap-led chain stores like Primark are mounting pressure as they are outperforming leading stores such us Next and M&S (Financial times, July 12th 2005). Figures from the Business Ratio report (2005) illustrate that compound growth sales average between 2001 and 2004 has rose by 14%. This rather flat trend has been impacted primarily by declining prices instead of consumption stagnation. Robert Lynch (2006, p196) proposes three main pillars to identify the critical success factors, which are applicable for any industry. These are Customers, Competition and Corporation. Looking at the elements presented by Lynch, and based on data obtained from Datamonitor (June 2006) and the business ratio report on the sector (2005); the department stores industry in the UK has become more customer oriented and regardless the population segment that any company may target, the overall commitment is to focus on an integrated price and value added offer. As the competition is tightening, the second factor is location, distribution and right stock; a combination of tangible and intangible resources to ensure that busy customers are expected to increase footfall yields through visiting prime locations, finding what they want easily and leading to high density sales areas. Based on Paul Fynes’ critical offer concept, the third CSF is the development of flexible portfolios, with emphasis on food access; consumer trends are heading towards wide options, versatile retailers delivering quick changing fashionable products. Question 2a (100 words) ¨C Analyse the tangible and intangible resources of your chosen company in the last 5 years. Answer: Based on Finlay’s exhibit (Strategic Management, p286), the critical offer features for Mark & Spencer are reputation, high quality merchandise, “no quibble take-backs” and skilled staff.

FIVE YEARS AGO 2005/2006
Type Strategic resource M& S’s position Today’s belief
Structural Asset (Tangible Resources) Occupancy Cost Freehold location 1% occupancy cost versus a 3-9% industry average Biggest realignment programme and key locations expansion. Focused on Products and Store Environment. Food Halls
Reputation (Intangible Resources) Reputation Customer recognition with minimal advertising, no promotional sales Strong Brands- Brands Rationalization: Simply Food M&S Collections
Internal Architecture (Intangible Resources) Labour costs Quality of Employees Employee Loyalty, lower labor , turnover 8.7% labour costs vs. 10-20% industry average Fewer layers of hierarchy Than competition Loyalty, staff turnover the lowest in the sector Strong Service Training Programme
External Relationships Input costs Suppliers have lower costs and provide high quality of goods sold. Better Price Architecture leading to price reduction awareness amongst loyal and potential customers

Source: Collins and Montgomery, Strategic Management Paul Finlay, M&S Annual Report 2002-2005 Question 2b (200 words) ¨C Analyse the capabilities of your company using the list of capabilities discussed in Hill and Jones (efficiency; quality; innovation; knowledge & learning; links with suppliers and customers) in the past 5 years. Answer: -Efficiency: By understanding the way of linking the right products with the right customer base’s needs and life style, the company is developing a comprehensive value chain programme through introducing several good practices:

  • Centralising purchasing activities and exercising a better utilisation of manufacturing and logistic practices = Supply Chain Savings (3%).
  • Improvement of higher sales density by 45% (Datamonitor, June 2006).
  • Price reduction over 30% of products.

-Quality: Following the underperformance of key categories (i.e. women’s underwear) M&S continues strengthening its brand recognition with strong ranges i.e. “Girls Boutique”, “Autograph” and “Per Una” (Lingerie). Committed to high quality offers, M&S has now rapidly improved presence with its Food offer with “Simply Food” Stores (Company’s Annual Report, 2005) -Knowledge and Learning: Overall reasonable contingency over 3%is available to the group. Based on continuous analysis and know-how the company intends to approach the right balance to hit its customer’s main needs. -Innovation: Fresher layout, better use of space and stylish clothing, For M&S, its store spaces have to deliver the right environment in order to attract more people and retain them as loyal customers. As expressed by CEO, Stuart Rose, “Quality, Value, Service, Innovation and Trust” Question 3 (200 words) Use Bowman’s Clock (see Johnson and Scholes’ book Exploring Corporate Strategy) to identify the chosen business strategy of your company. Source: Johnson and Scholes (p211) By using the strategy clock featured by Johnson and Scholes (2003), M&S business strategy continues to target perceived value in its portfolio of products, but with the intention of moving away from position 5 to position 4 against clockwise. Over the last years the company has shown special focus on a middle age segment, which now is ageing. This scenario creates M&S’s mission of attracting younger generations. An important decision on the strategic focus implemented by M&S and included in its 3-year plan of redefining and transformation is the way the company underlines its priority to understand the mindset and changing habits of its current and potential customer base. Nowadays, the definition of value and service (main stratetegic position for M&S) has changed evolving into a hybrid portfolio between price, accessibility, stylish fashion and personality (Financial Times, July 12 2005) Stuart Rose, company’s chief executive has a clear position on the need to strive on low prices, maintaining quality and improving presentation at every single store. Hence, base on the strategy clock, Mark & Spencer aims at securing loyalty from its customer base, similarly to former Chief Executive Roger Holmes’ plans, but looking into gaining customers and widening prospects. Customers expect dynamic, fresh and fast changing portfolios at less premium price. Question 4 (150 words) ¨C Analyze the financial performance of your chosen company over the past 5 years and discuss the implications of its financial situation. Answer: M&S five-year financial outlook reflects key points on its profitability, efficiency and growth as a company and investment decisions for market participants. Mark and Spence 5-year Financial Highlights (in millions of £)

2002 2003 2004 2005 2006
Revenue 6939 7399 7728 7490 7797
6.63% 4.45% -3.08% 4.10%
Operating Profit 525.9 678.7 807.8 648.8 855.8
29.05% 19.02% -19.68% 31.91%
Earnings Per Share 5.4 21.8 24.7 17.6 31.3
303.70% -13.30% 28.74% 77.84%
Net Assets 3081.3 2108.3 2454 909.2 1155.3
-31.58% 16.40% -62.95% 27.07%
Net Debt 1907 1831.4 1994.7 2147 1729.3
-3.96% 8.92% 7.64% -19.46%
CAPEX 290.5 311 433.5 218.5 326.8
7.06% 39.39% -49.60% 49.57%

Source: Company’s Annual Reports and Author Calculations Profitability: The company has shown a positive rebound from 2005 fall and against industrial average M&S is keeping up and outperforming its major competitor’s John Lewis pace. M&S is delivering consistency in an expected stable performance with potential improvements, if the company manages to offset price reduction plans with value chain efficient practices. Operating Profit: £855.8m (2205/2006) from £648.8m (2004/2005) ROC (Return on Total Assets): 14.3% higher than industrial average (13.8%) Efficiency and Sustainability: Quick Ratio (52 weeks 2006) = 0.39, it is concerning as the company can only cover 39% of current debts. (Declining position) Asset Utilization: 0.92, weak performance against industrial average and main competitors, meaning that the level of assets is high for the level of sales achieved. Growth and Strategy: Revenue: After a setback in 2004/2005, the company rebounded with a modest 4.1% increase, which is below the industrial average over the last four years and also outperformed by major competitors in the top 5. CAPEX: 2005 was not a positive year for M&S as CAPEX position fell; however, it was balanced out during the 52 weeks in 2006 in line with the 3-year plan. Investors: Earnings per Share: This is the attractive point for investors. M&S has delivered as earnings have followed a profitable trend over the last five years. Top Five UK Department Stores (Financial Indicators)

Company T/over Profit Margin Asset Utilization Total Debt/Net Worth Sales growth
Report Average 03/04 9.0 02/03 8.8 01/02 7.7 03/04 1.55 02/03 1.56 01/02 1.53 03/04 48.2 02/03 42.7 01/02 26.1 6
M & S Plc 8019.1 8.9 4.2 1.9 0.92 0.92 1.05 59.4 58.5 38.5 0
John Lewis Plc 4414.6 2.0 1.9 2.1 1.58 1.55 1.61 37.6 35.0 29.0 5
Next Plc 2516 14.1 13.7 14.3 2.16 2.22 1.90 228.0 105.9 5.4 16
Woolworths PLC 2120.1 1.1 0.9 -0.7 2.6 2.46 2.47 311.6 360.3 338.5 1
Debenhams Retail PLC 1810.2 8.0 8.9 8.6 1.44 1.41 1.38 54.8 47.2 50.3 7

Source: Business Ratio report 2005 Company Profile Conclusion: M&S is the leading department store in the UK market in terms of turnover. It sales performance over the last five years has shown a flat growth compared to its peers impacted by price-led department stores such Primark. The company has not managed to increase its market share in major business lines such us clothing. Uncertainty remains as the company has to regain market share, increase sales more rapidly and most of all improve liquidity position. Bibliography Business Ratio Reports, Department and Variety Stores, Prospect Swetnehams Edition 32, 2005 ISSN 1473-107x Datamonitor (2006), Mark & Spencer analysis, British Library Database:, Finlay, P. (2000) Strategic Management, An introduction to business and corporate strategy, Prentice Hall: England Johnson G, Scholes K. (1993), Exploring Corporate Strategy, Third Edition. Prentice Hall: United Kingdom. Lynch R. (2006), Corporate Strategy, Prentice Hall 4th Edition 2006 Mark & Spencer annual reports 2001, 2002, 2003, 2004 and 2005 available: Rigby E, Burgess K. Canny consumers dictate the in-store trend, Companies UK, Financial Times Newspaper July 12th 2–5

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