The Christmas trading reports season has been overshadowed by two major announcements. We include a summary of the results published so far later in the News Analysis section of this report.

Sainsbury’s and Home Retail

Sainsbury's said that it had made an approach to Argos and Homebase-owner Home Retail last November, but the offer was turned down. Home Retail has since announced the sale of Homebase (to Wesfarmers). Sainsbury’s has gone to considerable trouble to spell out why it thinks such a deal would be a good idea and now has until Feb 5th to PUSU (Put Up or Shut Up). It is hard to escape the impression that both sides are in favour of doing a deal, it is just a question of agreeing a price.

Big deals – Bad news

We are usually sceptical about this sort of ‘big deal’ and this is no exception. One can see the logic behind the argument that Argos concessions in Sainsbury's are working well, that non-foods tend to have a beneficial impact on food sales as well and looking forward they could be a useful traffic generator if superstores continue to see market share drift downwards.

But that does not justify bidding for the whole company. Argos and Sainsbury’s have almost nothing in common and they have totally different trading styles.

Argos’ trading style

Sainsbury's is not alone in trying to come up with solutions for its superstores, and it is encouraging to see the company trying new ideas. But there is more to Argos than just concessions in Sainsbury's, and we have reservations about its retail format. Argos has the advantage of visibility that a national network of outlets brings, but none of the other advantages that come with operating stores – especially product display and opportunities for good service. Nor has its performance been very good – sales fell last year in spite of opening 86 new concessions.


Sainsbury’s is aware of Argos’ problems and argues that in being able to open concessions in place of stores that Argos wants to close, it will be helping Argos turn its business round.

That’s all very well and one could argue that Sainsbury’s is making an investment in a business which it can help and then also benefit from the increased value of what it is buying. But we feel the prudent course would be to take the benefit of the concessions through rental income and not expose the Sainsbury’s group to the potential downside, because it is far from certain that what Sainsbury’s can add would be enough.

Marks & Spencer – Mixed fortunes

The Christmas trading statement was much as expected in terms of food doing well and clothing doing badly, but the actual figures were more extreme than expected. With general merchandise down a considerable 5%. But the figures were overshadowed by Marc Bolland’s decision to step down. He’s only 56 and would not necessarily have needed to go yet and he is going very quickly – he will hand over at the year end, at the end of March.

Great performance in food

He has been chief executive since May 2010 and since then the food business has been his great success and he is leaving it on a high note. In fact that is his greatest achievement at M&S. Over Christmas the food performance was particularly good – far better than Waitrose's. The food side of the business

Problems in general merchandise

But the general merchandise figures are much worse than expected and there is nothing to suggest that there has been a significant downturn in clothing in the final quarter of 2015, in spite of the warm weather. At M&S it looks as if the decline in market share has accelerated over the Christmas period.

Figure 1: M&S – Share of spending on clothing and footwear, 2010-15
[graphic: image 1]
Source: Marks & Spencer, Office for National Statistics/Mintel

The current strategy seems to be to boost profitability, by raising gross margins while letting sales decline. This is not a strategy for the longer term and already Mintel's own consumer research (see Clothing Retailers, October 2015) shows that customer perception of M&S' value for money is poor.


For such a major figure in the UK retail sector, Marc Bolland is leaving at very short notice. He hands over to Steve Rowe, currently Executive Director of General merchandise. There is no doubt that he faces a major challenge.

He comes from the fashion side of the business and is a long term M&S insider. That is not necessarily a bad thing, though the City may well have preferred to see an outsider. On the whole, we think that M&S has tended to perform better under a fashion man (eg Stuart Rose) and it is that side of the business that needs to be the focus of attention.


So he has to maintain the progress in the food side while reinvigorating the clothing offer. Clothing may generate less than half of sales, but it occupies well over three quarters of space in the high street stores and it is critical to the longer term success of the business. It has to start a fight back against major competitors, such as Next.

An opportunity with younger customers

We think that the great failure of M&S' clothing in the last few years has been to attract younger customers, by which we mean 35+, and that the success of Next has been in holding on to customers that 10 years ago might have been expected to migrate to M&S. There is absolutely no reason why M&S should not be able to succeed in doing this. That same consumer research shows considerable goodwill towards the brand in clothing. Perception of the stores, customer service and product quality are all above average. The retailer’s failure was that it did not capitalise on that goodwill. That is both the opportunity and the challenge for Steve Rowe.

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