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M&S: Keeping it simple to escape

woes on the high-street

M&S can learn from a tough month on the high-street:


Following a month when both BHS and Austin Reed went into administration, M&S
must avoid the all too common pitfalls of lacklustre execution when implementing
their new customer focused strategy. The demise of BHS and Austin Reed were,
at least in part, a result of their growing cost of organizational complexity which
made them unable to react to competitive pressures. Sensibly, M&S have
resolved to simplify.
M&S, while still profitable, have been given a sell rating by many analysts. A key
component to quickly addressing investor sentiment will be to improve their sales
performance in the Clothing & Home segment. M&S can learn lessons from BHS
& Austin Reed and execute its plan: removing toxic complexity from its operations,
and secondly, simplifying to grow sales.

Typical cost allocation methodologies dont allocate the costs of complexity in the
right way, nor take into account the significant cross-subsidizations that inevitably
and invisibly occur across products, business lines, and market segments,
which mask the true creators of profit and consumers of cost. WP&C has used
Square Root Costing to help a number of organisations identify where their
businesses were saddled with non-value added costs related to complexity. It is
a fast, dynamic alternative to methodologies such as Activity-Based Costing for
organizations looking to quantify the impact of complexity on cost and operations,
and reveals if, and at what volume, certain products in a portfolio could be profitable.
Standard Cost View
Sales price

$/unit

140

NVA cost

140

VA cost

M&S Group Revenue - GBP Billions

120

12

7.9 BN

10.3 BN
7%

9%

8%

28%

4
0

9.5 BN

32%

29%

64%

62%

61%

2005

2010

2015

Operating Costs have


crept up a percentage of
revenue over the last 10
years an indication
that economies of scale
are not being achieved
and complexity is holding
back growth

120

80

100
80

60

60

100

10

Complexity-Adjust View

$/unit

40

40

20
0

20
0
Volume:

NVA costs typically


shift toward lower vol.
products

A B C D E F

Volume:

A B C D E F

Volume: 1500 1000 600 200 100 50

Volume: 1500 1000 600 200 100 50

Profit:

Profit:

8% 11% 7% 7% 6% 6%

27% 19% 3% -27% -39% -54%

Profits shifts toward higher vol. products

COGS

Operating Costs

Profit before tax

Figure: Square Root Costing provides more accurate views of


costs & profitability

Figure: M&S Full Group Financial Expense Analysis 2005 - 2015

Challenges in executing a simplification strategy:


M&S has resolved to put customers at the heart of their growth initiatives, stop
chasing fashion trends, and make its range more accessible. They will commit to
lower prices instead of engaging in stop-start promotions, as well as moving to
sharper ranges, rather than their current plethora of sub-brands. M&S plans to:
Cut prices on around 30% of its clothing ranges, and
Take out 10% of its product range to simplify the groups offering
These exercises are expected to have an adverse effect on profitability in the near term,
however, there is opportunity to realize the benefits more quickly than anticipated.
Using pricing as an effective strategic tool requires careful planning. M&S will need a
good understanding of both its customer segments and true cost to serve each (which
includes the hidden complexity costs that are inherent of large retailers like M&S). The
same applies to portfolio rationalization. The challenge for M&S will be to streamline
its portfolio in a smart way, involving a multi-faceted, strategic look at the companys
offering. What really matters in a range optimization analysis are incremental revenue &
costs and product lifecycle. Beyond that, understanding substitutability across the range
is a powerful cost lever. Selecting the right products is an exercise that can yield huge
cost savings if done correctly, however these benefits will not be realized with a simple
cut the tail exercise. In addition, focusing on the right portfolio will allow M&S to drive
greater scale and profitability from their range.

www.wilsonperumal.com
ifernandez@wilsonperumal.com

Properly allocating costs in this way is not only a key input for price setting, but
will also allow M&S to fully understand both customer and product profitability
before undertaking any portfolio rationalization exercise.

The Common Pitfalls:


M&S will do well to avoid the pitfalls that see so many companies fail to derive
benefit from their rationalization exercises, namely: not removing the right items
to achieve the required cost break-points, or indeed cutting the real drivers of
long term value. This can result from using financial statements as a map (as
opposed to a barometer), or working with the wrong data. Needless to say, even
if the exercise is a success, without realigning operations with the new portfolio,
savings and performance will not sustain.

Embedding the benefits:


M&S have stated the need to address their UK estate as a measure for cost
control and investor return. The key metric here (and across the UKs retail
landscape) must be to optimize return on invested capital. This is another
opportunity to address the complexity that has become embedded and locked into
the organization, and re-organize around a simpler, more powerful, customercentric offering. In updating and aligning their stores, delivery channels, and
their supply-chain, M&S can reorganize to better execute localization and omnichannel strategies where many of its competitors have struggled.

Wilson Perumal & Company, Inc.

Wilson Perumal & Company, Ltd.

One Galleria Tower, 13355 Noel Road


Suite 1100 Dallas, TX 75240

Longcroft House, 2/8 Victoria Avenue


London EC2M 4NS, United Kingdom