A Financial and Strategic Analysis for Marks and Spencer by Amy Chapman

A FINANCIAL AND STRATEGIC ANALYSIS FOR MARKS AND SPENCER WITH RECOMMENDATIONS FOR THE FUTURE OF THE COMPANY AUTHOR: AMY CHAPMAN STUDENT ID: CHA09271929 ROLE: STRATEGIC ANALYSIS CONSULTANT REPORT DATE: DECEMBER 2010

CONTENTS

INTRODUCTION- 3 CURRENT UK CONTEXT- 5 FINANCIAL PERFORMANCE- 6 CURRENT STRATEGIC POSITION- 8 CONCLUSION AND SUGGESTIONS- 9 APPENDIX ONE- 10 APPENDIX TWO- 21 APPENDIX THREE- 36 BIBLIOGRAPHY- 39

INTRODUCTION Marks and Spencer (M&S) has been trading for 125 years and is now the leading clothing supplier in the UK with 800 stores globally and 750,000 employees. 21 million customers visit Marks and Spencer every week. Marks and Spencer is the number one provider of womenswear and lingerie in the UK and due to rapidly growing internet sales Marks and Spencer‟s are well placed to gain market share in other departments in the store. Marks and Spencer‟s are also breaking boundaries with their Plan A initiative that is sure to influence retailers globally to trade more ethically (http://corporate.marksandspencer.com/aboutus/company_overview, 2010). Marks and Spencer was started by Michael Marks in Leeds in 1884, Marks started off with a market stall featuring the slogan „Don‟t ask the price it‟s a penny‟. Marks then went into partnership with Tom Spencer and this is where the origins of Marks and Spencer as it is now known can be seen; built around the principles of Quality, Value, Service, Innovation and Trust that still stand today. By 1900, Marks and Spencer had expanded to include 36 Penny Bazaars and 12 High Street shops. Marks and Spencer was one of the first stores to display merchandise in trays so that customers could inspect items before they bought. Improvements in living conditions and increases in income meant that people were able to buy more of the things that they needed and Marks and Spencer stores offered shopping that was cheap, simple and friendly. Price points remained at a penny until the start of the First World War when goods became expensive and hard to source. Between 1920 and 1940 Marks and Spencer faced much competition from value retailers and problems resulting from economic conditions such as unemployment levels, the company managed to stay afloat as they adapted to the needs of consumers at that time; a quality that is very much still relevant today. As a result of the war Marks and Spencer faced yet more problems between 1940 and 1950 due to low numbers of employees and goods, stores suffering under enemy fire and „Making of Civilian Clothing (Restriction Orders)‟, all resulting in a greater understanding of making quality items.

Rationing still continued between 1950 and 1960 this however made it clear that fashion wasn‟t just for the rich and with the use of new technologies and fabrics, Marks and Spencer made fashion more accessible. The 1960‟s brought a desire for modern, labour-saving products; in order to answer this need Marks and Spencer‟s created new products and textiles showing their innovative qualities. Between 1970 and 1990 suppliers became more interested in design, Marks and Spencer‟s started giving guidelines on up-to-the-minute trends and design briefs were introduced as a buyers „bible‟. From 1990 to now many developments have been made in terms of fashion departments at Marks and Spencer, sub-collections have been added with the help of famous names in fashion such as Patricia Fields, George Davis and Paul Smith; keeping Marks and Spencer at the cutting edge of fashion (http://marksintime.marksandspencer.com/, 2010). What is clear from the history of Marks and Spencer is that they have always tried to maintain standards in order to consistently deliver key values; something which they must continue to do in order to maintain market share. Marks and Spencer has been an inspiration to business around the world with their innovative and forward thinking business plans including the Plan A initiative that sets out 100 aims to ensure a more environmentally friendly business. Due to a lack of attention to the needs of customers „In November (1998) M&S announced a 23 per cent decline in first-half profits (Johnson. G, Scholes. K, Whittington. R, 2008). Retail competition at that time was offering on trend fashions at similar prices and value retailers were offering similar products at lower price points. In order to get back into the hearts and the minds of the UK‟s consumers Marks and Spencer rolled out a number of new sub-brands including Per Una and Autograph. In order to streamline the company and boost recovery in the UK, Chairman Luc Vandevelde decided to sell off American subsidiaries and cut 4,000 European jobs. The idea was to be „completely focused on its customers in the UK‟ (ibid). In 2002 there were reports of profits of £335,700, although retained profit was still at £86,200 (FAME). This increase in profit was validation that Mr Vandevelde‟s strategy of

„refurbishing stores, selling off overseas assets and improving product ranges‟ (Cassy, 2002) was proving successful. In the years following Vandevelde‟s shake up of the business there were the following records of profit2003

£504,000

2004

£552,300

2005

£587,000

(FAME, 2010) Marks and Spencer‟s profits have continued to grow and year on year since this shake up and the outlook for the company has never been better. When Stuart Rose joined the company as chief executive he said he wanted to bring the company „back to basics- products, stores and service‟ (Davidson, 2006) and he has stuck to his word maintaining profits and getting customers back through the doors. CURRENT UK CONTEXT „The ability of firms…to act strategically depends upon the relevant strength of (Porter‟s) five forces‟ (Britton &Worthington, 2006). Current five forces analysis highlights the following concerns. Supplier power appears to be low especially when sourcing out production overseas this means M&S have more bargaining power over suppliers to reduce costs. With so much freedom and with such array of choices buyers have the power in retailing; M&S must continue to pay attention to customers and meet their needs in order to maintain profitability. Any fashion retailer today will be faced with a number of competitors especially with the emergence of value retailers such as Primark and George at Asda. Companies like M&S need to ensure they are offering quality products at similar prices and maintain visibility in the market via advertising. (A full Porter analysis has been compiled and can be found in Appendix One.) „PESTLE analysis looks at the likely changes in political, economic, socio-cultural and technological factors and seeks to predict the extent to which change is likely to occur and its possible consequences for the organisation‟ (Britton & Worthington, 2006). 5

Current PESTLE analysis highlights the significance of the new UK coalition government‟s intent to make large spending cuts which is likely to make trading challenging. Economically the UK is in a facing many difficulties; the recession has put unemployment levels to 7.7% with 1.02 million women out of work, the highest figure since 1988 (http://www.statistics.gov.uk/, 2010).

Inflation is currently at 3.2% (http://www.bankofengland.co.uk/, 2010) meaning that Marks and Spencer have to continue to increase prices in order to make a profit, however interest rates are at an all-time low of 0.5% (http://www.bankofengland.co.uk/, 2010) meaning people are willing to use credit to fund consumption. This is good news for Marks and Spencer Finance but consumer‟s savings are down which will have a knock on effect in-terms of how much they will be willing to spend. VAT is set to increase to 20% in January 2011; this will influence customers to spend now whilst prices are lower especially during the Christmas period but a slow-down in spending could be expected as a result of the rise.

In terms of technology internet penetration has plateaued at 70% and 90% of those with an internet connection say they have purchased goods online in the last year. The popularity of buying online has increased despite the recession with 42% of consumers saying they bought more than last year (Mintel 2010a). M&S have seen an increase of 27% of sales via their transactional website putting the value of sales at £413m. (A full PESTLE analysis has been compiled and can be found in Appendix Two.) FINANCIAL PERFORMANCE

Marks and Spencer Turnover 12,000,000 10,000,000 8,000,000 6,000,000

Marks and Spencer Turnover

4,000,000 2,000,000 0 2010 2009 2008 2007 2006

This graph shows that over the five years since 2006 turnover at Marks and Spencer has gradually increased. This is positive as it shows that the recession has not made much effect upon how much consumer are willing to spend.

Marks and Spencer Pre-Tax Profit 1,200,000 1,000,000

800,000 600,000

Marks and Spencer Pre-Tax Profit

400,000 200,000 0 2010

2009

2008

2007

2006

This graph shows the rise and fall in pre-tax profits at Marks and Spencer. Profit rose steeply between 2006 and 2008. Due to the recession profits fell quickly from ÂŁ1,129,000 in 2008 to ÂŁ706,200 in 2009/2010. One positive sign shown in this graph is that profits have been maintained in the year 2009/2010 despite further economic troubles. 12,000,000 10,000,000 Marks and Spencer Turnover

8,000,000 6,000,000

Next PLC Turnover

4,000,000

Primark Turnover

2,000,000 0 2010 2009 2008 2007 2006

This graph show the turnover of marks and Spencer compared to its main competitors in the clothing market. From this you can see how clearly Marks and 7

Spencer have the majority share of the clothing market in the UK but it can also be seen that the turnover at Marks and Spencer has not always been as high as it is now; it has increased gradually since 2006. Primark have the lowest share in the market out of these three competitors however they have had the greatest increase in turnover going from £754.656 in 2006 to £1,743,006 in 2010. Primark have grown in popularity due to the low price points in the store. Value retailers have gained a greater share in the market due to the recession, consumers have limited disposable income and so it is often more suitable for them to buy high fashion items at lower prices. Next has the third largest share of the clothing market in the UK and this graph shows that they have maintained similar levels of turnover since 2006. 

Currently Marks and Spencer have the largest share of the UK fashion market maintaining levels at 11%.

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Pre-tax profits for 2009/2010 stand at £702.7m

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Sales at £9.3bn up 32%.

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Like for like sales are up in general merchandise as are general merchandise sales in total.

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Added £1.9bn in sales

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M&S Direct sales up 27% to £413m

(All financial data used in this section has been taken from FAME and Marks and Spencer‟s final results 09/10 and annual report 09/10.)

CURRENT STRATEGIC POSITION

A SWOT analysis had been complied to assess the current strategic position of Marks and Spencer the full example of which can be found in Appendix Three. According to this SWOT analysis Marks and Spencer have a number of this they are currently doing well such as providing value for money garments at competitive price points, offering traditional values including own-brand goods and aiming sub brands such as Portfolio to the over 45‟s. Current weaknesses included the layout of stores, many customers found this to be overwhelming with so many sub-brands; they found that they struggled to find what it was they were looking for. They also said that they 8

found there to be little â&#x20AC;&#x17E;fashionabilityâ&#x20AC;&#x; seen in available ranges. Plan A also took some of the brunt as it seems as though the initiative is doing very little to win trust in consumers. It is positive to note that the SWOT analysis showed up a number of opportunities for the company but unfortunately due to economic conditions, political changes and competition there are a number of threats to Marks and Spencer.

CONCLUSION Marks and Spencer are a global, multi-channel company that have worked hard to gain the trust of their consumers and to maintain key values set in place when the company was founded 125 years ago. Despite numerous problems and changes in to those in key roles in the company M&S have managed to regain profits and turnover and win back the hearts of the British public with their quality items and customer service.

APPENDIX ONE MARKS AND SPENCER PORTER ANALYSIS

Supplier Power- Supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. The bargaining power of the supplier in an industry affects the competitive environment for the buyer and influences the buyer‟s ability to achieve profitability. Strong suppliers can pressure buyers by raising prices, lowering product quality, and reducing product availability. All of these things represent costs to the buyer. A strong supplier can make an industry more competitive and decrease profit potential for the buyer. On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and price, makes an industry less competitive and increases profit potential for the buyer. Low supplier power makes an industry more attractive and increases profit potential for the buyer, while high supplier power makes an industry less attractive and decreases profit potential for the buyer.

Bargain Power of Suppliers is High/Strong if: • Suppliers are more concentrated than buyers • Buyer switching costs are high • Threat of forward integration is high • Buyer is not price sensitive • Buyer is uneducated regarding the product • Buyer purchases product in low volume • Buyer purchases comprise small portion of supplier sales • Product is highly differentiated • Substitutes are unavailable

Supplier Bargain Power is Low/Weak if: • Buyers are more concentrated than suppliers 10

• Buyer switching costs are low • Threat of forward integration is low • Buyer is price sensitive • Buyer is well-educated regarding the product • Buyer purchases product in high volume • Buyer purchases comprise large portion of supplier sales • Product is undifferentiated • Substitutes are available Buyer Power- Without the possibility of buyers there would be no market regardless of the product for sale. This means that theoretically they exert a huge amount of power over manufacturers or sellers of the products they are looking for.

Buyer power is at its highest when: 1. There is a concentration of buyers (the smaller the amount of buyers the more suppliers they will have trying to grab their attention, possibly lowering prices or offering discounts) 2. There are lots of small operators in the supply industry (the more suppliers there are the more competition they have to gain customers, so again will they will be attempting to grab buyers attention, with tempting offers) 3. There are alternative sources of supply (the more sources of supply a buyer has the more they can negotiate deals to their advantage as there is always the option of them going to another supplier which most firms would want to avoid) 4. There are low switching costs (if it is inexpensive to change supplier then it gives the buyer the opportunity to dominate the relationship and bargain for cheaper costs) 5. Materials are expensive so buyers shop around (again buyers can look around until they find a price they like, or refuse to buy until the price drops) 6. There is backward integration (this is where the buyer acquires ownership of their supply chain, reducing input costs by reducing supplier power)

Buyers generally have a large amount of market power, all suppliers want

their products purchased and often buyers can influence their spend and therefore the deals that are made between companies. They are a source of „marketing economies of scale‟ which means they have a great deal of control over suppliers. -

It is hard to find definitive data for this though as „no data collected centrally on the level of buyer concentration‟ (Worthington & Britton, The Business Environment, 5th ed, 2006, Prentice Hall, pg. 355)

There are markets where buyer power differs. It is often possible to predict market behaviour dependent on the relationship between buyer and supplier within and industry.

Monopoly – where there is one dominant producer (so buyers have no option but to purchase from

this manufacturer)

Monopsony – where there is one buyer Oligopoly – small number of large producers and a large amount of interdependence of decision

making

As a nation with as much choice and freedom as there has ever been, buyers have the power. A business succeeds or fails depending on the buyers, whether they want it or whether they need it. One massive example which can be seen all over the high street as an example of buyer power is designer collaborations with high street chains, the first significant and since the most notable being H&M with Karl Lagerfeld. The success, popularity and consequential demand for these lines has meant that H&M have repeatedly collaborated with international designers to bring high end looks at low cost prices all encouraged by the consumers demands, and which spread though to most of the other leading high street brands. Offering these kinds of collaborations with celebrities and designers, the most successful of all these have been Kate Moss at Topshop which is now in its 8th season due to consistent buyer demand. Topshop is a brand which constantly pays attention to its customer and is „notorious for quick change. It brings in brands and loses brands‟ (David Shaw, BBC), according to buyer power. More buying equals more demand which equals more choice. Fast fashion seems to

be going out of style with the recession and consumers are beginning to demand more for their money. In the luxury market consumers who were hibernating during the recession are beginning to invest in more expensive, luxury items. „Customers are looking for enduring value and quality; they expect quality commensurate with the price‟ (Karen Walker, financial times). So what does this mean for lower value brands? Interestingly with Primark, Tesco and Peacocks all reporting an increase in sales last year (Mintel), buyers obviously want to keep fast fashion flowing also. Barriers to Entry- are any kind of barriers which prevent or inhibit the entry of firms into the industry. There are a few sources to barriers to entry. If for example the scale of production increases, the average cost of production falls. The average cost of production changes as the scale of production changes. Let‟s say M&S has a line that is going very well and the demand for the line is very high. M&S would try to invest in more production, which means that M&S‟s cost for the production will be reduced, because they are producing more. Of course M&S would try to keep their selling prices the same, so they can benefit from the cost of production and not let the consumer benefit in lower prices. (Economies of scale reduce average cost.) The sources of economies of scale are under technical, marketing and financial headings. Technical economies mean that the greater the amount being produced, the lower is the average cost of the items as its being spread over a large output. If M&S starts producing more goods the average cost of an item will be much lower. Marketing economies means that marketing costs would be spread out over a large output which means that the average costs sink. If M&S produces more products the marketing costs can be spread out over a larger output. Even specialised marketing departments can be used to keep the costs spread and low. Financial economies mean that often it is easier and cheaper for large companies to borrow capital. If M&S needed capital from its bank it would (with a good plan) get it without any problems where as a small new starter firm would probably not get too much capital at the beginning. Economies of scale are very effective barriers to entry. Competitive Rivalry- Competitive rivalry is a starting point in analysing the industry. If entry to an industry is easy (entry barriers) then competitive rivalry is likely to be

high. This is the case within the fashion industry, particularly amongst „value‟ and „high street‟ retailers. If it is easy for customers to move to substitute products for example from M&S to Next then rivalry will be high. Generally competitive rivalry will be high if: • There is little differentiation between the products sold between customers • Competitors are approximately the same size • If the competitors all have similar strategies • It is costly to leave the industry hence they fight to just stay in (exit barriers) Looking at Marks and Spencer‟s in more detail; as an example of a High Street Retailer, the levels of competitive rivalry can be analysed as follows: Balance of competitors FIGURE 23: UK: Leading clothing retailers, market shares, 2008 Source: Mintel „Clothing Retailing - UK - October 2009‟ Share of clothing specialists Company name

sales (a) %

Marks & Spencer

11.8

Next Group

10.3

Next Retail

7.5

Primark Stores

Arcadia Group

5.8 (b)

TK Maxx

New Look

3.8

Matalan

3.6

Bhs

2.9 (b)

Peacocks/Bonmarché (Peacock Group)

2.4

Aurora Fashions

2.4

River Island Clothing Co

2.3

Monsoon/Accessorize

2.1 (c)

(a) Based on reported 2008/09 turnover as share of all clothing specialists sales of £29.2 billion in 2008 (b) Based on latest reported 2007/08 sales as share of all clothing specialists sales of £29.2 billion in 2008 (c) Figures for an extended trading period, on a pro-forma basis market share stood at 1.6%. M&S is the UK‟s most popular store for clothing purchases, shopped at by 43% of consumers, according to Mintel, (Jan 2009). M&S‟ clothing sales rose by 1.4% and 2.7% in Q1 and Q2 2009/10 respectively, and like-for-like sales of general merchandise (the lion‟s share being clothing) dipped by 2.4% and 0.8% respectively. (Mintel, Oct 2009) However there are a high number of competitors for the retailer (on the fashion side), including stores such as; Next who increased total sales by just 1.4% in the half year to July 2009. (Mintel, Oct 2009) High entry barriers There are high fixed costs associated with setting up and maintaining a profitable chain of stores such as M&S. The increase of online-only stores offering similar ranges, quality and often cheaper clothing has increased over the past few years. Meaning stores such as M&S have had to invest heavily in e-commerce websites to keep up with this technological advance in the industry. The advantage that M&S has over other retailers wanting to enter the market is: 

M&S is a familiar, trusted brands and has a quality image



It is the UK‟s most trusted retailer (Mintel, Ethical and Green Retailing – UK, September 2008)



Has the most comprehensive geographic coverage in UK non-food retail (over 300 stores) (Mintel: Department Store Retailing - Europe - January 2009)

The cost for new or existing retailers to try and achieve the above levels of competitive advantage would be extremely unlikely. There would need to be 15

significant investments in advertising spend, PR and general development of stores. Markets are undifferentiated M&S‟s competitive edge in differentiating itself from competitors: 

27% of UK shoppers are now looking to buy fewer but better quality clothes, while 13% will buy more clothes at value retailers



72% of M&S clothing is in the best and better price brackets



M&S has green and ethical credentials – one of the first major retailers to put issues on its corporate agenda (the 100-point plan)

(all above points from: Mintel: Department Store Retailing - Europe - January 2009) The problems M&S faces in terms of competitive rivalry are:

Slow market growth M&S is the destination for clothes shopping for the over-45s, according to Mintels consumer research, and is therefore well placed to benefit from the expected ageing of the population. However one small disadvantage is that it has limited appeal among the under-25s. This will not affect M&S too much though as the under 25s market is very competitive and saturated. The key challenge for the brand is not to grow old with its customers and to make the store as inclusive as possible through sub-branding and merchandising without alienating its core customers. (Mintel: Clothing Retailing - UK - October 2009)

High exit barrier Although an M&S benefits somewhat from being a familiar, trusted brand. In terms of an exit barrier this can be seen as a downfall. When a brand has a certain public image, it can be hard to move away from this if required. However M&S has had no problem with rebranding itself before. If M&S did want to reinvent itself again there is a possibility it would lose a certain level of trustworthiness; affecting its key image.

Compared to Value Retailers: 

In market share terms, Primark has been the major winner during the downturn of the recession. Due in part to its very cheap and fashionable range of clothing which appeals to the mass market.



As a whole, the value segment has outperformed the rest of the sector in retail.



Collectively, youth fashion retailers have also held up quite well with young people continuing to spend.

(Mintel: Clothing Retailing - UK - October 2009) 

However value stores usually have low entry barriers and therefore competition is far higher. For example value stores do not tend to have the same level of branding as high street and luxury retailers and therefore do not have the same level of emotional attachment for a shopper. There is more chance of a shopper moving from one value store to another than in luxury retail; where a customer could feel „connected‟ to the brands image.

Compared to Luxury Retailers: Luxury retailers have an advantage over high street and value retailers in that they are seen as unique 

Shoppers at luxury stores are unlikely to start shopping at High Street and Value stores due to the different perception (unless they are forced to i.e.: because of finances etc.)



Like M&S in some ways, most luxury brands are well established and trusted by shoppers and therefore have that added appeal of brand awareness

Threat of Substitutes- Any fashion company found within the market today, will ultimately be faced with the idea of competitors. Over the years competitive pressures have been emerging in the UK. New substitutes in the forms of George, from ASDA, and Tesco with its clothing lines compete with high-street retailers such as Marks and Spencer, Next, Arcadia, Bhs, and H&M. Some of the problems for companies as new entrants hit the markets are that their market share, as a whole will decrease. Companies need to respond by price matching, raising advertising or promotion methods. Other issues within the clothing industry is the idea of fast fashion, where clothing is imported from places like China or Bangladesh and sold within the UK at remarkably low prices. In the early 1990‟s M&S prided itself on being British and having 90% of its products manufactured in the UK. However because of this it was harder for M&S to compete

in regards to price. A decision was made to import more products from overseas, to the point where 90% of its supply came from overseas and only 10% from UK Sources. (Source: The Fashion Handbook, T. Jackson, D. Shaw). In 2005 the quotas of the Multi-Fibre Agreement (which put a limit on how much could be sourced from specific countries such as China) was lifted, giving rise to supply from China. This increased the competitive pressure within the industry. UK based producers faced even more severe competition from low cost sources having effects on output and employment. The price of goods remains low for the following grocery retailers such as ASDA, Tesco, Sainsbury‟s, and discount stores such as Primark, TK Maxx, and high street clothing retailers such as M&S because of the high levels of competition. Luxury brands can get away with higher prices, only by offering something very different, for example the fashionable clothes, the shopping experience, or special service levels.

Some factors that will determine who wins the market share are: 

The difference in price between rival products



Quality and reputation of one brand versus another

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How many substitutes are on the market i.e. how much choice the consumer faces

One way in which this pertains to the Fashion industry is in the case of counterfeit luxury goods being sold for a fraction of the original‟s price. In March (2010), luxury retailer Burberry filed a lawsuit against TK Maxx owners TJX Companies as they found the discount retailer to be selling counterfeit items of Burberry clothing and leather goods. This demonstrates a single market for Burberry goods with one product being sold at a luxury price and the other illegal product being sold in a discount retail environment. The fake good is a threat to substitute real Burberry products but it is also an illegal copy of a brands property. The following is taken from Drapers: “TJX has continued to import, distribute, supply, promote and/or sell large quantities of counterfeit goods bearing one or more of the Burberry marks in conscious disregard of Burberry‟s intellectual property rights and the counterfeit nature of the

products in an effort to target their customer base and profit at Burberry‟s expense,” according to the lawsuit. http://www.drapersonline.com/multiples/news/burberry-fileslawsuit-against-tk-maxx-parent/5011184.article Research has shown that the UK bra market was dominated by multiples retailers, namely Marks & Spencer, Debenhams and Next. However supermarkets have overtaken all but the market leader. The figure below shows how supermarkets have infiltrated the lingerie market and have managed to surpass most of the department stores in terms of sales. Marks and Spencer have held onto their lead but it is clear that supermarkets are producing a viable substitute and are gaining market share. Retailer choices Marks & Spencer still dominant but... “From which of these shops, if any, have you bought underwear for yourself or someone else in the past 12 months?” FIGURE 56: Shopper base of leading underwear retailers and brands, by age and affluence, December 2009 Base: 1,140 adults aged 15+ who have bought underwear or had it bought for them in the last 12 months Bubble size = % who buy Source: Ipsos MORI/Mintel

APPENDIX TWO MARKS AND SPENCER PESTLE ANALYSIS PoliticalM&S has over 600 hundred stores located throughout the UK, and it has more than 300 stores in over 40 territories around the world, planning to expand the international business through both franchised operations and partnerships (http://corporate.marksandspencer.com).

Operating in a globalized environment places great importance on companies to take into account the national, regional and local legislation in each of the geographical areas they operate in: labour legislation, planning permission, tax incentives for international business, and so on. Some of the countries do not even have a freemarket political system, with a tight government control over the markets (i.e. China).

In the Arab world, political changes could happen that could bring further economic changes. An ageing leader soon will be replaced, which could bring more liberal changes.

After the natural disasters in Pakistan, the EU called to drop tariffs to boost its trade. For Pakistan, textile and apparel exports represent a huge percentage of its total merchandise exports.

World Trade Organization has recently ordered the removal by EU of import tariffs on electronics, which can bring down prices and boost sales for distributors, like M&S.

A recent bilateral trade agreement, the EU-South Korea free trade deal (www.europeanvoice.com), means that British retailers and manufactures need to be prepared for Korean imports. Again, it can be positive for importers who could benefit from cheaper deals, but the competition could increase, and competitiveness of UK goods may be affected.

At home, UK government is making significant public spending cuts, making trading conditions ahead likely to become more challenging. There is a general “cut spending” political agenda in the EU; making these conditions general to many other countries in Europe (i.e. Portugal has just presented a tough austerity budget). There is consensus as well in Europe to reform finance aspects, with ministers to discuss tax and global reforms.

Labour laws could change, as the European Parliament will vote on 21 October on a proposal that would give fathers a right to paternity leave and would extend the minimum maternity leave from 14 weeks to 20 weeks. (www.economist.com).

Environmental/Ecological

Corporate Social Responsibility- A business is responsible for its actions and the effects they may or may not have on society and the environments. These are determined by its business ethics. A Corporate Governance document is drawn up based on a company‟s business ethics and are the rules and guidelines a company bases its active engagement with the environment. 

Ethical clothing market growing but to date still underdeveloped



Ethical clothing market worth £175 million or 0.4% of total market ( up from £40 in 2004/5

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Improving consumer awareness of ethical issues re fashion and greater availability of ethical fashion driving up sales.

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A need for fashion that is as fashionable as major high-street to make ethical fashion more appealing.

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London fashion week hosts Esthetica for ethical fashion lines

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ABC1 women most likely to buy ethical fashion

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Like all fashion the sale of ethical clothing has been affected by the adverse economic conditions i.e. recession.

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H&M, Monsoon and Marks Spencer have broadest ranges of ethical fashion on High Street

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Ethical manufacturese Ciel, Edun, Enamore, From Somewhere, Gossypium, Howies, Junky Styling, Noir and People Tree.

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Ethical fashion sells alongside mainstream fashion. The sector has found internet sales integral to its success. (Ethical Clothing- UK – February 2009)

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Fashion industry has opportunity to make a real difference to the world‟s poor by providing manufacturing jobs. In Bangladesh, a Least Developed Country, 70% of GDP is derived from the fashion industry.

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The Made in Britain label can be earned. The benefits are a reduced carbon footprint as less transportation is involved in the manufacturing process.

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Fashion appeals to a vast cross-section of people, many of these celebrities with huge media appeal. These celebrities are able to affiliate themselves with environmentally sound fashion getting the word to a bigger audience.

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Fair-trade fashion ensures farmers receive fair prices and working conditions in many underdeveloped countries. This ensures a healthy lifestyle for many of the poorest who are then able to cultivate ancestral culture and skills from one generation to the next. The most vulnerable i.e. the very young and the very old have a higher life expectancy due to improved work and living conditions



(Ethical Fashion Forum http://www.ethicalfashionforum.com/the-issues)

http://www.springerlink.com/content/b7r43221531065l3/ Economic Development- Factories producing textiles provide jobs and lively-hoods for some of the worldâ&#x20AC;&#x;s poorest people. The fashion in the UK is largely based around the sale of cotton garments. Bt cotton adoption increases returns to labour, especially for hired female workers. Likewise, aggregate household incomes rise, including for poor and vulnerable farmers. Hence, Bt cotton contributes to poverty reduction and rural development. http://wrap.warwick.ac.uk/2489/ Economic Growth- If demand of cotton made fashion flourishes the high-street is seen to be strong. This inflow of money into the UK retail sector helps to secure jobs and pumps money into the economy. Retail sales figures are a good indication of the economic state of affairs - increased consumer spending generally eases concern among both policy-makers and investors, and if sustained can lead to job creation and a cycle of economic growth. http://www.igmarkets.co.uk/cfd/highlight-retail-sector.html Environmental Protection- High on the agenda of many environmentalists is the production of organic and fair-trade cotton. Retailers as mentioned above have incorporated fashion made by this cleaner raw material into their consumer provision giving the consumer an active choice to enjoy fashion and protect the environment all at the same time. Organic agriculture protects the health of people and the planet by reducing the overall exposure to toxic chemicals from synthetic pesticides that can end up in the ground, air, water and food supply, and that are associated with health consequences, from asthma to cancer. Because organic agriculture doesn't use toxic and persistent pesticides, choosing organic products is an easy way to help protect yourself. http://www.ota.com/organic

Social Income distribution, redundancies, reduced working hours and uncertainty regarding security in jobs means consumers are less likely to part with disposable income and in fact may have less disposable income as a result of unemployment levels and cuts in benefit.

Lifestyle Changes such as advances in technology and flexibility of working conditions mean people can now work remotely, thus causing work force to spread further, perhaps even abroad. UK jobs could be outsourced, different channels of distribution or sourcing might be explored, taking business away from the UK.

Educational reforms by the government such as the removal of the cap on tuition fees meaning universities can charge whatever they choose. This may put off students from going to university resulting in a lack of new talent and a reluctance to “top-up” their degrees to boost existing knowledge.

Consumers are now demanding to know where their goods are produced and to know that the person making them have been treated fairly. The recession has also caused customers to choose quality over quantity perhaps showing signs of trouble ahead for fast fashion brands such as Primark. Organic and ethical goods are almost seen to be “fashionable” in themselves. Brands not seen to be making more ethical choices may find themselves left behind in the market as consumers become more commercially aware.

Social class is a categorisation of individuals who share a similar social status depending upon their educational background, occupation or salary. Though it cannot be said whether a person‟s social class will affect what goods and services they will choose. According to Worthington and Britton (2009), in the year 2006, a “never worked and long term unemployed” person spent just ten pounds per week LESS on clothing than a “managerial and professional occupations” employee.

Reference groups such as work colleagues, friends and family will influence future decisions we make regarding consumption of goods.

Technological

Consumption Methods- Over the past few years the fashion industry has seen a growth in the amount of people using the internet to shop and browse online. Statistics show the major players online are traditional retailers as they are known and trusted brands. However many pure-play retailers such as ASOS have quickly developed a solid reputation. These pure-plays now account for one third of the market share.

Online retail sales were around ÂŁ17.8 billion in the UK in 2009, 6.6% of all retail sales.

The market has grown by 150% since 2005, 25% per annum.

One significant factor for growth in online retailing is broadband access, which is levelling out at just below 70% of the adult population. Retailers need to think of ways to engage this captive audience to further development.

The fashion industry has the opportunity to capitalise on the advances in technology both online and in store. Possibilities such as augmented reality, mobile technology (12% of us now own smart phones) and intelligent advertising (behavioural targeting) and searching, open the door for the industry to develop relationships with consumers and their brands on a far deeper level.

Marks and Spencer has said that it expects its optimised website for mobile phones would become profitable â&#x20AC;&#x153;very quicklyâ&#x20AC;? due to the convenience of the service.

M&S Direct chief Dave Hughes said that the website currently has around 800,000 users. Hughes added that a website was chosen instead of an app to avoid having to make different ones for each brand of phone. (Retail week 14 th May 2010).

Financial forecast (Mintel 2010) 26

Online sales will be around ÂŁ27 billion, excluding VAT in 2014, 9.1% of all retail sales.

Online sales will grow 7% per annum (faster than all retail sales over the next five years).

The sector is growing fast- by 13% in 2009, compared with just 4% for retailing as a whole. Intelligent Textiles â&#x20AC;&#x201C; In September 2010 Marks and Spencer introduced a line of jersey wear into sub-brand Per Una Speziale. The whole collection completely sold out in store and online within a month.

The range used a fabric technology called Fibriq.

Smart fabrics can help manufacturers and designers increase emphasis on lifestyle and aesthetic appeal. The nanotechnology enables fabrics to be imprinted with memory; no need to iron and drying time is significantly reduced thus saving time for a consumer with a busy lifestyle.

Manufacturing Methods- Investment into sewing machine technology has led to human controlled machines being made that ate capable of stitching speeds in excess of 1,600 stitches per minute. Sewing pattern data programming software can easily be connected to the machine via a commercially available USB cables, meaning even the humble pattern cutter/maker will eventually lose out. Intelligent Retail (EPoS Electronic Point of Sale) â&#x20AC;&#x201C; Hand held tills give freedom to sales staff meaning they can provide a more personal service and prevent the need for customers to queue.

Sales flow is analysed so that stock replenishment and reordering is kept perfectly in

check allowing for optimum profitability.

Accounting is made easier at the click of a button. At the end of any financial period account information is available for use, saving hours of expensive manual accountancy.

Management reports are refined and information quickly accessible. Too much information can be as bad as too little when making decisions.

Till software improves the way customer account information is held. This enables the company to have a better overview on what customers are buying and their preferences.

When Marks and Spencer introduced its investment of £450m for a three year IT spend in 2008, the strategy helped improve operational efficiency and cut like-for-like IT running cost by 13.5%. (http://www.computerweekly.com/articles/2008/07/11/231440/MampS-earmarks163450m-for-three-year-IT-spend.htm)

Other technological developments include 

Distribution methods



Information exchange



Analysis



Marketing (Behavioural targeting)

Environmental/Ecological

ethics and are the rules and guidelines a company bases its active engagement with the environment. 

Ethical clothing market growing but to date still underdeveloped



Ethical clothing market worth £175 million or 0.4% of total market ( up from £40 in 2004/5



Improving consumer awareness of ethical issues re fashion and greater availability of ethical fashion driving up sales.



A need for fashion that is as fashionable as major high-street to make ethical fashion more appealing.



London fashion week hosts Esthetica for ethical fashion lines



ABC1 women most likely to buy ethical fashion



Like all fashion the sale of ethical clothing has been affected by the adverse economic conditions i.e. recession.



H&M, Monsoon and Marks Spencer have broadest ranges of ethical fashion on High Street



Ethical manufacturese Ciel, Edun, Enamore, From Somewhere, Gossypium, Howies, Junky Styling, Noir and People Tree.



Ethical fashion sells alongside mainstream fashion. The sector has found internet sales integral to its success. (Ethical Clothing- UK – February 2009)



The Made in Britain label can be earned. The benefits are a reduced carbon footprint as less transportation is involved in the manufacturing process.



very old have a higher life expectancy due to improved work and living conditions ď&#x201A;ˇ

(Ethical Fashion Forum http://www.ethicalfashionforum.com/the-issues)

Sustainable CapitalismEnvironmental Degradation- E.g. Cotton makes up a half of the global textile production. Intensive use of chemical fertilizers, pesticides and herbicides used in cotton production endanger both the environment and agricultural workers. Population growth and the pollution of water, air, and soil are contributing to the increasing number of human diseases worldwide. Currently an estimated 40% of world deaths are due to environmental degradation. The ecology of increasing diseases has complex factors of environmental degradation, population growth, and the current malnutrition of about 3.7 billion people in the world. http://www.springerlink.com/content/b7r43221531065l3/ Economic Development- Factories producing textiles provide jobs and lively-hoods for some of the worldâ&#x20AC;&#x;s poorest people. The fashion in the UK is largely based around the sale of cotton garments. Bt cotton adoption increases returns to labour, especially for hired female workers. Likewise, aggregate household incomes rise, including for poor and vulnerable farmers. Hence, Bt cotton contributes to poverty reduction and rural development. http://wrap.warwick.ac.uk/2489/ Economic Growth- If demand of cotton made fashion flourishes the high-street is seen to be strong. This inflow of money into the UK retail sector helps to secure jobs and pumps money into the economy. Retail sales figures are a good indication of the economic state of affairs - increased consumer spending generally eases concern among both policy-makers and investors, and if sustained can lead to job creation and a cycle of economic growth. http://www.igmarkets.co.uk/cfd/highlight-retail-sector.html Environmental Protection- High on the agenda of many environmentalists is the production of organic and fair-trade cotton. Retailers as mentioned above have incorporated fashion made by this cleaner raw material into their consumer provision 30

giving the consumer an active choice to enjoy fashion and protect the environment all at the same time. Organic agriculture protects the health of people and the planet by reducing the overall exposure to toxic chemicals from synthetic pesticides that can end up in the ground, air, water and food supply, and that are associated with health consequences, from asthma to cancer. Because organic agriculture doesn't use toxic and persistent pesticides, choosing organic products is an easy way to help protect yourself. http://www.ota.com/organic

Legal Contract Law – concerning contracts between the offeror and an offeree. E.g. Business partnership. Say if a fashion organisation such as Marks and Spencer‟s wanted to create a contract between themselves and another organisation/ individual they would have to abide by certain regulations and laws concerning it. This is time consuming and costly for both parties. The contract will only be binding if: it is not contrary to public policy, if entered into freely and without any defects and if person has full contractual capacity (e.g. NOT a minor, drunk or mentally disordered) Consumer Law – is there to protect consumers when purchasing. Trade Descriptions Act 1968 Protect consumers from traders misdescribing goods or falsely describing services. Fashion businesses have to be very careful when describing what they are selling otherwise they can be taken to court by the consumer and forced to pay out a certain amount of money or face imprisonment if convicted. The Consumer Credit Act 1974 This became fully operational in May 1985; it controls transactions between the credit industry and private individuals (including sole traders and business partnerships) up to a limit of £15k. Small businesses are the most affected by this. It is here to assist the individual purchasing the credit. Say a designer borrowed money to set up their own business this Act is in place to make sure only the sound of mind

are contractually obligated, it is not misleading or undesirable and to make sure they are protected from behaviours such as the bank they borrowed from suddenly demanding a large amount of money from them that they cannot afford. Sale of Goods Act 1979 This protects the rights of consumers (defined as individuals buying for personal use) when purchasing goods. Conditions: 1. “Goods which are sold by description must match the description given to them and it is of no significance that the goods are selected by the purchaser” 2. “Goods had to be of „merchantable quality‟ (later changed to „satisfactory quality‟ to save confusion), except where any defects are drawn specifically to the attention of the purchaser before the contract is made or where the buyer has examined the goods before contracting and the examination ought to have revealed such defects.” 3. “Goods are fit for a particular purpose (capable of performing the tasks indicated by the seller)”

The Consumer Protection Act 1987 It came into force in March 1988. It “provides a remedy in damages for any consumer who suffers personal injury or damage to property as a result of a defective product by imposing a „strict‟ liability on the producers of defective goods.” All of the above are designed to protect the consumer and for the fashion industry create time consuming and costly add-ons to their businesses. Not only this if they do not abide by them they could face heavy fines or imprisonment. The same goes for laws concerning employees, health and safety, insurance, the list is endless. Not only that but when trading or selling abroad international laws have to be taken into consideration. Every countries laws differ whether it is to do

with employees‟ rights, contractual law or consumers. Again this all costs money to investigate and generally means more money that the fashion business has to spend putting measures in place to abide by them. It can also constrict their ability to sell and how quickly they can have their products made. In fact there are not many things that the law does not influence and each of these has to be investigated thoroughly and abided by. Interflora is currently attempting to sue Marks and Spencer‟s for buying keywords on Google (Ad words) directly relating to their business. So that when some is looking for the Interflora website M&S pops up as an alternative. M&S has paid Google to advertise them every time Interflora comes up to promote their own flower business. It is being taken through the European Court of Justice, but M&S insist that it is not illegal. M&S said they are “encouraged by other cases which have gone to the Court of Justice on this question”. If the case is accepted though they will still have to face heavy legal fees to defend themselves, and also now face damage to their companies image which could affect sales and partnerships with other companies/ individuals. (www.bbc.co.uk/news, 13/10/10).

Counterfeit goods- the cost of counterfeiting to the fashion industry in the UK is an estimated £1.3 Billion and continues to grow with up to 11% of fashion in circulation being fake, an estimated 3 million consumers but counterfeit goods every year.

70% of consumers of these black market products knowingly enter into their counterfeit transactions but perhaps we could learn a thing or two from our counterparts on the continent where it‟s not just retailers but customers also that are punished. In France, the maximum fine for buying fake goods is 300,000 euros (£246,000) or three years in jail and in Italy this summer, a tourist was fined 1,000 euros (£825) for buying a fake Louis Vuitton bag for seven euros (£6) from a vendor.

There are many different types of law and they can either constrain or assist fashion businesses: Public Law – concerns the state (International treaties, conventions, constitutional

law, administrative law, criminal law) Criminal Law – relate to legal wrong doing (criminal offence) Tort – situations where conduct of one party threatens or causes harm to interests of another party – aim of law to compensate for this harm (negligence, nuisance, defamation and trespass) Trusts – „equitable obligation imposing on one or more persons a duty of dealing with property, over which they have control, for the benefit of other persons who may enforce the obligation‟ (money, stocks, shares, land, property) There are also sources of law which derive the laws themselves: Custom – forms of behaviour accepted as social norms that become incorporated into body of legal principles (common law) Judicial Precedent – previous decisions of the courts (lower court must follow higher courts decisions) Legislation/ Statute – emanate from government and represent supreme law of the land Delegated Legislation – law made by a body or person to which parliament has given limited powers of law-making (EU) Union Legislation – EU law that takes precedence over domestic legislation Some of the activities of fashion businesses which are affected by law are as follows Examples of Legal Influences

1. Establishing the organisation

Company laws, partnerships, business

names

2. Acquiring Resources

Planning laws, property laws, contract,

agency

3. Business Operations

Employment laws, health & safety laws, contract, agency

4. Selling output for consumption

Consumer laws, contract, agency

APPENDIX 3 SWOT ANALYSIS STRENGTHS

WEAKNESSES

56% of adults shop either in-store or

Store layout leaves little to be desired for

online

consumers- the experience is also

5.3% rise in like-for-like sales-

important to them

suggesting consumers are returning to

Limited appeal in under 35‟s- would be

quality

wise to stay out of competitive under 25‟s

Obtained 26% of lingerie sales in 2009 Sales internationally continue to grow year on year 330 non-food stores, 690 stores in total in the UK and 320 stores in 41 territories abroad Value for money garments, competitive price points

market Little “fashionability” seen in available ranges Despite trying to become carbon neutral and where no waste is sent to landfill by 2012 levels remain at 14.2kgs/£1000 sales for waste and absolute emissions up by 1.7% Plan A does not seem to be winning any

Traditional values including own-brand

new consumers or improving consumer

goods

trust

Providing solely for over 45‟s with Portfolio range Celebrity endorsements in advertisingcelebrities of various ages appealing to broad market 125 years of retailing Employment levels- 75,000 people Highly experienced management team

Known for trying to improve green credentials 1 in 10 clothing items purchased from M&S Footfall levels to April 2010 at 21.0 million Direct sales currently at £413m +27% 80% of stores refurbished since 2005

OPPORTUNITIES Internet to launch m&s into global market 45-54‟s to grow by 6.4% in next 5 yrs

THREATS Pay at Bangladesh factories lower than minimum wage- affects the way consumers view the company when they

AB‟s up by 19% by 2015

claim to be working for equal rights.

C1‟s up by 8%

Rising youth unemployment further

Enticing mothers in store with a good offering in children‟s wear Investment in stores

affecting the lack of young consumers interested in M&S Cuts in child benefit for higher income families will impact upon the disposable

More available stock To inject more “fashionability” via

income of mothers but will drive them to value sectors

exclusive/limited ranges and further

Rising competition in over 35‟s market

collaborations with “style” influences

such as GIVe and Next

(Such as Patricia Field) Business expansion will affect Plan A Keeping back some of budget for inseason buying to keep up with changing

results (Carbon footprint)

trends creating buy-it now mentality and more frequent visits to store.

Government spending cutsCuts in housing benefits will reduce

To win new customers and gain

income of poorer families affecting the

consumer trust by making ethical

value clothing sector

intentions more clear To reach target of ÂŁ500m of direct sales making a multi-channel retailer Cuts in child benefit for higher income families will drive them to value sectorsemphasis to be put on value range Plan A will reduce annual revenue from the carbon reduction commitment More consumers shopping closer to home as rail costs will prevent rural shoppers from going to London 66 is the new age of state pension meaning older shoppers will be working later into life and will have more disposable income- opportunity to exploit the â&#x20AC;&#x153;grey poundâ&#x20AC;? Additional purchases made for Christmas and also before VAT increase

Public sector job cuts will reduce disposable income Levy on banks will make them less likely to lend to businesses Rail costs increase prevent consumers heading to London Middle-market families most likely to be affected by government spending cuts Women seem to be hit harder in the spending review than men- 65% of public sector workers are women

REFERENCES Bank of England- Available at: http://www.bankofengland.co.uk (Accessed: 8 December 2010) Britton, C and Worthington, I. (2006) The Business Environment. 5th ed. Harlow: Pearson Education Limited, Prentice Hall Cassy, J. (2002) „Changes at the top of Boots and M&S‟. [Online] Available at: http://www.guardian.co.uk/business/2002/dec/16/marksspencer (Accessed 8 December 2010) Davidson, A. (2006) „Full marks for Stuart Rose‟. [Online] Available at: http://business.timesonline.co.uk/tol/business/article788500.ece (Accessed 8 December 2010) Fame- Available at: https://fame2.bvdep.com/version2010126/Report.serv?seqnr=0&context=14B14UVPDS8SVJJ&_cid=56 (Accessed 9 December 2010) Johnson, G. Scholes, K. Whittington, R. (2008) Exploring Corporate Strategy. 8th ed. Italy: Pearson Education Limited Marks and Spencer Corporate Website- Available at: http://corporate.marksandspencer.com/home (Accessed 9 December 2010) Marks and Spencer Timeline- Available at: http://marksintime.marksandspencer.com/Welcome?mnSBrand=core# (Accessed 9 December 2010) Mintel 2010a- E-commerce - UK - February (2010) Mintel [Online] Available at: http://academic.mintel.com/sinatra/oxygen_academic/search_results/show&/display/i d=479843 (Accessed 9 December 2010) Office for National Statistics- Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=12 (Accessed 9 December 2010)