Marks & Spencer Group Plc’s plan to sell British stilton cheese and lingerie to the French may hold even less appeal to investors than to Champs Elysees shoppers.
The return on equity at the biggest U.K. clothing retailer is smaller than the average of its global peer group and, according to data compiled by Bloomberg, is likely to worsen further this year and next as Chief Executive Officer Marc Bolland ploughs cash into opening stores from France to China.
The expansion “is concerning,” said Tim Green, who holds Marks & Spencer stock as part of the more than 25 billion pounds ($40.3 billion) he helps manage at Brewin Dolphin in London. Bolland plans to more than double the pace of overseas openings even as he struggles to halt domestic underperformance. The retailer may report a drop in first-half profit next week following the biggest decline in non-food revenue since 2008.
“I just don’t think there’s enough concentration in approach and whether it will move the dial” in terms of profitability, Green said of the company’s investment plans.
Marks & Spencer has a return on equity, or profit as a proportion of shareholder funds, of 18.8 percent, according to data compiled by Bloomberg, down from 24 percent a year ago and a five-year average of 26.6 percent. That compares with a ratio of 19.5 percent for its global peer group and 338 percent for main U.K. competitor Next Plc, which is buying back shares and tapping overseas markets through online expansion.
As Bolland steps up spending, Marks & Spencer’s return will probably drop to 15.4 percent next year, the data shows. That would be the lowest since 2001, the year that the company exited France as part of a plan to close 38 stores across Europe.
‘Big Question Mark’
“I would prefer a company to be investing in its business,” said Paul Mumford, a fund manager at Cavendish Asset Management Ltd., which manages $1.2 billion in assets including Marks & Spencer stock. “The big question mark of course is, is that investment a wise one, is the return going to make it worthwhile? I would like to see some more from M&S.”
Returning to France is part of a 200 million-pound investment program which includes the addition of 100 overseas outlets a year, compared with 37 last year. After opening its inaugural French store on the Champs Elysees a year ago, Marks & Spencer added a second last month at So Ouest in Levallois-Perret and has two more lined up. The retailer has also started a local language, euro-priced website and is assessing the introduction of its Simply Food convenience-store format.
Earl Grey Tea
Not all shoppers on the Champs Elysees are convinced that the street’s Marks & Spencer store can meet their needs.
“There’s really not much choice” of food in the store, said Veronique Verdier, a 30-year-old insurance consultant. “You can still find products like tea, but only in a few varieties. By contrast, there are rows and rows of clothes, which aren’t very well tailored and they’re quite expensive.”
The 15,000 square-feet (1,400 square meter) store has three floors of women’s wear, lingerie and food including ready-prepared meals, own-brand Earl Grey tea and crumpets. While menswear and home furnishings aren’t on show, touch-screen order points allow shoppers to purchase a full range of products.
In addition to France, Marks & Spencer is seeking to expand in China, India, Russia and the Middle East to provide relief from Britain’s moribund consumer economy. This week, it also added local websites for Germany, Spain, Austria and Belgium.
The London-based retailer got only 11 percent of sales from outside its domestic market last year, a slight increase on the three prior years. Bolland hired former Inditex SA executive Jan Heere in May last year to lead the retailer’s international expansion as he seeks to meet a target set in 2010 of doubling overseas revenue to as much as 1 billion pounds in three years.
Sales in the 390-store international unit, which includes 14 outlets in Hong Kong, rose 0.9 percent in the first quarter of the fiscal year as growth in India and China offset weakness in Ireland and Greece. Same-store sales in the U.K. declined 2.8 percent, with the non-food unit showing a 6.8 percent slide.
Marks & Spencer may say Nov. 6 that first-half pretax profit fell to 280.1 million pounds, according to the average of eight estimates compiled by Bloomberg, a second straight drop.
For any U.K. retailer, turning the growth potential of international expansion “into meaningful profits is far more challenging than it appears,” said Richard Hyman, strategic retail adviser at Deloitte LLP in London.
“Brands with history, culture and longevity domestically may well start off having no credentials at all,”’ Hyman said, adding that brands must understand the local market and not open carbon-copy stores of their outlets at home.
‘Really Rough Period’
“It’s quite challenging for mid-market brands like M&S to export, to travel abroad,” said Anne Critchlow, a London-based analyst at Societe Generale.
The retailer should focus on getting its clothing offer right in the U.K. before it targets new customers overseas, according to Honor Westnedge, an analyst at Verdict Research.
“It’s a really rough period to be opening new stores so they should take it gradually before rolling out ambitious plans,” Westnedge said. “They really need to make sure their clothing offers good value for money, the design is right and consumers want to buy into it.”