They are the biggest food and clothing retailers in the UK which between them have 225 years of history. However, Tesco and Marks & Spencer are battling to stay in touch with the modern British shopper.
2013 is not a year that will be remembered as the finest for the supermarket group founded in east London by Jack Cohen in 1919 or the food and clothing shop that began life as a penny bazaar in Leeds in 1884.
It began with a leaked January trading update for M&S, while Tesco had to take a hit of more than £1bn to end its American dream and further declines in UK sales despite its “Building a Better Tesco” plan.
Tesco and M&S are under pressure from traditional rivals such as Next, but also a new generation of challengers such as the discounters Aldi, Lidl and Primark, and online businesses like Amazon and Apple.
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British consumers have proven many times that track records can count for nothing. As shown with the demise of Sainsburys in the early 1990s and M&S later in the decade, shoppers will take their custom elsewhere at a sniff of trouble.
Over the next year, a key question in the retail industry will be whether these two behemoths can get back on track, and again begin to steal a march on their younger pretenders. Or whether the problems that appear to have besieged both companies in 2013 are too insurmountable to recover from.
Neither is likely to set off on the front foot. This week Tesco is expected to report a 2pc drop in like-for-like sales over the Christmas period.
Meanwhile, M&S’s like-for-like food sales will rise about 2pc, but its all-important clothing business will be down by at least 0.5pc.
The results will confirm that it was a challenging Christmas for retailers. Despite signs of a recovery in the economy, and clear winners such as Next and John Lewis emerging, consumers have remained cautious.
M&S was caught up in the “sea of red” that Michael Sharp, the chief executive of Debenhams, blamed for his company issuing a profits warning.
Fashion retailers went into December with piles of unsold jumpers and winter coats because of milder than average weather in the autumn. Only a handful of retailers, such as Next and Superdry, had the confidence to keep their clothing at full price during December.
M&S was not so confident. Unsettled by rivals such as H&M and Gap offering up to 60pc off, it ploughed in with 20pc discounts via its website and then cut prices by 30pc in stores for a “Mega Day” promotion over the weekend before Christmas.
As a result, analysts are forecasting that M&S’s profits will take a hit in addition to its like-for-like sales.
Freddie George, analyst at Cantor Fitzgerald, said: “Our concern is that gross margins have been under pressure from higher levels of discounting in general merchandising.
“The strategy of reducing the number of lines and backing the ‘winners’, which are highly geared to a cold weather environment, including cashmere and coats, appears to have backfired as a result of the milder than expected weather over the last two months.”
For Marc Bolland, chief executive of M&S, the Christmas results will be a setback. The festive season was earmarked as a key test of his new strategy for the clothing business. However, the retailer appears to have been undermined by the weather, weak consumer sentiment, and its decision to join the “sea of red”.
The company’s clothing range this Christmas was the first created by the new team of John Dixon, executive director for general merchandise, and style director Belinda Earl. It won strong reviews from the fashion press, primarily for the shift upmarket, the return of sleeves to its dresses and the range of winter coats.
However, M&S frustrated customers by limiting the availability of key items – particularly a pink coat that featured in a high-profile advertising campaign – to enhance the fashion credentials of the brand.
Bolland, though, is likely to reiterate his view that M&S’s general merchandise division, which is primarily clothing, is on a “journey” and that it will take time to turn around.
To date, investors appear to have bought into Bolland’s long-term vision for M&S, which still serves more than 21m customers a week and controls a third of the lingerie market.
Despite clothing sales remaining under pressure, M&S shareholders have publicly backed Bolland.
Bill Adderley, founder of homeware group Dunelm and the biggest private investor in M&S, said before Christmas that the high street retailer deserved “top marks” for the performance of its food business and that “too big a deal” has been made of the underperforming general merchandise division.
Jonathan Pritchard, analyst at Oriel, appears to agree. “For much of the last year we have believed that M&S is on the right track. The return to its heritage of quality, design and good fabrication is, in our view, the correct strategy,” he said.
“We believe that prior to this latest downturn in demand, there was evidence of much-needed improvement within the business. M&S’s share of the menswear market has grown, as has its dominance within lingerie. Indeed there was even some evidence that its share in the important womenswear category had shown signs of stabilising.”
None the less, underwhelming Christmas numbers from M&S will be a disappointment and raise new questions about the direction of the company. Shares in M&S rose 30pc in the first nine months of 2013, but then gave up almost half of that gain in the final quarter as investors began to doubt how much progress was being made in clothing.
In 2014, Bolland must demonstrate that the financial performance of the clothing business is improving, particularly because May will mark the end of the three-year plan he laid out after taking charge of the retailer.
M&S’s food business is outperforming the market and now accounts for more than 50pc of its sales. However, clothing offers M&S a higher margin and remains pivotal to its prosperity.
Two key milestones over the next year should help Bolland by strengthening the company’s online operations. M&S’s new warehouse in Castle Donington, one of the biggest buildings in Europe, should ramp up to full capacity, while the retailer will also launch a new website in the spring, which is based on its own systems rather than Amazon’s.
It is already clear from the early sales figures that retailers with strong online businesses and efficient click-and-collect services – namely John Lewis, House of Fraser, and Next – have emerged as winners of the Christmas period.
This was the first Christmas, for example, where Next offered a free next-day delivery service to stores, meaning customers could order online the weekend before Christmas Day and collect it in time.
The result was that online sales did not fall off in the same way as they have in previous years. Lord Wolfson, chief executive of Next, said: “Both businesses [stores and online] grew strongly into Christmas. There is a change here. Online sales still peaked in sterling terms in early December, but the fall-off was much smaller.”
Date: 04 Jan 2014