Case study: Marks & Spencer

Marks & Spencer store

Marks & Spencer (M&S) is a general retailer that sells clothes, gifts, home furnishings, and foods under the St. Michael trademark in the UK, Europe, the Americas and East Asia. The company also operates a financial services segment, which accounted for about 3 per cent of the companys 1998 profits. M&S started as a stall in 1884 by Michael Marks in the Leeds market using an L5 loan from a wholesaler. The company stressed value and low prices as a hallmark for development.

M&S had achieved impressive growth rates and market shares in many of its business segments. By 1994, the firm had 18 per cent of the UK retail market, 33 per cent of the womens undergarment market, and 20 per cent of the mens suit market. The company has 40 per cent of the nations underwear market and 14 per cent of the clothing market - the only retailer in Europe to have a double-digit market share. The M&S food market share has been around 4.3 per cent. The impressive market shares have gained M&S the reputation of being a leading retailer in the United Kingdom.

The euphoria, however, did not last as M&S caught investors and business spectators off guard. In 1998, the companys stock fell 34 per cent. Pre-tax profits fell by as much as 41 per cent (to $1.09 billion) and market share declined, for the first time in years, by almost 1 per cent. In May 1999, the company reported full-year profits of $630 million, a 50 per cent fall from 1997-1998. Warburg Dillon Read, an investment bank, reduced its profit expectations for M&S by 10 per cent for 1999-2000. Overseas profits declined from their 1996-1997 high of $100 million to a loss of $15 million, before exceptional items, for the fiscal year 1998. Sales measured in local currencies were down by 3 per cent.

The company blamed consumer confidence and a strong pound for the decline in sales and the companys value. M&S Press Release (1999) stated that the deterioration in 1998-1999 profits had been the result of (1) a shortfall in expected sales, (2) a slowdown in overseas markets, and (3) the purchase of Littlewoods stores for $90 million.

Recessionary business environments in Europe and the Asian crisis have put a great strain on global profitability. At the same time, domestic and international competition has intensified both from speciality retailers and mega merchandisers, such as Wal-Mart.

Stockholders and business analysts were not convinced that the companys problems were merely external. M&S stock had underperformed other British retailers by more than 25 per cent. They blamed M&S management for dull merchandising, poor inventory control, and lagged response time to competitive environmental conditions (Business Week 1998). Industry commentators have criticised the colour, size and shape of their clothes, the lousy retailing climate, the unglamorous stores, the overpriced products, and the personal service.

The core values of M&S: quality, affordability and service, came under the greatest attack, not from critics, but from competitors. Retailers such as Topshop, Kookai, Miss Selfridge, Jigsaw, Oasis, Warehouse and the Gap offered more fashionable designs and trendier labels. Other retailers, such as Next, Debenhams and BHS, offered better values. Food chains, such as Tesco, Waitrose, and Sainsburys moved into prepared foods (Financial Times 1999). M&S was challenged (and still is) in every single business segment it competed in. By its own admission, M&S did not change quickly enough to react to accelerating competition, which resulted in an unacceptable fall in profitability and market share (M&S Press Releases 1999).

M&S experimental involvement with internationalisation began in the 1940s. Unlike most service firms, however, the company began exporting its St Michael brands overseas as a way to test the waters. The company did not own manufacturers, merely branded their merchandise using the St Michael private label. In 1955, the company was exporting about $1,146,000 worth of merchandise.

Early internationalisation of the company was mostly due to domestic factors. Internally, the company started to feel that it has saturated the domestic market and that expansion will have to come from overseas. Externally, some Labour Party members were suggesting nationalising the leading domestic retailers. Internationalisation was, therefore, seen as a tool of diversification.

Out of the export business, some international franchising relationships were formed. Importers of the St Michael brand, who were familiar with the success of the brand in their countries, also bought the business format (including store layout and operating style) from M&S. By the early 1990s, St Michael franchises were operating in 14 economies including some emerging countries such as Gibraltar, Bermuda, Israel and the Philippines. Franchising allowed the company to achieve global presence with minimal economic and political risks. As M&S familiarity with internationalisation grew, more direct modes of entry, such as acquisitions and joint ventures, were being used. By 1996, the company had 645 outlets worldwide, most of which (58 per cent) were in the UK, Europe and Canada.

The internationalisation of M&S resembles the theoretical explanations of service firm internationalisation. These theories suggest that service firms become increasingly international as they gain experience, are willing to commit more company resources, and take additional risks. Retailers will use relatively less risky modes of entry, such as exporting and franchising, in markets where political and market risk are high. Retailers will share ownership where sole ownership is prohibited or restricted. In markets, such as the US and the EU, with significant purchasing power, large population and developed infrastructure, retailers enter through high-control high-risk modes of entry, such as sole-ownership and acquisition.

M&S utilises various types of modes of entry around the world. The company believes in opening its own stores and expanding through acquisitions in major economies. On the other hand, M&S expands through franchise agreements into countries where a partners local expertise is viewed as beneficial. The company owns stores in Belgium, Canada, France, Germany, Hong-Kong, Ireland, Spain and the Netherlands; and franchises in the rest of the countries including The Bahamas, Bermuda, Canary Islands, Cyprus, the Czech Republic, Gibraltar, and Israel. The company uses franchising in countries that have a relatively small population size or low per capita incomes, but sufficiently large to support a small number of stores.

When forming international alliances, M&S often preferred an experienced retailer with significant market share. In 1990, M&S went into its first joint venture with Cortefiel, one of Spains leading retailers. A joint venture was initially used in Spain because it was felt that the market knowledge and power of an existing retailer will help mitigate the cultural distance and the sometimes adverse political climate. In Australia, M&S chose a partner who is an experienced local clothing retailer. In China, the company is looking for a likely candidate as the industrial structure of the economy develops.

The entry into East Asia was twofold. M&S first exposure to business in East Asia occurred indirectly through the purchase of Brooks Brothers in 1988, which co-owned affiliates in Japan. Brooks Brothers has 19 years of brand exposure trading experience with Japan. Two Brooks Brothers franchises started in Hong-Kong over 1998. M&S believes that Asia will be a major market for Brooks Brothers because of the regions receptiveness to US culture and the brands aspirational values. In recent years, Brooks Brothers Japan was adversely affected by recessionary conditions in the economy.

The second penetration to East Asia was through the brand name of M&S. M&S clothes are marketed as high-quality western style items. M&S opened stores in Hong-Kong, which were supplied through the British home base. All of the wholly owned stores in East Asia are in Hong-Kong, the 33 other outlets are franchised across six other nations in the region. In recent years, the company has expanded to suburban areas of Hong-Kong, a move it believes will help it penetrate the Chinese market. The company already has a resident office in Shanghai with a purpose to evaluate the market and to spark interest in a joint venture there. During the last couple of years, the company expanded its presence in Thailand, the Philippines, Indonesia, Korea and Australia.

The 1997 Asian crisis has seriously stalled retail sales in the region, and M&S stores were not an exception. Both franchised and non-franchised outlets have been adversely affected by the crisis. Despite the slowdown, the company was able to increase the number of owned and franchised stores from 9 to 43. The companys expansion coupled with the adverse conditions created by the Asian crisis has hampered sales and profitability in Asia. Therefore, no new development is planned in the near future. The company plans to source locally and buy temporarily depressed properties. Hong-Kong will remain a strategic base, despite sales being $20 million below expectations for 1998-1999.

Questions

What market entry modes did M&S use in its international expansion?

What criteria do you think M&S applied when it decided the entry mode?