Can Marks get streetwise?

Falling profits and boardroom intrigue have left the retailer in unfamiliar territory. Peter Koenig asks if it can put the damage right

SO WHAT was all the fuss about? Assessing the turmoil that jolted Marks & Spencer last week in the wake of reports about a boardroom power struggle, people are still shaking their heads.

"They looked out of control," said Richard Hyman, managing director of Verdict, a market research firm. "Well, this is just not Marks at all. It's totally uncharacteristic."

M&S, indeed, is not just another corporate name - fodder for the usual rough and tumble of Sunday business journalism. It is one of the 10 largest companies in the country in terms of market capitalisation, trailing only the oil and pharmaceutical giants, the biggest banks, and BT. It is the third largest retailer in the world after Wal-Mart and Seven- Eleven Japan.

The company's might was brought to bear last week after events got out of control. A gagging order was placed on employees from directors to floor sweepers and there was the almost palpable sensation of information drying up on Fleet Street and in the City. Approached for an interview by the Financial Times as he emerged from the company's Baker Street headquarters, its chairman and chief executive, Sir Richard Greenbury, retorted: "Don't be ridiculous."

Nevertheless, M&S has a problem. Its public position on the succession of the 62-year-old Sir Richard has been blown to high heaven. The company must reconsider what it's doing post-Sir Richard, craft that position, and find a credible way to present the package.

The City last week waited for the fruits of this labour - and waited. There was supposed to be an announcement following an emergency board meeting which was due to take place as soon as Chris Littmoden, the director responsible for US operations, could get to London from Asia, where he was travelling on business.

But the announcement never came. The company probably decided to deny oxygen to the boardroom struggle story and to rely on the media's gnat- like tendency to stick with a story for five minutes then move on.

Still, it is unlikely that M&S can walk away from the story altogether or outwait the gnats entirely. However anti-climactic, simple logic dictates that there must be some sort of denouement to the boardroom power struggle story.

A quick reprise: on 3 November, M&S reported that pre-tax profits fell 23 per cent in the half year to 26 September, from pounds 452m a year earlier to pounds 348m. The press conference announcing these figures was not a happy occasion.

"The hordes of silent M&S identikits attending Tuesday's press conference seemed terrified of [Sir Richard]," one reporter noted.

On the eve of this press conference, it now seems, Sir Richard made a move on the matter of his replacement. He apparently signalled that he wanted to bypass the established favourite - the deputy chairman, Keith Oates, a financial man and still something of an outsider with a puny 14 years' service to the company. He tapped instead, apparently, Peter Salsbury, a joint managing director, an M&S lifer like Sir Richard, and a retailer to the bone.

This did not come out at the press conference. But last Sunday the papers were full of unsourced news to the effect that Mr Oates had gone over Sir Richard's head to M&S non-executive directors, asking them to consider him for the chief executive post.

Who gets the chief executive's job - and thus becomes the preferred candidate to succeed Sir Richard - is the question that remains to be answered. Aside from Mr Oates and Mr Salsbury, various dark horses have emerged. By the end of last week, however, the story was yellowing around the edges.

"You'll have to excuse me," said a senior retailing analyst when asked to go over ground he had covered many times before. "I'm suffering from boardroom-struggle-story fatigue."

In the absence of news there was frustration in the City about the absence of a debate over M&S's corporate strategy.

M&S's present strategy is "steady as she goes": batten down the hatches for the downturn; trim the 80 per cent of M&S supplies sourced at home in favour of cheaper sourcing overseas; press ahead with shop floor expansion and international growth; keep abreast of innovations like e-commerce, home shopping via the internet and interactive TV.

"If you can contrast the strategies for M&S put forward by the contenders for the throne, you're better informed than I am," said the senior retailing analyst.

Few are complaining about M&S's basic strategy. Few are over the moon about it, either. A straw poll turned up the following sample of opinions:

The City: M&S's UK business is doing all right, but not great. The company's food business - mainly upmarket, temperature-controlled prepared products accounting for 40 per cent of revenues - faces stiff competition from supermarkets. It's no longer price leader.

The company's clothes business rules the land and the company is adding floor space. But sales are dropping. This has yet to hit gross margins because M&S has pushed the effects onto its suppliers.

Internationally, M&S has been expanding for five years, not including its longer-established presence in the US, but it has yet to get the international formula right.

M&S needs to review the way it deploys its capital. The company should, in short, make more of it. This is what the fight between Mr Oates on the one hand and Sir Richard and Mr Salsbury on the other is about - a fight between a financial view of the world and a retailing view.

The competition: hats off to M&S, but perhaps the company has become a bit complacent. Under Sir Richard the company leapt into the modern age of retailing. But over the past few years it has been blind to the fact that competitors like Debenhams, Next and Arcadia were lifting their games. M&S thus is no longer synonymous with value in shoppers' minds. On the quality front, yes, M&S is value. But on the price front, no: the shops sometimes seem devoid of bargains.

"My advice would be for them to look at how they are running their international operation," said one competitor. "The temptation is for senior management to play with overseas baubles. But this is disastrous. The only way to expand overseas is to separate out the international business."

The view from overseas: Asman Usmari, a retail analyst at Edward Jones, the St Louis, Missouri-based broker, reckons the boardroom-power-struggle story is a tempest in a teapot. She reckons the questions thrown up about M&S's strategy are exaggerated.

"If analysts in the City are saying that M&S should be taking capital out of the company now - cutting back on expansion - they're wrong," she said. "Now is the right time to expand, particularly internationally and in Asia, where prices are dirt cheap."

The market researcher: Mr Hyman at Verdict is scornful of City analysts who claim that M&S is fuddy-duddy about the deployment of its capital.

"M&S is a public company so they must be mindful of the City," he said. "But they have no debt. They're not a takeover candidate. So why should they pay any attention?"

Mr Hyman thinks he knows why M&S interim profits were so bad. "They're adding 20 per cent to their UK floor space," he said. "They knew this would be disruptive. But they underestimated how much. Customers do not like to shop in a store where alterations are being made."

Still, Mr Hyman supports M&S's expansion plans. "So what if there's a downturn and they don't make the 13-14 per cent margins they have in the past. Say they make 11 per cent. The expansion is still a good use of capital. It means more sales. More sales mean M&S will remain the dominant retailer in the UK."

Mr Hyman has a different critique of M&S. He says the company has lost its edge as a retailer. "Retailing is a volume- dominated business," he said. "The loss of small proportions of business hit the bottom line disproportionately hard. That's what's been happening."

Why has M&S lost its retailing edge? Because, says Mr Hyman, it has enjoyed the luxury of being the price setter on the high street for so long it has paid insufficient attention to its competition.

"You can only analyse your own performance objectively in relation to that of your competitors," he said. "For a company its size, M&S has been slow to recognise this, although it was moving in that direction even before the story blew up."

So what will this week bring? The odds are the directors will meet. There will be news that it's steady as she goes. The rockiness of the past fortnight will, however, force the company to name the man who will replace Sir Richard as chief executive. There is not enough wrong with the company for Sir Richard not to get his way here. M&S will therefore get Sir Richard II in the form of Mr Salsbury.

And the moral of the story? Power breeds claustrophobia. So the way M&S brings the boardroom power-struggle story to a close will tell the real tale. Either the company seeks to control the flow of information, and runs the risk of even greater claustrophobia.

Or it finds a formula that signals it has learned its lesson - like the ageing but formidable gent who learns from his minor heart attack.