The company's shares have taken a pounding, so investors as well as customers are unhappy. The company is under pressure from angry shareholders and well-meaning advisers to find a new formula, and find it fast. The new chief executive, Peter Salsbury, has promised to do better and has started putting reforms in place.
So will the management create a new corporate culture and can the marketing people recapture the reputation for selling what Middle Britain wants?
What went wrong?
The company stands accused of getting the UK fashion market wrong at a time when consumer confidence was falling. All clothing retailers had a terrible time in the last quarter of last year when sales experienced their biggest year-on-year decline since 1992. M&S compounded the problem because its fashion buyers misread the market and failed to produce the goods to appeal to younger shoppers, especially women.
After a buoyant first quarter last year, M&S stocked up heavily for the autumn and winter season. Sales were especially poor; M&S was slow to recognise the trend and was forced to slash prices from October onwards, culminating in a massive winter sale, sacrificing profit margins to get rid of stocks.
In a fashion-based industry anyone can get the market wrong, as both Next and Oasis had done in the previous two years. M&S admits that the predominant fashion colours of black and grey did not show to best advantage in the stores and there was not enough colour contrast to present an attractive display. Meanwhile some lines were overpriced, partly because of the strength of sterling and M&S's traditional insistence on sourcing at least 65 per cent of its clothes from UK suppliers.
Consumer surveys were less kind. They suggested that shoppers thought M&S stores were cavernous and uninviting, the decor was dated and the goods were dull and lacking in flair compared with close competitors such as BhS and Debenhams. Retailing analysts began criticising M&S for failing to make use of the latest styles in store design and layout, too little use of partitions and visual displays, a lack of attendants in changing rooms and an absence of lockers for customers to store their shopping.
Food sales also suffered as a result of growing competition from the supermarkets especially for "recipe dishes", the pre-prepared meals where M&S had established itself as the overwhelming market leader.
The company compounded its problems by getting involved in a very public boardroom row over the succession to Sir Richard Greenbury, who has combined the roles of chairman and chief executive since 1991. Sir Richard has agreed to retire as chief executive and to stand down as chairman at the annual general meeting next year, a year ahead of schedule. This brought the problem of succession to a head and led to the abrupt departure of the one-time favourite, Keith Oates (the deputy chairman and one of four joint managing directors), and the promotion of Peter Salsbury.
The row emphasised the current trading difficulties and the fact that M&S was in the middle of a pounds 2bn capital spending programme which increased the company's sales area by a further 10 per cent, including the acquisition of 19 former Littlewoods stores.
Statistics confirm the dismal story. In the vital 15 weeks to 9 January, sales were actually 4 per cent lower although the trading space was 9 per cent larger than the previous year.
Operating profits in Europe and the Far East combined are thought to have plunged from pounds 51m to pounds 14m. Converting the former Littlewoods stores to the M&S format disrupted business at nearby M&S stores, which also had to be refurbished to produce a consistent standard and style of shopfit, and cost pounds 25m. Establishing the mail-order business, M&S Direct, cost a similar sum, installing new tills and electronic point-of-sale systems added another pounds 21m, and interest costs on the increased capital expenditure added a further pounds 22m. But close analysis suggests that costs have also been rising, something which analysts blame on higher wages and increased staffing levels in in-store butchers, bakers and delicatessens.
Profits for the first half fell by 24 per cent to pounds 453m, and after a poor Christmas period the company warned that profits for the full year would be between pounds 625m and pounds 675m, a massive drop of 40 per cent from 1997- 98. Analysts who had already been expecting a 10 per cent fall to just over the pounds 1bn mark were forced to slash another 30 per cent off their forecasts both for the current year and next.
St Michael's fall from grace last year was complete and comprehensive. M&S shares almost exactly halved in value from a peak of 665p in the last quarter of 1997 to a low of 333p in the first quarter of 1999. In the past month, the shares have stopped underperforming the FT-SE index, but they underperformed by 35 per cent in the past year. They are still at a discount of 14 per cent to other retail stocks in the FT-SE 100 and the discount widens to over 20 per cent for the year to December 2000.
What is being done?
Keith Oates was widely seen as a hard man who could have introduced a slash and burn campaign. Peter Salsbury has taken some steps to tackle the problems, creating a new command structure, sacking 31 out of 125 senior managers and setting up a marketing group headed by James Benfield, who was formerly responsible for menswear, to co-ordinate marketing activity across the group and encourage greater emphasis on cus- tomers rather than products.
Mr Salsbury himself says that no stone will go unturned in the search to rediscover the secrets of success. Plans are already in hand - in co- operation with leading UK suppliers like Coats Viyella, William Baird and Courtaulds - to increase the proportion of imported goods to around 50 per cent.
So far, though, the changes fall well short of the sort of draconian reforms the more hot-headed shareholders have been demanding. No stores have been closed, there have been no redundancies, and the company's best hope of a speedy return to form seems to depend on the merchandise buyers rediscovering their flair.
Analysts point to the company's continuing strengths: its 15 per cent share of the UK clothing market rising to 40 per cent in lingerie; its close relationship with its suppliers; and the strong public awareness of the St Michael brand. Clothing sales per square foot are still 50 per cent higher than at Debenhams. The 6 million store cards give M&S a customer database its rivals would die for and a base for expanding sales of financial services. Direct marketing and home furnishing are still in their infancy.
M&S is up with the leaders in opening new stores, especially in new regional shopping centres like Cribbs Causeway just outside Bristol and the Bluewater Centre in Kent. Another 500,000 square feet of space will be opened in the next 12 months, including the world's biggest M&S store in the rebuilt Arndale Centre in Manchester.
If the marketing rethink gets the company back on track, the recovery could be rapid. Each extra 0.1 per cent on margins will add pounds 7m to profits. Twelve out of 13 analysts expect profits to resume an upward trend in the coming year. The median forecast is pounds 760m, a far cry from the pounds 1,175m they expected six months ago.
If the company has got to grips with its problems and stopped the rot, the shares now look cheap at 392p. Only Mark Charnock at CCF Charterhouse currently rates them a buy, saying the shares could be worth 500p in 12 months' time. Five more brokers say "hold" or "neutral", one says "underperform", two say "reduce" and two more, Tether & Greenwood and Lloyds Private Banking, "sell".
Will the old M&S be lost?
M&S has been spared the drastic treatment Mr Oates might have introduced, but the Salsbury regime is facing de-mands to slash prices and squeeze suppliers in order to maintain margins. There is pressure to shift sourcing away from traditional suppliers in favour of more low-cost foreign sources, to abandon its traditional styles in favour of targeting smaller groups of customers, and to divide up its customer base according to age, lifestyle and attitudes to fashion.
Critics are even pressing for an end to a hallowed M&S tradition and the stocking of third-party brands to supplement the standard M&S range. They also want radical changes in store layouts to introduce more imaginative lighting, graphics and colour, and more movable partitions to help display merchandise in "capsules" targeted at specific sub-groups of customers, as well as giving local store managements more freedom to do their own thing and identify with local customers.
The marketing manager, James Benfield, is also under pressure to spend much more on specific advertising and on introducing campaigns along the lines of Boots' "3 for 2" promotions. The critics only draw the line at introducing loyalty cards and accepting credit cards.
The danger is that the new imperative to generate short-term shareholder value and chase after the most fickle customer base will weaken the commitment to traditional virtues and consistent quality, undermine staff morale and risk alienating more of the group's 12 million loyal customers.