MARK & SPENCER Strategy InsightAt the Marks & Spencer AGM, on the 11th July 2001, Luc Vandevelde, the Chairman and Chief Executive of Marks & Spencer, gave a key speech regarding the managements recovery plan for the company, which was launched earlier in the year. The speech and extracts from Marks & Spencer Press Releases, presented below, provide a valuable insight into the nature of strategic planning within large organisations, and the role of the Chairman and Chief Executive in this process.Extracts from the Speech’Good morning. Welcome to the 2001 Annual General Meeting. I want to pick up exactly where we left off a year ago. In response to the very last question from the floor at the 2000 AGM, I made this statement: ‘I am taking charge and I will create shareholder value in the future.

‘I’d like you to keep that statement in mind. In everything we have done or are planning to do for your Company, we share with you the common objective of increasing the value of your investment by returning Marks & Spencer to its rightful, leading position in the marketplace.As to ‘taking charge,’ at the last AGM I’d been with Marks ; Spencer for less than five months – and I didn’t take over as Chief Executive until two months after the AGM in September 2000.At that point, a little over six months in, I came to certain conclusions about the Company’s strategy ..

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. and it took six months because Marks ; Spencer is a very unique and very complex company.My conclusion was that the recovery plan, then in place, was doing a lot of useful things .

.. getting us closer to our customers, improving our supply chain, and so on. But it still wasn’t good enough to address the real problems of the Company which, as I’ve already admitted, were more serious than I realised when I first took up this post.

The previous plan was like feeding a tree that was already overgrown and unhealthy. What it really needed was serious pruning back. It had unproductive limbs that were hampering its growth and a lot of its best characteristics were lost in the foliage.

It became clear that for M;S to grow productively, we had to get back to its core strengths – to those fundamentals that underpinned its success in the past – and begin our recovery from there.’Putting together the right team’Having reached this conclusion, my next step was to appoint a new team.Peter Salsbury, as you know, resigned last September, having reached the conclusion that he was not the right person to take this Company forward.

Not withstanding, I believe he did valuable service for Marks ; Spencer. He inherited a difficult task and had the courage to take some tough but necessary decisions.Along with Peter, I’d like to thank the five other directors who’ve left the Board in the past year.

We also say goodbye today to three of our Non-Executive Directors – Michael Perry, Ralph Robins and David Sieff. David spent his entire career at Marks ; Spencer, 25 years as an Executive Director. My thanks go to Michael, Ralph and David for their tremendous contributions over the years.This is perhaps also an appropriate moment to pay tribute to David’s father, Lord Sieff, our Honorary President, who died in February. When I speak of returning to fundamentals, I’m referring in many ways to the values that he and the founding families instilled into this Company. The heritage of our founders remains profoundly influential in shaping our future and we should be grateful to them.Apart from Robert Colvill, Alan McWalter and myself, it’s now a completely new Executive Board to the one you met a year ago.

So let me introduce them David Norgrove, Roger Holmes and Alison Reed. I’d also like to welcome the two Non-Executives who’ve joined us since the last AGM Kevin Lomax and Tony Ball.So what we have is a virtually new team — because we had to accept that only a new team could take the radical measures needed to turn the Company round. Since we last met, we’ve effectively rebuilt Marks ; Spencer’s management. Central to this is the Board of UK Retail where half the members – including its Managing Director, Roger Holmes – are new since a year ago.

This new talent complements the quality of our existing staff, many of whom have been with us for a long time and whose experience is immensely valuable. In the past, these excellent people often lacked the leadership to perform to their full abilities. Now I do believe they have it.’The Strategic Review and Selling the Plan’As soon as we had the executive team in place, we began a rigorous strategic review.

Its objectives will not surprise you. We wanted to return Marks & Spencer to its former position as the standard against which others are measured. We want M&S to be famous once again for its quality, value, service and innovation, drawing on strengths which still exist but which may have been overlooked. We want to inspire trust in our customers, and we want to reward you, our shareholders, for loyally standing by us.This review clarified our future direction and resulted in the Group restructuring and UK Retail operating plan which we announced on 29th March this year.

It’s a radical plan. Some of the conclusions have been tough and controversial. But this is clearly what has to be done.In recent weeks I’ve visited investors representing more than 40 per cent of our shareholding. On the whole, they recognise the need to take this action. They’re confident we have the right team and the right strategy, and they’re reacting positively to the plan.

In fact, the share price wouldn’t now be at its highest point for 10 months if the institutions didn’t believe we’re on the right track. The main question they have is about timing – not if, but when the recovery will come.The plan has been well publicised, but let me briefly touch on the highlights.’The Plan : 1. Focus on the UK’The first element is to focus the entire organisation on our UK business, with a mission to make aspirational quality accessible to all. This is the heart of the Company, and it’s vital we get it right.

We’re returning to our unique fundamental strengths — those things for which Marks & Spencer has always been famous.From now on, we’ll only sell our own brand. We’ve tried selling other company’s brands – Orange mobile phones, for example – but it’s clear that there’s very little or no extra value in buying such products from Marks & Spencer. Everything from M&S must be distinctive and must conform to the Company’s uniquely high standards.The way to ensure that is to re-take command of our supply chain — another of Marks & Spencer’s traditional strengths.

In the past, one reason we were able to offer such innovative, high-quality, competitively priced products was our unique, direct relationships with our suppliers. We now know that returning to this kind of partnership will help us, once again, to provide the products and value our customers want.Furthermore, Marks & Spencer will only operate in sectors of the market where it has real scale and authority. In food, for example, we have just under four per cent of the total UK market, but up to 30 per cent in our chosen categories – including such fast-growing sectors as ready meals and prepared foods.Every one of our products must – and will – exhibit the quality, value and innovation for which Marks & Spencer used to be famous. That’s ‘quality’ reinterpreted for the times in which we live.

In the past, ‘quality’ meant clothes you could wear for years and years. Today’s customers are more sophisticated … more discriminating.

They still want quality clothes that last, but they also emphasise other criteria such as style and fit. We must satisfy these aspirations as well as the more traditional demands.In restoring these fundamentals, we’re also making our stores more attractive and easier to shop in, while focusing more sharply on our classically stylish, core customers.At the same time, we’re strengthening the retail business by building on the great asset we have in Marks & Spencer Financial Services.

‘Press Release Extract : 29 March 2001Total Focus on UK RetailFollowing a detailed review, the UK retail management team, led by Roger Holmes, has developed an operational plan that will build on the inherent strengths of Marks & Spencer and exploit new growth opportunities.100% Own Brand: The Company will return to selling only own brand products and brands exclusive to Marks & Spencer so it can guarantee customers the quality, value and service they have come to expect. Central to the recovery plan is the delivery of significant improvements in product appeal, availability and value thereby rebuilding the relationships with core Marks & Spencer customers.Improved Segmentation of Clothing: Marks & Spencer will concentrate first on regaining the loyalty of core customers, who prefer classically stylish clothes.

This is the priority. As part of its plan to segment its products across different lifestyles, the Company has already announced the appointment of George Davies to design and supply a collection of women’s clothing for the fashion-conscious woman. This sub-brand will be available only at Marks & Spencer. Stores will be laid out by lifestyle to give impact to the display of these sub-brands and to add clarity to the offer.The Company has plans to regain the confidence of its customers in the quality and fit of its clothing.

It will sharpen pricing by rebalancing the price architecture, extending the range of entry-price merchandise and communicating this clearly to customers.A preview catalogue will be launched this summer to increase flexibility in buying, improve availability and reduce product markdowns.Build on Success in Foods: Marks & Spencer Foods continues to perform well and has earned customers’ trust for providing quality, innovation and convenience. The business is a key platform for future growth and the Company is considering opportunities to expand its reach through new locations and selling channels.Develop High-Growth Areas of Home & Beauty: The Home business is growing strongly, with home furnishings and gifts the fastest growing product areas. Beauty, albeit relatively small, is also growing rapidly.

Both of these areas offer promising opportunities for development and will be expanded. Accelerate Store Renewal Programme: Marks & Spencer will accelerate the rollout of the successful elements of its new concept format under a plan to refurbish more stores faster and at lower cost. Two-thirds of its retail space (120 stores) will be completed by the end of the coming financial year, benefiting the majority of Marks & Spencer’s customers.More Intensive Use of Space: Selling space will be reallocated to higher growth product areas to maximise returns per square foot. In total, 600,000 sq ft will be reallocated within the year to areas such as the new Clothing range supplied by George Davies, Home, 50 new Beauty Shops, and 30 new Coffee Shops.Improve the Supply Chain: The Company continues to see substantial benefits from the reconfiguration of the supply base, being shown in a Clothing primary margin that is rising strongly.

The priorities now are to eliminate duplication and increase transparency. By re-establishing closer working relationships with its supply partners, historically a unique strength, Marks & Spencer will achieve further improvements in quality, value, product appeal, and availability.Financial ServicesPlans for the future include developing the Marks & Spencer store card as an essential partner to the growth of retail sales; a stronger presence for Financial Services in stores; continued growth of the credit business; and faster rates of growth of non-credit areas, which may involve bringing in external partners.The Plan : 2.

Sell or Close loss-making businesses.’So to the second element in the plan.In order to concentrate totally on restoring our UK business, we could no longer afford to support non-core activities ..

. nor continue to subsidise loss-making businesses. We’re therefore selling Brooks Brothers and Kings Super Markets in the US. We’ve also closed our direct clothing catalogue operations.In addition, we’ve announced our proposal to close our subsidiary stores in Continental Europe.

Now, despite what you may have heard, our business in Europe was not a success. In the last three years it’s lost nearly 100 million, with losses of 34 million in the last 12 months.Our stores were too big, and we hadn’t properly understood the markets before we invested in them.The only solution now is to admit our previous mistakes and stem the losses. This conclusion was hard to reach because we knew that we’d have to cause distress to our loyal people in those stores. But the fact is, we don’t have a sustainable business in our current circumstances.

We’re now in the process of consulting our staff — as indeed we always intended to do.The plain fact is that we have to restructure in the interests of our 60,000 UK employees and our 400,000 shareholders. We have to reduce the complexity of M&S so we can focus all our attention on that part of the business on which our success really depends. There is no alternative if we want the Company to succeed.So there you have the first two elements of the plan – focusing on the UK and selling or closing loss-making businesses.’Press Release Extract : 29 March 2001Value Realisation, and Closure of Loss-making BusinessesIn order to focus all its efforts on the recovery of the UK business, Marks & Spencer intends to divest or close non-core businesses and assets, subject to consultation with its employees.

International: The Company intends to close its loss-making business in Continental Europe, affecting some 3,350 jobs, subject to consultation. It also intends to dispose of its two profitable US businesses, Brooks Brothers and Kings Super Markets. These operations do not provide an appropriate platform for future international expansion by Marks & Spencer.The Company’s 10 stores in Hong Kong will be sold to become a franchise. Our franchise business, spanning 30 countries and operating with appropriate formats and strong local partners, continues to be successful.

The Company’s business in the Republic of Ireland is also growing fast and profitably. Marks & Spencer remains firmly committed to these businesses, recognising the importance longer term of international development.Direct: Marks & Spencer intends to close its loss-making catalogue business including a dedicated call centre and fulfillment centre.

This proposal will be subject to consultation with employees in the Direct operation with about 690 jobs affected. Although the joint Clothing and Home catalogue will be discontinued, Marks & Spencer is committed to maintaining its e-commerce website: www.marksandspencer.com, as well as a Home brochure and a range of services including flower delivery.The Plan : 3.

Change the Capital Structure.’The third element is to change our capital structure to improve one of the key financial criteria on which investors base their decisions — namely, return on equity.Return on equity and assets has traditionally been low for Marks & Spencer. One of the main reasons is that M&S owns an unusually large proportion of its property and returns are lower in property than they are in retailing. I’d much rather realise the assets and give the money back, so that you can invest it as you like. For this reason, we’ve decided to sell or securitise those properties that we don’t really need to own.

This doesn’t mean that we’re selling or closing stores. Our customers won’t see any difference, whether we own or rent the property in which we operate.As part of this decision, we made a commitment to hand back 2 billion to our shareholders. I know some of you are already calling in and asking when you can collect your 2 billion! Well, be patient. We’re talking about March 2002 and later this year we’ll announce full details of how you’ll get your share.Add that to the rising share price, and I hope you’re starting to see the value building up.’Press Release Extract : 29 March 2001PropertyTo reduce the dilution from the relatively low returns from property investment, Marks & Spencer intends to release value from almost half of its extensive property portfolio.

Ownership of stores in prime locations will be retained to maintain maximum operational flexibility as well as capturing future increases in capital value.Improved Capital StructureTo create a more efficient capital structure and improve the potential for a faster rate of earnings growth Marks & Spencer intends to return 2 billion to shareholders by the end of March 2002. Following the return of cash to shareholders, Marks & Spencer will retain the financial strength and flexibility to fund future growth.’So that’s the plan. Of course none of this means anything unless customers and shareholders see real changes. So I’m happy to report that the plan is taking effect. There’s a new energy and momentum as we move from strategy to action and you’ll notice the difference in our products and stores in the coming months.

That said, there’s bound to be a time lag between implementing these improvements – which we’re doing as fast as we can – and starting to see significant movement in sales and profits.With that proviso, let me take you through our current trading results.In the 14 weeks to 7th July, overall sales declined by 2.6 per cent. General merchandise declined by 8.5 per cent while foods increased by 5.

9 per cent.The worst performing area remains women’s wear. As we’ll see later, we’re working hard, right now, to address this area.On the positive side, our Foods business always benefits when people are concerned about food quality and food safety. Food sales have been strong in the wake of the foot and mouth crisis and have benefited more recently from exceptionally strong sales of fresh produce.The 1.5 per cent decline in sales in the home category was mainly due to poor results in April after a lot of customers wrongly thought we were closing our home business.

By communicating quickly with them, we turned that around and home sales in the last eight weeks have actually risen by 4.8 per cent. That’s a much truer picture of the health of the business.Although total sales are down – which is disappointing – it’s significant that profits, relative to sales, are increasing. For one thing, we’re buying more cost-effectively.

We’re also more flexible in our buying – which means that less stock now has to go to the summer sale. All of this has contributed to better margins. The result is that profitability continues to recover.I said there’d be a lag between implementing the plan and earnings starting to rise, and we’re in this period now. During this transition, we need your support and we need to be realistic in our expectations. In broad terms, what we’re shooting for is to restore our reputation in clothing, while developing our growth categories such as home, beauty and food.That’s the plan for the next three years.

In the shorter term, I’m aware that I promised results within two years of last year’s AGM and I stand by my commitment. Whether, by ‘results’, we mean an upturn in sales across the board, I’m not prepared to promise at this point. The task was tougher than I expected, so it’s bound to take longer than expected for the full turn-around to happen. But we should begin to see progressive signs of improvement.

The plan will succeed, because it focuses the entire organisation on the three things that matter most to our customers – our products, our stores and our people.As we move to implementation, let’s look at what’s happening under each of those headings.’Product’In terms of products, we’re building on our knowledge and understanding to provide exactly what our customers want.To do that – as I mentioned earlier – we’re focusing our teams on the classically stylish, core customer.

That’s not to say we’re turning our back on our younger shoppers. These will be served by Per Una supplied by George Davies — products made exclusively for us and according to our standards, but in such a way that doesn’t distract our own people from the core Marks & Spencer customer.Two weeks ago, the fashion press was invited to see our autumn clothing collection.

Everyone who came was impressed. Although we still have some way to go, we’re rediscovering our strengths … superior style, quality and value, good-looking clothes that fit and wear well. That’s what you – and all our customers — have said they want.’Stores’After products, the plan addresses our stores.

Last year we showed you a video of Fosse Park – one of 25 stores we refurbished as part of our ‘new concept’ last year. This year we’re taking the most effective elements of these stores and applying them to a further 100 locations – 60 by October and the rest by March. In total, the changes will extend to around two-thirds of our space, so most of our customers will notice the difference.I hope you’ll feel excited by what you find when you walk in. If you’re enthused as customers, you should also be excited as shareholders because you’ll know we’re getting it right.

We’re also looking for new ways to meet customers’ needs. Yesterday we opened the first of a new, small store format in Surbiton. This caters exclusively for customers who want to buy our prepared food products more conveniently, and it’s called ‘Marks & Spencer Simply Food’. There’s another opening in Twickenham next week. In the coming year, we’ll be testing these and other ideas to help make our products more accessible, to more customers, more often.So products .

.. stores … and crucially, our people.

‘People’In the last couple of weeks, we’ve announced a new head of women’s wear to complete the clothing team for our UK Retail business. This year we’ve also appointed a new Creative Director for Clothing, new heads of design for men’s wear and children’s wear, and new heads for stores and foods.I’m pleased to say we’re able to recruit top talent because good people do want to be part of this turnaround team.Our leaders are now working to motivate their teams, restore their confidence and get everyone lined up behind the changes.Marks & Spencer’s employees are some of the most skilled and dedicated in the industry. When all 60,000 are pulling together to provide what our customers want, they can exercise a powerful influence on our results.

We’ll benefit even more when we move our head office to Paddington Basin. There are good economic reasons for that but I expect it to have a positive effect on our whole culture, and the way we work together to meet our customers’ needs.’Changing Attitudes’So we’re focusing hard on these three simple components – products, stores and people. I could talk about this all day, but I’d like you to hear it from those who are making it happen every day.There’s just one remaining piece in this whole exercise, and that is the part that you can play in speeding our recovery.You know, of course, that everything we do is covered by the press — and that what they’ve said has not always been positive! As long as the negative comments are directed at me and don’t influence customers’ and employees’ attitudes, I don’t really mind. But what I don’t like is to see words like ‘beleaguered’ or ‘ailing retailer’ applied to Marks & Spencer.

Let’s not forget, Marks & Spencer is still a fantastic business. We remain the biggest clothing brand in the UK by a huge margin. Ten million customers a week come into our stores. We’re one of the best known, best trusted, retail brands in the world. We have a very special place in the nation’s affections, the most loyal customers and a tide of goodwill that wants us to succeed.Constant criticism makes life a whole lot harder for our people who are out there serving our customers every day. It also affects our customers’ behaviour and therefore does slow down our recovery.In the past year, we’ve put in place a strong leadership team. This team has developed a robust plan and is making very good progress in its implementation. We’re doing everything possible to improve the value of your investment in Marks & Spencer.As I said at the start, all of us in this room have a common interest in seeing this Company recover. I’m asking now for your continued loyalty and support for the 60,000 employees who are working very hard to get it right for our customers … and for our 400,000 shareholders who’ve supported us through this difficult time and are wanting us to return their Company to health.Despite our troubles, the qualities that made us great are still there and waiting to be reapplied in today’s marketplace. If such a company were to be offered to investors for the first time, I’m pretty sure you’d want to buy the shares. So take heart. Profits and value will return as we get back to what we do best and restore the fundamental strengths of this great business.Thank you.’

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