How can M&S ‘keep it simple’ to escape high-street woes?

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M&S: ‘Keeping it simple’ to escape woes on the high-stre high-street et

M&S can learn from a tough month on the high-street: Following a month when both BHS and Austin Reed went into administration, M&S must avoid the all too common pitfalls of lacklustre execution when implementing their new ‘customer focused’ strategy. The demise of BHS and Austin Reed w ere, at least in part, a result of their growing cost of organizational complexity which made them unable to react to competitive pressures. Sensibly, M&S have resolved to simplify. M&S, while still profitable, have been given a ‘sell’ rating by many a nalysts. A key component to quickly addressing investor sentiment will be to improve their sales performance in the Clothing & Home segment. M&S can learn lessons from BHS & Austin Reed and execute its plan: removing toxic complexity from its operations, and secondly, simplifying simplifying to grow sales.

Typical cost allocation methodologies don’t allocate the costs of complexity in the right way, nor take into account the significant cross-subsidizations that inevitably and invisibly occur across products, business lines, and market segments, which mask the true creators of profit and consumers of cost. WP&C has used Square Root Costing to help a number of organisations identify where their businesses were saddled with non-value added costs related to complexity complexity.. It is a fast, dynamic alternative to methodologies such as Activity-Based Costing for organizations looking to quantify the impact of complexity on cost and operations, and reveals if, and at what volume, certain products in a portfolio could be profitable. Standard Cost View

Complexity-Adjust View

$/unit

Sales price

$/unit

140

NVA cost

140

 VA cost

120    s    n    o    i    l    l    i    B    P    B     G      e    u    n    e    v    e    R    p    u    o    r     G     S    &    M

£12

£ 7.9 BN

£10

7% 8%

£6

28%

£4

£0

£ 10.3 BN

9%

£8

£2

£ 9.5 BN

64%

32%

29%

62%

61%

2010

2015

Operating Costs have crept up a percentage of revenue over the last 10 years — an indication that economies of scale are not being achieved and complexity is holding back growth

120

80

100 80

60

60

100

NVA costs typically shift toward lower vol. products 

40

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20 0

20 0  A 1500

B 1000

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 Volume:  Volum e:

 Volume::  Volume

 Volume:  Volum e:

 A 1500

B 1000

C 600

D 200

E 100

F 50

Profit:

8%

11%

7%

7%

6%

6%

Profit:

27%

1 9%

3%

-27%

-39%

-54%

 Volume::  Volume

Profits shifts toward higher vol. products  products 

2005

COGS

Operating Costs

Profit before tax

Figure: Square Root Costing provides more accurate views of costs & profitability 

Figure: M&S Full Group Financial Expense Analysis 2005 - 2015

Challenges in executing a simplification strategy: M&S has resolved to ‘put customers at the heart’ of their growth initiatives, stop chasing fashion trends, and make its r ange more accessible. They will commit to lower prices instead of engaging in stop-start promotions, as well as moving to “sharper ranges”, rather than their current plethora of sub-brands. M&S plans to: • Cut prices on around 30% of its clothing ranges, and • Take out 10% of its product range to simplify the group’s offering These exercises are expected to have an adverse effect on profitability in the near term, however,, there is opportunity to realize the benefits more quickly than anticipated. however Using pricing as an effective strategic tool requires careful planning. M&S will need a good understanding understanding of both its customer segments and true cost to serve each (which includes the hidden ‘complexity costs’ that are inherent of large retailers like M&S). The The same applies to portfolio rationalization. The challenge for M&S will be to streamline its portfolio in a smart way, involving a multi-faceted, strategic look at the company’s company’s offering. What really matters in a range optimization analysis are incremental revenue & costs and product lifecycle. Beyond that, understanding substitutability substitutability across the range is a powerful cost lever lever.. Selecting the right products is an exercise that can yield huge cost savings if done correctly, however these benefits will not be realized with a simple ‘cut the tail’ exercise. In addition, focusing on the right portfolio will allow M&S to drive greater scale and profitability from their range.

www.wilsonperumal.com [email protected]

Properly allocating costs in this way is not only a key input for price setting, but will also allow M&S to fully understand both customer and product profitability before undertaking any portfolio rationalization exercise.

The Common Pitfalls: M&S will do well to avoid the pitfalls that see so many companies fail to derive benefit from their rationalization exercises, namely: not removing the right items to achieve the required cost ‘break-points’, or indeed cutting the real drivers of long term value. This can result from using financial statements as a map (as opposed to a barometer), or working with the wrong data. Needless to say, even if the exercise is a success, without realigning operations with the new portfolio, savings and performance will not sustain.

Embedding the benefits: M&S have stated the need to address their UK estate as a measure for cost control and investor return. The key metric here (and across the UK’s retail landscape) must be to optimize return on invested capital. This is another opportunity to address the complexity that has become embedded and locked into the organization, and re-organize around a simpler, more powerful, customercentric offering. In updating and aligning their stores, delivery channels, and their supply-chain, M&S can reorganize to better execute localization and omnichannel strategies where many of its competitors have struggled.

Wilson Perumal & Company, Inc.

Wilson Perumal & Company, Ltd.

One Galleria Tower, 13355 Noel Road Suite 1100 Dallas, TX 75240

Longcroft House, 2/8 Victoria Avenue London EC2M 4NS, United Kingdom

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