It’s been another good year for M&S, achieved in difficult circumstances. We started with a strong first half, but experienced more difficult trading conditions in the second half, largely as a result of the economic slowdown.

Having completed the first phase of our recovery, we are now broadening our plan in order to take the business into the next stage of growth. In 2008/09 we will need to manage the business in a challenging economic environment, while continuing to invest for future growth.

Broadening the plan

In 2004 we put in place a three-part plan for renewing and reinvigorating M&S in order to secure profitable growth and build the business for the long term. Our focus was on getting the basics right, by improving the products we offer, our customer service and shopping environments.

In 2007/08 we continued to make progress against the plan. We sold more goods to more people, reporting our biggest volume increase in sales in eight years, with volume market share in clothing and footwear at 11.2%. At the same time, we held our lead in the value market for clothing and footwear achieving 11.0% market share. Clothing and home sales were up 1.4% to almost £4.06bn. Per una also performed strongly under the leadership of George Davies, reporting sales of more than £428m.

In food, a good performance saw sales increase from £3.97bn to almost £4.25bn, and value market share remain steady at 4.3%.

M&S Money continues to benefit from our partnership with HSBC, with 3.8 million customers now signed-up to an M&S Money financial product. M&S Money now has more than 3.1 million M&S Money credit cards in circulation, 114 bureaux de change in our stores, and it served 4.8 million travel money customers during the year. Its range of financial products also includes car, home, travel, pet and wedding insurance, as well as cash ISA and unit trusts like the M&S Ethical Fund.

As we take the business forward, we are broadening the plan for long-term growth. This will be achieved by continuing to invest in our core UK retail business introducing new goods and services; strengthening our UK property portfolio; driving our M&S Direct business; expanding our international business; and ensuring Plan A – our ‘eco plan’ – is integrated in everything we do.

I will return to the specific steps we’re taking to achieve our objectives. First I want to review the changes we’ve made to ensure we are building on a strong foundation.

Building management capability

In the Chairman’s foreword, Lord Burns explains the business rationale for my appointment to Executive Chairman. As the decision has attracted much comment, I’d like to highlight the immediate and longer-term benefits for the business.

We believe in developing management talent internally, but this has been difficult for M&S in recent years, with the business experiencing considerable turbulence, followed by rapid change since the turn of the millennium. However, we now have a strong senior team in place, which has an opportunity to develop its skills – with Ian Dyson as Group Finance and Operations Director, Steven Esom and Kate Bostock appointed as Executive Directors running food and clothing respectively and Steven Sharp continuing in his role as Executive Director of Marketing. We also benefit from an expanded and talented Executive Committee.

With Ian taking on significant new responsibilities, I can now focus on a more specific set of executive responsibilities, in particular product, people development, and key growth areas for the business including M&S Direct and International. My new role will also give me time to develop and mature talent within the business – a key task for any Chairman. At the same time the Board will be able to continue to drive a proven plan without distraction, in a difficult economic environment.

Responding to market conditions

2007/08 was a year of two halves, with a strong start followed by a weaker performance. While we believe our second half performance is largely attributable to a deterioration in market conditions, like any retailer there are things we could have done better. For instance, although we sold significantly more volume, we under-potentialised products in the middle and top price categories – what we call ‘better’ and ‘best’ – during the key Christmas period.

Although we can’t predict how severe the current downturn will be, or how long it will last, we expect its impact to be felt into 2009/10. However, we believe we have the potential to outperform the competition by planning for modest sales growth and keeping a tight control on costs and stock levels, while at the same time, driving our business using our five key values of: quality, value, service, innovation and trust.

Our efforts in the last three years to re-engage with customers so they once again consider M&S as ‘great value’ for money, will support us in the years ahead.

We have reviewed our pricing architecture in order to attract a broad range of customers. We are now achieving a wider price span – staying in touch with the supermarkets at entry levels, while extending our offers above and beyond other high street retailers. It will enable us to flex our ‘good’, ‘better’ and ‘best’ ranges to respond to changing customer demand, as and when the economic situation alters.

We continue to invest in our stores, having completed 70% of our store modernisation programme. We plan to modernise an additional 10% of space, and open an additional 5.5% of new space in 2008/09 so that we enter a difficult period for UK retailing, with the majority of our stores looking their best and using every square foot to its full potential.

Finally, owning 70% of our assets and having relatively low gearing means M&S has one of the strongest balance sheets in the retail sector. Ian will discuss this in the Group Finance and Operations Director’s statement.

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1. Investing in our core UK business

 

Product

Our core UK business comprises the individual business units of womenswear, lingerie, menswear, kidswear, home and food. In 2007/08 we made good progress in each business unit.

In womenswear and lingerie, the emphasis was on our segmentation plan, where we clarified our sub-brands (such as Autograph) to help our customers quickly and easily find what they’re looking for. Further work is needed this year to ensure customers feel comfortable in shopping for their requirements. At the same time, ranges were continually refreshed so that customers can always find something new. This adds up to what we call ‘Every Woman, Every Time’ – where we make it easier for our customers, regardless of their age, size and budget – to find clothes that are beautifully made, stylish and offer great value for money.

Work to segment our sub-brands was also central to the kidswear plan, as we took important steps to win back market share.

In menswear and home, changing customers’ perception of value was the focus as we competed hard on opening price points (with home prices at almost 12% below the high street average), while improving ‘better’ and ‘best’ products for the more aspirational shopper.

In food, we delivered against our commitment to provide food of the highest quality without compromise, with a focus on provenance, innovation and health.

Brand stretch

Our brand is strong, and in 2008/09 we believe we can build on the trust it inspires to offer our customers better service and more of what they want through ‘brand stretch’. For instance, by featuring plus sizes online; offering bespoke Made to Measure shirts for men; and expanding our in-store hospitality options.

Additionally, while M&S will always be essentially an ‘own brand’ business, we believe we can add significant extra value, by partnering with guest brands that complement our values. In the last year, this was predominantly with trusted technology brands in home, such as Sony and Apple. In food, where we face strong competition, customers tell us that time and convenience are key drivers. During the summer we will therefore trial the sale of up to 350 branded food products – such as Marmite, Heinz tomato ketchup and other branded ‘must haves’ – in a small number of stores. We will roll this out if successful.

Service and store environments

In addition to our products, we have continued to improve the quality of our service and store environments.

In service, during 2007/08 our store colleagues sold record volumes, while simultaneously improving their scores in our mystery shopping programme – achieving an above average score of 86%. It’s to their credit that we continue to be seen as one of the high street’s best customer service providers.

We’ve invested behind the scenes in our IT and logistics infrastructure in order to maintain service efficiency. In 2007/08, as well as delivering 13% more stock to our stores than in 2006/07, our logistics network responded to a 63% rise in volume from M&S Direct. The plan has helped us to develop faster and more efficient IT systems throughout our business. For instance, we are introducing new point-of-sale systems, including more than 2,000 new tills and 258 new hand-held terminals in-store to make stockchecking easier and more efficient. Ian will discuss this further in his statement.

While our IT and logistics improvements help support our stores to run more efficiently, our store modernisation programme is improving our shopping environments.

2. Strengthening the UK property portfolio

We are undertaking one of the biggest store investment programmes in the UK; modernising and expanding our existing footage (with 70% now complete); increasing the number of stores we have; and ensuring we offer the right stores in the right locations. We will modernise a further 10% this year.

In order to achieve the scale of our property plan, in November 2007 we announced that we would open an additional 15% to 20% more space in the next three to four years.

But, like any business in this market, we need to prioritise costs. Although we will continue to invest in our store modernisation and expansion programme, this year we will particularly focus on new footage, and modernisations with extensions.

3. Developing our M&S Direct business

M&S Direct covers our e-commerce website; home catalogue; Christmas hamper delivery; flower and wine delivery; in-store ordering service; and Lunch to Go. During the year it not only became an important part of our commitment to become a multi-channel retailer, but with sales up £60m to £220m, it put us on course to reach our target of £500m annual sales by 2010/11.

On our e-commerce site in particular (relaunched with Amazon in March 2007), we have recorded strong growth with visits to the website up by nearly 60%, and sales growing ahead of the market.

4. Building an International business

Expanding internationally provides strong opportunities to build a broader revenue base and drive profitable growth in some of the world’s most exciting markets. In November 2007 we set ourselves a target for International to achieve between 15% to 20% of total Group revenues within the next five years (in 2007/08 it contributed 7.9%). We will do this by flexing our business model so that we expand not just through franchise partners, but also on a part-owned and wholly-owned basis.

We have already signed deals in Europe with two of our existing partners, and in India where we will open around 30 to 50 new stores in the next five years. This is in addition to our plans to enter China on a wholly-owned basis later this year.

In 2007/08 we made significant strides against the plan, opening 38 new stores, which helped lift sales by 16.8% to £712.9m; and operating profit by 33% to £116.4m.

5. Keeping up momentum on Plan A

Plan A, our five-year ‘eco plan’, reached the end of its first year in January 2008. We pledged to meet 100 separate Plan A commitments within five years, and so far we’ve made progress on 94.

Despite the tough consumer climate, our commitment to Plan A remains, because there are compelling moral as well as commercial reasons to do so. Plan A gives us brand differentiation, and as Al Gore said, “a sustainable business can be a profitable one”.

Looking ahead

The next year will be tough. We will have to continue to challenge ourselves to become more efficient, drive down costs and improve our rate of return. At the same time we must maintain our investment for the long term both in the UK and overseas. I believe that we have started to achieve this. We have talented and motivated people; well-priced, quality products; a clear plan; and dedication to understanding what our customers want – all of which put us in a good position to meet the difficult market conditions that lie ahead.

I would like to pay tribute to all of our staff and suppliers for their hard work this year. It has been a tough but rewarding experience, and they can take pride in their achievement. I would also like to thank Lord Burns for his support as Chairman over the past two years. He has guided the Board through some difficult discussions, always having the best interests of the Company at heart.

Sir Stuart Rose

Chief Executive

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