As M&S unveils Marc Bolland as its new chief, what are the challenges ahead for the retailer and its supermarket rivals

Published on Saturday 21 November 2009 14:16

THE only sound that could drown out the tinkling of the bells attached to Santa's sleigh this Christmas is the computerised "beep" of the supermarket checkouts as the grocers convince their customers that they need to buy just one more mince pie.

But once the last of the novelty socks are sold and the tinsel has been cleared away, supermarkets will be left to face the chill winds of the new year, with food price inflation falling and the return of the 17.5 per cent VAT rate.

Step forward Marc Bolland, the newly crowned chief executive of Marks & Spencer and saviour of supermarket chain Morrisons. Bolland was drafted in to the company from brewer Heineken in 2006 following a lengthy search to replace the long-serving Bob Stott as chief executive. During his three-year tenure at Morrisons, Bolland oversaw a near doubling of pre-tax profits from 330 million to 636m, guiding the chain through its difficulties after buying Safeway in 2004.

Stepping into the fray at M&S marks a different challenge. While supermarkets have continued to grow during the recession, M&S has suffered from declining sales. Some commentators have highlighted Bolland's lack of experience in clothes retailing, raising the question as to what will be his first move at M&S?

"At Morrisons, he took a long time going round the business, keeping a low profile, and I think he'll do exactly the same thing at M&S," says Freddie George, the respected retail analyst at Seymour Pierce. "He'll come up with a strategic plan, which took him about a year at Morrisons."

George, who thinks Bolland was the best candidate for the top job at M&S, predicts that, although food is important to the chain, the new chief executive's focus will lie elsewhere.

"I don't think he will just look at the food side of the business," says George. "I think clothing is more important than the food. If he can get the apparel – the non-food – side of things going right, then he can increase footfall on the food side.

"He'll know from his research that people go into M&S food just for a top-up shop. They go in and cherry-pick the products they like. So he will know that he's got a huge amount of customers going into the food side and he needs to increase the spend and increase the footfall. He can do that by increasing the footfall in the apparel section."

Following quarter after quarter of falling sales, M&S appeared to have turned a corner when it delivered its interim results earlier this month, with Sir Stuart Rose – who will swap his "executive chairman" hat for that of a more investor-pleasing "chairman" in the new year – noting that even the performance of its food section had improved.

Much of the credit for stabilising the business has gone to director of food John Dixon, who was promoted to the company's board in September and was once tipped as Rose's most likely successor, after he took over from Steven Esom, the former Waitrose managing director who left M&S after only a year. Bolland will be looking for continued success as he gets to grips with the business.

While Bolland runs his tape measure up and down M&S's clothing business, the hunt is on for his successor at Morrisons. After posting industry-beating growth figures – 8.5 per cent in the 12 weeks to 1November, according to TNS WorldPanel, compared with 4.7 per cent at market leader Tesco – Morrisons will be looking to continue its winning run.

Justin Scarborough, an analyst at RBS Equities, says that while Bolland's department was disappointing, it would be "business as usual" at the supermarket chain.

Scarborough points out that it was Richard Pennycook, appointed as Morrisons chief financial officer in October 2005, who was responsible for much of the initial change, announcing the group's first three-year "optimisation plan" in March 2006. He also highlighted the fact that Morrisons has added "significant management capability" over the past 18 months.

"Of course the market will want to know who the new chief executive will be, but until that announcement we do not expect changes to the group's strategy or its operational and financial momentum," says Scarborough. "We believe the company remains in good shape."

Fraser McKevitt, a retail analyst at TNS WorldPanel, agrees with the assessment that Morrisons will continue along the same path without Bolland.

"He's done a great job in getting them over their problems with the integration of Safeway, but there's no reason to think it was a one-man operation," he says.

McKevitt highlighted Morrisons' twin strengths – in that it has become known among consumers for offering fresh produce through its "market street" of butchery, bakery and fish stalls within stores, and for offering value – and said these put it in a strong position to compete with its larger rivals.

Analysts have tipped Pennycook as one of the front runners to replace Bolland, while outside candidates linked with the role include M&S finance director Ian Dyson, who missed out on the top job at his current employer. Other names banded about include Richard Brasher and Tim Mason, respectively commercial and market director and head of US operations at Tesco, as well as Darren Blackhurst, Asda's head of merchandising.

As Morrisons hunts for a new chief executive, analysts are highlighting the challenges facing the whole of the grocery sector. While supermarkets have the impending VAT change and a continued softening in food price inflation to face, the greatest challenge may come from within the sector.

"The biggest worry isn't deflation, because there will be inherent inflation around," says George. "The biggest worry is competition – the sector will be getting more and more price competitive."

Competition is already fierce, with a host of celebrities drafted in for television advertising campaigns, with Richard Hammond and Denise Van Outen in the Morrisons corner, and Myleene Klass, Twiggy and Philip Glenister lining up for M&S. As retailers slash prices, analysts predict that consumers will continue to benefit.

"What's interesting is that, at the moment, we've got all four big supermarkets – Tesco, Asda, Sainsbury's and Morrisons – firing on all cylinders," McKevitt explains. "That hasn't really happened over the past decade: there's always been somebody who has been in a weak position. That means competition is now more fierce than it's ever been."

He says promotions are now at record levels as all four supermarket chains compete on price.

"The biggest question is that at some point the retailers won't be able to promote any more – but nobody knows where that point is yet," McKevitt says. "Food price inflation has fallen back from a high earlier in the year of about 9 per cent to the current level of 3.2 per cent.

"Supermarkets have shown robust growth numbers during the recession, and a lot of that has been due to inflation. As inflation falls away, I think we're going to see retailers having to work very hard to keep growth at those levels. Food price inflation should fall to about 2 per cent in the new year.

"The big guys have beaten away at the independent grocers over the past ten years, but now that there are so few independent stores left, the big four will now have to fight it out among themselves for market share."

With so much competition already going on in the market place, supermarkets may well keep one eye on the horizon, watching to see if another player will enter the fray. George thinks it is very unlikely that a new player will enter the market in the coming year, and McKevitt highlights the lack of existing retail space available to a new player, compounded by restrictive planning regimes stifling the building of new stores.

But McKevitt would not rule out the entry of fresh faces through the acquisition of an existing player.

"That's a much more likely route," the analyst says. "Anecdotally, it's always a possibility that a bigger European player – like Carrefour – could move in, but it hasn't happened yet and the most recent talk is of the Qatar sovereign wealth fund buying Sainsbury's. In that instance it's an investor rather than another supermarket chain potentially coming into the market. The last retailer of any size to be taken over was Asda, by Wal-Mart."