M&S Economic Study

Economics: Assignment

Marks and Spencer's

Marks and Spencer's is a multinational chain of department stores, which sell a wide range women's, men's and children's clothing and footwear, gifts, home furnishings, beauty products, financial services and food, all exclusive to Marks and Spencer's. It is a successful company that has 375 stores in 29 countries worldwide and over 10million shoppers a week. As well as owning the US supermarket group "Kings Supermarkets" M&S website

The company has expanded both vertically and conglomerately. Looking at home ware, foods, flowers, (see appendix) cafйs, gifts and cards. They have invested in many different styles of clothing ranges such as Per Una, Per Una Due and the Limited Collection. The conglomerate integration of the food market has proved to be very successful with the opening of independent "simply foods" branches and 'lifestores, selling homeware.

M&S operates in an oligopolistic market structure with its main competitors being NEXT, House of Fraser, Gap and Alders. All of which have aimed their clothes at similar markets such as middle aged men and women and their children. This market has fairly high barriers to entry, as it is hard for new companies to enter and compete as these are well established firms with a dedicated customer base and strong supplier relationships. The larger firms such as M&S can take advantage of internal economies of scale. These would include bulk buying, managerial, and technical economies of scale. For M&S bulk buying would mean that they can use the size of their company and massive purchasing power to get huge discounts from their suppliers. Managerial economies of scale would mean that they can specialise their managers and as the output of the M&S rises the managerial cost per unit output will not rise at the same rate. The Technical economies of scale that M&S would take advantage of would be things such as large storage would mean lower cost of storage per unit. Risk bearing economies of scale would mean that they can spread the risk over different areas of the country or different countries. So if there is a change in demand in one area or there is a crash in the economy, they can depend on their other sections to hold the company up. They are large companies and new competitors would need large financing to set up and advertise in a highly competitive and already saturated retail market.

If one firm decides to increase the price others will follow, by lowering their prices, this will enable them to keep hold of original customers and capture new market share of the old company. This would be the case of M&S if they were to kept here prices high they are likely to lose there customers to another more cheaper substitute. In this oligopolistic structure the best strategy would be to keep prices the same as they tend to be rigidly set due to the companies interdependence changes of the demand curve.

M&S have been retail giants for a long period and have gained sufficient competitive advantage and in 1998 M&S where the countries most profitable retailer valued at nearly 20 billion, (see appendix) Part of M&S success is due to their good reputation for producing quality goods both in food and clothing. M&S has a strong relationship with its suppliers and a strong "Brand Image" which has taken years to develop. M&S have had a consistent record of success and profitability until recently when they experienced falling sales. They were unprepared for this slump and while they were expanding the business their competitors were strengthening

The decrease in sales was probably due to the lack of innovation, (See appendix). M&S seemed to have 'lost touch' with what consumers wanted and therefore they were going elsewhere. Some thought they had got too complacent as the market leader. M&S was losing out because the lack of clothing suitable for younger customers. Most of their clothes were aimed at the older generation; they were losing out on custom from younger women. The loss of competitive advantage could have been blamed on the fact that they were being product orientated instead of market orientated, not listening to customers.

M&S also needs to look at its pricing strategy's because for a long time they relied on their strong brand image to allow them to charge the premium prices. However with recent sales falling dramatically this would be a key area for them to review. Consumers are now looking for cheaper alternatives especially in clothing because trends are always changing. Cheaper forms of production such as moving areas of production abroad where labour is cheap has allowed companies to spend less and therefore sell items more cheaply. M&S products have become more elastic as people are no longer buying into the brand and go for cheaper substitutes. The diagram below shows how the product is elastic, people will still buy the products at a higher price as they buy into the brand image however a small amount of customers will be lost due to cheaper alternatives as illustrated below;

M&S were too busy concentrating on expanding abroad and as a result the UK sales started to drop. M&S did not spend a lot of time or finance on advertising. It was a policy of there's to run a low key advertising campaign and relied heavily on their strong brand image and prominent location of their stores to promote new ranges. Also M&S moved production abroad in order to keep production costs down but this resulted in roughly 60,000 jobs being lost in the British textile industry, and that brand image of 100% British clothing was hindered which would have caused many consumers to feel let down. (See appendix)

The demand for their clothes fell rapidly shifting their demand curve to the left as sown in the diagram.

M&S have used "non price" tactics for example offering 10% off all shopping when they open an new account card and have introduced the new &More credit card which allows customers to earn points and get money off. These are to encourage customers to stay loyal and give M&S the opportunity to directly mail customers. This type of competition in this Market is that of Game theory. This is where one company analysis its best strategy which will enable them to gain larger pay offs. This means that if the competition can see that this type of strategy is successful they in turn will follow. The firms try to anticipate the other competitors'