A Leading UK Based and Globally Prevailing Retailer Enters in China

Marks and Spencer, a leading UK based and globally prevailing retailer enters in china pursuing its global growth strategy. It enters in market organically by opening stores but the Chinese stores show a poor performance and annoying variances which resulted in investigation of problems by our consultancy group. We applied all necessary marketing and other relevant tools to make problems visible and have made our recommendations to tackle the issues.

Problems:

Supply chain has some problem areas which are related to timing and strategy of entrance, location, institutional and political factors and lack of integration among areas such as lack of localization.

Products offered by marks and spencer in china also failed to attract customers due to inappropriateness of design, shape and sizes of outfits and poor presentation in Chinese stores. The price was too high and uncompetitive. In food section there was a lack of variety and small percentage of fresh food items. All items were marketed under trade name. Customers were complaining about packaging and labeling was not helpful due to language and design.

Price strategy followed by M&S in china is baseless. Product prices are too high and uncompetitive as compared to other rivals. The customers fail to balance price and quality and they perceive premium too high than quality offered.

Place selection to open stores is poor. Also the occupied premises are not properly maintained and structured.

Promotion side has many weaknesses in it. There is a lack of store and brand awareness of M&S among people. The advertisement budget is very small and audience is not properly targeted.

Cultural and social understanding is at zero level. This is the main reason that led to superstitious rumors about M&S in china.

Recommendations:

There is a need for Marks & Spencer to analyse the situation carefully and then develop a localized strategy to cope the issues. After conducting marketing audit of Chinese market we are recommending the following actions in problem areas identified in above section.

Supply chain issues can be solved by carefully selecting the right time to enter in a market and then developing strong ties with political and institutional forces that effect and control the Chinese market. Adopting a localized strategy will uproot the dangers of foreign traded view.

Product issues can be solved by adopting localized designing and manufacturing strategy. Reposition the products in stores to catch customer’s eye. In food section introduce fresh food section. Make improvements in packaging and labeling of products and meet customer’s expectations.

Price strategy should be revised and products should be priced in local terms using fare basis and purchasing power theory. Price premium should justify its reason of inclusion. Price may be used as a competitive tool by M&S as by other retailers such as Zara.

Place should be wisely selected. The space should be appropriate for all sections. Stores should be restructured according to Chinese trends so people perceive it safe and comfortable. All superstitious beliefs should be taken into account while selecting and designing new stores.

Promotions are set of tools that marketers use to create image of company and its products. M&S should allocate significant budget to promotions in china. It should adopt and show a well CSR strategy so winning trust by helping people of china. M&S should use local television channels and local but highly regarded print media to advertise its stores and products. Awareness campaigns could lead to high results,

Customers & public relations management in china is very important for long term success.

M&S should incorporate above mentioned recommendations in its new marketing strategy to achieve its goals and objectives in China.

Introduction

‘Quality worth every penny’

Marks & Spencer is one of the most renowned and oldest retailers of Britain. It was found in 1894 through the partnership of Michael Marks and Thomas Spencer. The first store was opened in Manchester and the company was based on primary values emphasizing on high quality, value for money, service, innovation, and trust (Marks&Spencer, 2010).

Thanks to these corollaries, the organization experienced a great success which led to national and global expansions. Today, it is one of the largest clothing retailers with 895 stores in more than 40 countries around the world (Marks&Spencer, 2010). It’s also listed on the London stock Exchange and FTSE 100 index.

The company’s current main products include clothing range, home ware and food products with a supply chain of more than 2000 suppliers globally (Marks&Spencer, 2010).

Nevertheless, the company started facing problems due to the various reasons such as outdated fashion products that were not on par with the fashion trends. This was primarily due to the fact that they lost focus on their central business by introducing a wide range of products that were not compatible with their core competencies. This led rivals to steal the market share.

In order to tackle these issues M&S decided to move into the Chinese market where they saw better and wider opportunities.

Why Chinese market?

China is the world’s third largest economy and the country has the largest population of 1.3 billion (in 2008) making it one of the fastest growing economies (Ujikane, 2010).

When the recession hit the world’s economy and the leading retail markets like US and Europe the companies were looking for opportunities to expand and diversify the risk. China was one of these markets that were not affected by the economic downturn. In 2009 its retail sales hit ¥12.5 trillion ($1.8 trillion), an increase of 15.5% from the previous year. This was due to the continuous rise in the same year of the per capita disposable income which amounted to ¥17,175 ($2,515) (Lu, 2010).

In 2008, M&S opened its flagship store in Nanjing Road, Shanghai (M&S, 2008). However, the outcome of this venture was not as successful as expected due to several problems ranging from product incompatibilities to superstitious beliefs.

The first section of the paper highlights the current financial performance of the company. This is followed by an exploration of the problematic marketing mix that contributed to the failure of the firm in China. After which, recommendations will be provided for M&S to use as a turnaround strategy.

Part I

Financial highlights:

The financial and trading performance is the measurement of the results of a firm’s policies and operations in monetary terms. These results are reflected in the firm’s return on investment, debt to equity ratio and many other ratios (Dictionary, Financial Performance Definition, 2010). During this section the light will be put on the financial aspect of Marks and Spencer’s business to assess whether its financial situation is adequate with its current strategy and if there is any loopholes that the company might have to consider in the future.

Table : Highlights

Income:

Table : Income

From these figures, it can be seen that Marks and Spencer has been gradually increasing its net revenues. However, even if they increased, its net income and earnings per share decreased. This can be explained by the investments that have been carried out by the company to realize its internationalization strategy. Not all of these investments have been successful as some did not succeed like in France for instance where the company decided to close all its stores and exit the market. Indeed, they abandoned their opportunity to expand in France but the cost to exist was relatively expensive mainly because of the labor force protection by the French Government (Global Oneness, 2010).

Revenue by region:

Table : Revenue by region

Stock performance:

Table : Stock performance

Ratios:

Table : Ratios

In short term solvency, it can be said that the company is managing normally its activities in an inefficient way. Indeed, if it was to pay its short term debt immediately, the company would just be able to cover around 80% of them. If Tesco is taken as an example, its current ratio is 345% (Yahoo Finance, 2010)which means that Tesco is more secure financially than Marks and Spencer. Thus, investors would be willing to invest more in Tesco. This situation also spread bad image for the company in its financial circle which can have the effect of reducing the investing power of the company.

Regarding the long term situation, the level of Asset-to-equity and Debt-to-equity ratios show that the company have a large part of its assets financed by Debt. Consequently, it highlights a high level of financial leverage, approximately 64%; which is supported more by the debt ratio.

Problematic areas of Business:

Marketing mix – Product:

Clothing

It is crucial in fashion industry to get the product right. In the past decade, M&S had downturns of business and brand image related to its apparel getting ‘old fashioned’. Although analysts say they have recovered, they seem to be repeating product mistakes in Chinese market as well. Experts in fashion, have identified key issues that may lead a fashion product to fail. According to Jackson and Shaw (Shaw & Jackson, 2009), here are the common reasons why fashion products fail:

poor or outdated design;

poor sizing or fit;

unfashionable or irrelevant styles/prints/colors;

poor positioning or in-store presentation;

poor value or uncompetitive price;

poor or non-existent consumer awareness of the product and/or it’s availability;

hyper strong competitive offers elsewhere.

Researches and analyses on the M&S expansion to Chinese market indicate that all above points were relevant to their products.

Sizing

Each clothing retail brand has its basic pattern block that probably has been made after studying target groups measurements and taking the average from that.

Marks & Spencer’s typical apparel customer is a woman after 40s who prefers comfortable fit and quality. This has affected M&S fashion and sizing as well. Customers complain M&S clothes and underwear are larger compared to the same sized item from another shops.

In mass production of several thousands of pieces of garments, shrinking the measurement in to unnoticeable 1 cm may make noticeable reduction in cost. Therefore fashion is created according to feasibility, cost effectiveness of the designs and it is influencing the way clothes fit and the sizing as well. The reason why M&S clothes seem greater compared to cheaper rivals is actually can be explained by the philosophy of not compromising on quality.

Average size in Chinese apparel industry is smaller than European size in every dimensions. It is shorter; sleeves are 2 inches shorter, sizes up to 16-18. In Europe it is up to 26. When a fashion retailer enters a new market, it is important to research consumers’ sizes, body structure, and culture. Because these things influence people’s fashion tastes and clothing culture.

Two customer base (target group): European expatriates and typical Chinese consumer, also created merchandising issues. Chinese consumer found M&S clothes to be ‘too big and frumpy’, may be because they were exposed to fast selling plus size clothing, which looked unusual.

Style and Fashion:

In the Chinese market, M&S offering large size garments that pleased expatriates who struggle to find their size in shops, which target average Chinese women. However, Chinese customers showed very low interest, as the clothes are ‘too big and too simple’ (Bolland, 2009).

M&S is a department store that tries to meet the needs of all age groups with different needs. Whereas competitors try to focus on one segment and one fashion concept and therefore perform effectively. The brands failure of drawing young Chinese people’s attention could be due the failure of ‘Everything for all’ positioning in general. Fast fashion requires the retailer to focus on certain, preferable well-specified segment (like Zaras, classy chic over 20’s). May be it is time for M&S to give in-house brands independence and expose number of different brands, keeping M&S just a store name.

Diversified products result in bigger and slower supply chain. Because competitors are adopting efficient and quick product turnover, smaller and faster batches, M&S clothes, when arrived to stores cannot stand the competition. Costumers find them out of fashion.

Brand value is a key for success in fashion industry. Fast moving, better-positioned and low price competitors are jeopardizing brand value of once famous clothing retailer with heritage. Celebrating it’s 125 birthday, M&S resembles older generation fashion and in store brands and young celebrities used as brand ambassadors not helping to attract 20-25 year olds although they are helping to retain more customers who’d switch to competitors otherwise.

According to research by Datamonitor, more than 75% of shoppers in the food halls of M&S, are over 45. In the fashion department the problem is worse: 65% of its main clothing shoppers were aged over 55, as were those who accounted for 48% of spending on M&S clothing last year (Datamonitor, 2009).

Food:

Limited range and Long life food products:

Marks and Spencer has been criticized by its Chinese customers that the food products in shelves were produced a long time ago from the date of purchase. So there is only a small portion of fresh products and also the range and variety is limited. Majority of products are approaching towards expiry date. The food items contain preservatives that effect taste of products.

Further research shows that a large amount of products were destroyed due to expiry, spoilage and bad conditions.

Almost all products are made in UK so this leads to customer’s perception of Marks & Spencer as a British store.

Research shows that the main reason for above mentioned problems is that Marks and Spencer imports its products from UK. It takes a significant time in shipment of goods from UK to China due to enlarged supply chain cycle involved. A portion of products is deteriorated due to inefficiencies in handling, storing and transportation procedures.

Branding issue

Marks and Spencer brands all its products under its trade name M&S. this brand name appear strange to Chinese people and they have translated it into a Chinese term. Also this brand name has no direct linkage with products.

This is due to company policy towards branding and trends in UK market as much of retailers such as Tesco brands their products under their trade name.

Packaging issue:

Marks & Spencer customers are finding product packs confusing and misleading. Research reveals a customer complains that he bought a packet assuming it to be biscuits but when he opened it were snacks.

The above problem is a result of standardized strategy towards packaging and labeling. The labeling lacks Chinese description and also rich in text and without product images.

Marketing Mix – Price:

When setting the price of a product, the company must understand perfectly its cost and the customer value perception for the product (Armstrong, Harker, Kotler, & Brennan, 2009).

Marks and Spencer did surely understand these points when operating in UK and in other successful countries but not when it came to China as the company failed to set the price correctly. Normally, the price the company charges will fall somewhere between one that is too high to produce any demand and one that is too low to generate any revenue (Armstrong, Harker, Kotler, & Brennan, 2009). These are the extremes and Marks and Spencer leaned far too much to the high price end. As a result, the company found it very hard to sell its product and generate profit for a viable business in China.

One example would be the cashmere scarves that Marks and Spencer was selling or pretending to sell, as no one bought them, at £50 where it was possible to get them for far less at nearby stores (Moore, 2009).

However, in some cases the prices of products were convenient but the customers still did not buy them. The reason is primarily that Marks and Spencer did come late. Indeed, Wal-Mart and Carrefour were there before and had more than enough time to impose their respective brands and enjoy the lion’s part (Crabbe, 2010).

Marketing Mix – Place:

When entering a new market, one of the crucial decision that a company has to make is choosing the right location to open in. indeed, the location is one of the key factors to a business success firstly due to of being the least flexible of the strategic retailing issues and secondly, because the location set the geographical boundaries of the trading area from which the store draws its customers (William & Ferrell, 2010). As a result, in the following paragraph will discuss the problems related to the Marks and Spencer stores in China.

Marks and Spencer has opened since 2008 two stores in China, one in Nanjing Road in Shanghai, the equivalent of London’s Oxford Street (City Focus, 2010). And the other one is in Yuyuan Garden, Shanghai major attraction and commercial hub (City in Pulse, 2010). These stores, especially the first one, have suffered poor trading in the last months. This was due to many factors but the discussion will only focus on location related issues.

The first issue concerning the location was the first store opened. Marks and Spencer had chosen one of the most popular streets in Shanghai because it wanted to show its brand reputation and refined stores. But at the same time, the company wanted to expand quickly and as a result the store was not ready to welcome the new Chinese customers. Indeed the walls were scuffed and the paint job was poor (Moore, 2009). As the old adage confirm, the first impression is the last impression and by failing to make a good one in the Grand opening of its first store, Marks and Spencer condemned itself of having a bad image in China.

The second issue was that the company underestimated the differences in operating in China and Hong Kong, therefore using the same strategy to find the store location in China. Indeed, Sir Stuart Rose admitted to the Financial Times during his visit to the Shanghai store that Marks and Spencer did misunderstood the Chinese mainland market, assuming that its experience in Hong Kong could be directly transferred to this market (News, 2009).

Marketing Mix – Promotion:

Brand awareness:

One of the major problems with Marks and Spencer’s venture into China is the fact that many local people were not aware of the brand. In fact, one of the articles regarding M&S in China talks about local men saying “we’ve never heard of this company”. Many female shoppers also claimed to be unfamiliar with the brand. Although it is a well-known British company with many outlets overseas, it is fairly unknown amongst China’s local public. This means that there is a lack of brand awareness and advertising as the locals do not have much knowledge of its history. As a result of this, many customers would not be instantly drawn to it as they do not recognize it. Lack of familiarity discourages people to enter the stores which will inherently affect sales.

Other issues:

Supply chain:

Global supply chain management is an important area for M&S in its expansion to China. Global supply chain management involves the company’s worldwide interests. In China’s expansion it is noticeable that the supply chain related issues are based on the following areas.

Timing

Proper timing in approaching a market gives advantages for a company. For example first movers in a market always have advantages in gaining profits.

China’s retail industry has grown rapidly during the recent history. The move of M&S to China was taken during the recession.

Even though China was less affected by recession due to its closed financial system, the worldwide demand for Chinese exports were decreasing. It was a time when cash strapped consumers were moving away from expensive ready cooked meals and thinking about buying the cheaper substitutes instead of the expensive.

Luxury ready prepared meal that is the mainstay of Marks and Spencer’s offering.

Marks and Spencer don’t have enough flexibility to move their offerings at the time of Moving to China.  The result is loss of customers to competitors and it will become difficult to recover them when economic times get better.

Institutional Factors

Product controls, government regulations, tariffs affects supply chains.

When M&S initially started the business in China the company had lots of difficulties in getting products into the country. Chinese custom officials blocked M&S goods. This situation created empty shelves in the food department of the store (Jade, 2009).

Corruption and government bureaucracy remain a major issue in China. Business activities and financial related activities can take a lot more time than comparing with UK and the administration costs remain extremely high.

The higher amount of control in the economy by the government creates policy uncertainty. This uncertainty exists as a major challenge for businesses operating in China.

Integration

According to the experience of successful international businesses in China such as Sara, H&M and Tesco, it is necessary to take a long view in China. Existing products should not be transplanted into Chinese markets without making them localized.

In the localization process it is necessary to have a proper integration with the local talents that can create better customer links.

Superstitious beliefs:

Although China is one of the big and a great country in all the aspects of the world but still they have lots of superstitious beliefs. Marks and Spencer in china has suffered from these kinds of beliefs.

China has a main impact of Feng Shui. Feng Shui is widely used to orient buildings.

According to the retail competitors of Marks & Spencer the main store is at a cursed location of the city. This superstitious gossip was because just at the four days of opening of the China’s main M&S store there was a death of one of the man named Harshit Shah. He got killed accidently while leaning over the side of escalator (Moore M. , 2010).

As M&S is in China we can’t neglect these things that could have been one of the reasons of the failure for Marks & Spencer in China.

Most of the Chinese people have some traditional beliefs about the numbers. They consider no. 4 is associated with the death so most of the times they don’t even buy products that price starting or ending by number 4. They consider number 8 for prosperity and good luck. They also skip the 4th floor in many of the buildings. Different styles & forms of the Feng Shui are often used to block or reduce the negative energies that occur.

According to some believers of the Feng Shui the structure of the Marks & Spencer’s store was wrong and that led think of superstitions as one of the problems for M&S in China.

Part II

Recommendations:

Marketing Mix – Product:

Clothing

Researches show Chinese consumers are not familiar with M&S brand. This gives an opportunity of positioning the brand differently than it is positioned in home country.

The construction of store image, comprising both tangible and intangible dimensions, compounds problems of moving into international markets – as consumers in the host environment are less familiar with the intangible dimensions of image, which have been built up over time with exposure to the retail company. Retail companies therefore need to fully understand the importance of image in competitive positioning and the components of store image before attempting to replicate this image and positioning overseas.

Repositioning the brand can give a chance to reach the desired customer, 25-35 year old Chinese consumer with higher disposable income. With current strategy M&S cannot be as successful in china as in the UK. Because older generation in China do not have high disposable income unlike their European peers. BCG researches indicated that Chinese consumer is very young.

Although fashion has become global already, it still needs localization when entering a new market. Jessica Lo, of the China Market Research Group warns that western brands should not bank on Chinese consumers directly paralleling European and American shoppers when it comes to taste and aesthetic appetites. “Many western companies forget to localize both their styles as well as advertising. They use celebrities and images that work in the UK and Europe, but that don’t resonate with Chinese consumers. It is critical that companies get the right product selection and style and advertising image” (Alisa, 2010).

Marks & Spencer can increase its Petite range products and bring it to Chinese market with different, localized brand. When petite sizes are average, it is better to replace the name, because it may sound offensive rather than just size attribute. It is recommended that M&S researches fashion preferences, consumer behavior of Chinese people and then create an in-house brand customized for Chinese market. Similar brand should be created for menswear as well. It is expected to solve merchandising issues as well, because different target groups with different sizes would be more satisfied.

Food:

Limited range and long life products:

Chinese people are very conscious about their food selection because they link it directly to their good health and long life. So the following actions are recommended to be taken and implemented.

Marks and Spencer should develop local production facilities so that products are produced and processed in china than importing from UK. So as a result people will get fresh products at best taste. This will also change its image from a British retailer to a local manufacturer.

Develop methods and improve conditions so the preservatives are not added in the products. This can be achieved by improving packaging, storage conditions and efficient supply chain and product replacement cycle.

Re-engineer the import process so the inefficiencies in handling, packaging, storing and transportation are removed to ensure minimum wastage.

The freshness and pureness (no preservatives) features will be used for promotion of products as it is a successful practice now days used by high profile food manufacturers. The company executives can perceive local production as a costly operation when comparing to demand but it will increase demand in long term by bettering product image. We can also export our made in china products to other near locations like India and other markets. It will also lower the cost and will drive prices in a competitive range.

Packaging:

The packaging is a core area of concern as it acts in a multiple way by communicating product information and brand character. It is the first point of contact of product with customer so it should be attractive in terms of design and color. The Chinese link longness to long life so package should be designed in long shapes and the color are also important. As they will be attracted towards red packs which is a symbol of prosperity and avoid using black color as it is for bad luck (China Search, 2009).

Package should be functional and clear so it shows the true picture and nature of product. It should be convenient for Chinese people to open as they avoid cutting things with scissors and knives.

Package should be well labeled about product, brand and all relevant information. Marks and spencer should label products using a bilingual approach. Using both Chinese language and English so it will be useful for customers to read all information they need. The label can be made more attractive and functional by adding Chinese recipes.

Marketing Mix – Price:

To make the prices of products more affordable and competitive, one solution would be that Marks and Spencer improves its supply chain to reduce cost:

First, by exploiting the technology in its stores by introducing hand held communicators to track clothes from the distribution to the sales floor which helps to know exactly what is in the stores. The result would be a more efficient and cost effective delivery system

Second, by introducing a technology that consists of counting the number of items sold by kind automatically when the transaction is handled; For clothes especially to know what items are better sold and what are the ones that have to be removed.

Another suggestion would be to carry out a consumer shopping experience research to know what kind of design Chinese prefer, and what products should go together in order to get rid of unwanted products and consequently reducing the cost of unsold goods

The last but not least is to make enough space between clothes and food so that the stores looks more attractive thus reducing the concern about price.

Marketing Mix – Place:

As it was said at the beginning, the location is the less flexible asset. Consequently the suggested solution will focus more on upcoming stores. The ideal location for these future stores would be places that people can access more easily, also MS should think about starting to open small stores to catch also the low volume buyers as this type of potential customers are willing to become loyal clients but are not going to waste time in a supermarket just to buy few items. For future stores, Marks and Spencer should evaluate the relative ease if movement to and from the site, including factors such as pedestrian and vehicular traffic, parking and transportation (William & Ferrell, 2010). The company should also evaluate the characteristics if the site itself: types of stores in the area and the visibility of the lot under consideration (William & Ferrell, 2010). One last thing to do is to look for compatibility with neighboring stores merely because stores that complement one another draw more customers for everyone (William & Ferrell, 2010).

Marketing Mix – Promotion:

Re-branding and Corporate Social Responsibility (CSR):

Due to the fact that the company has been battling with bad press and negative public views due to several reasons such as offering products that do not cater the needs of the market, lack of products, providing wrong sizes and superstitions due to the occurrence of a death during the opening week, M&S needs to re-brand itself in order to move away from the negative connotations, erase the past image and start afresh. This can be done by changing the store look and layout. It should have colours and products that exude vibrancy and freshness. The M&S logo should be re-designed in order to bring a sense of novelty. The focal signboard outside the store should grab attention and be vibrant. It can be designed with neon lights and a different shade of green, together with black in order to make it look noticeable. The window displays should also be creatively designed with mannequins dressed up in vibrant colours and innovative designs. The arrangement should grab hold of the passer-by’s interest, especially the female youth- which will be M&S’s new target market. Although this is an advertising technique, it primarily falls under re-branding the store and giving the brand a new image. All these efforts should be con