Andrea Felsted25 May 2022, 10:59 BST

Britain’s retail stalwart emerged from Covid in excellent shape. Unfortunately, the good times are coming to an end.

“Never the same again” was the name Marks & Spencer Group Plc gave to its effort to transform in the wake of Covid-19. But perhaps “Never had it so good” would have been more apt.

As the high-street bellwether emerged from the pandemic, it benefited from consumers’ pent-up demand and the failure of a raft of rivals. Add in shoppers’ appetites rebounding much stronger than expected, leading to fewer markdowns, and the success of Ocado Group Plc’s retail arm, of which M&S owns half, and it’s little wonder that M&S pre-tax profit before one-time charges jumped tenfold to £522.9 million ($655 million) in the year to April 2 from £50.3 million in the previous year.

Those helpful factors won’t be repeated this year. In fact, the tailwinds that M&S enjoyed are set to become headwinds. It expects sales growth to slow as the cost-of-living crisis bites and a lower level of profitability.

Chief Executive Officer Steve Rowe stepped down on Wednesday after six years at the helm. It will be up to his successor Stuart Machin, assisted by Co-CEO Katie Bickerstaffe and Chief Strategy and Finance Officer Eoin Tonge, to steer the good ship M&S through the coming choppy waters.

Although trading in the first six weeks of the current financial year has been ahead of the year-earlier period, the company is braced for the environment to become much tougher in the second half.

Tougher from Here

After significant pent-up demand M&S faces more challenging conditions

M&S has been making itself more resilient, for example by cutting net debt excluding lease liabilities from £1.1 billion to £420 million. The company has also been turning itself into more of a food business — and it soon could be a beneficiary of Brits skipping restaurant meals and eating at home instead. It has been focusing on value, introducing cheaper items to complement its historic focus on more indulgent fare that could be ditched as budgets are squeezed.

Its well-heeled food customers may be more cushioned from the ravages of inflation, but even some of them may decide to trade down to cheaper supermarkets.

At the same time, online demand for its food is settling down after the big pandemic boost. The Ocado retail joint venture cut its forecast for sales growth to a low single-digit percentage, down from its previous estimate of about a 10% expansion. As it invests in the joint venture’s order fulfillment capacity, the profit contribution to M&S this year will be minimal.

Meanwhile, many of M&S’s clothing and home-furnishing customers tend to be older. They may be living on pensions and dependent on stock-market returns, which will have taken a hit this year. And when it comes to fashion, M&S sits squarely in the mid-market. Consequently, some shoppers may downshift to the likes of Associated British Foods Plc’s Primark.

The company has flagged more restructuring in its clothing and food-supply chains and store estate. It has been overhauling its brick and mortar shops — including closing 68 clothing and food stores — but many of its outlets remain dated. That is likely to mean more investment. Indeed, capital expenditure will increase from about £300 million to £400 million this financial year.

Costly Decline

Shares in M&S have fallen this year amid cost of living concerns

The new management team’s first test will come this autumn, when household energy bills go up just as savings are depleted from spending on vacations. Although they are already taking steps to prepare — they’re ordering quite conservatively, for example — they should go further and rein in top-end price points in fashion. The Jaeger range, for one, looks too expensive. The leaders must not take their eyes off value-for-money in food, even amid the inflationary pressures.

That way, at least, their next catchphrase won’t be, “Never saw it coming.”