Marks & Spencer: taking a gamble by re-entering Spain

Oct 15, 2009 (Datamonitor via COMTEX) -- MASPY | Quote | Chart | News | PowerRating -- Marks & Spencer has announced plans to return to the Spanish market, despite the fact that many retailers have shelved their expansion plans for the country as it suffers a severe economic downturn and rising unemployment. Against this backdrop, M&S also faces the challenge of confronting a fierce domestic adversary, El Corte Ingles, to which it lost out during a previous attempt to enter Spain.

With M&S losing share in its core UK market, the company has opted to take the international route to grow its turnover. As part of its international expansion drive, M&S has indicated that it plans to re-enter the Spanish mainland market. While the company retains a small presence in the Peninsula, with four franchise stores in the Canary Islands, it has not had a presence in mainland Spain since it closed and sold its nine stores in Madrid, Barcelona, Seville and Bilbao to El Corte Ingles in 2001.

In a bid to minimize the investment costs involved in the new venture, M&S will rely on franchise partners for its renewed expansion effort in Spain. York Limited is the franchise partner for its first new store, which is set to open before Christmas in La Canada shopping center in Marbella, Malaga. The 1,000 square meter store will showcase M&S' full range including clothing, homewares and food.

M&S' expansion into mainland Spain is likely to concentrate initially on the Mediterranean coast, tapping into ex-pat communities that live in the region. Indeed, there has reportedly been strong demand from customers in Spain on M&S' online site in recent months, so a distribution center and stores in the region could prove successful. The company has decided to act now as property prices have fallen considerably in the wake of the economic crisis and the weakness of the pound makes exports from the UK cheaper. However, looking ahead, M&S' real challenge in Spain will be to recuperate some of the scale it had before it withdrew from the market and gain a presence in the country's largest commercial centers such as Madrid and Barcelona.

While the new store in Marbella will likely be well received by nostalgic, credit crunched British ex-pats living in the Mediterranean coastal region, it is still uncertain how Spanish consumers, unfamiliar with M&S' offer, will respond to the returning business once it opens stores in other areas of the country.

Indeed, the timing of M&S' decision to re-enter the Spanish market could not be worse. Spain's economy is still in deep recession and unemployment is approaching the 20.0% mark. Retail sales are in freefall as consumers tighten their belts and cut back on discretionary expenditure. The only areas that are faring well are value and discount segments. As M&S will not go into Spain with a value offer, it is likely to suffer the same fate as other mid-market retailers, which have witnessed double-digit sales declines over the last year. The recovery in Spain will be slow and painful. At a time when many retailers already present in the market are questioning whether to stay or go, M&S is placing a big bet on expansion in one of Europe's toughest markets.

Besides challenging market fundamentals, M&S also faces stiff competition from a fierce domestic rival, to which it lost out once before. In Spain, El Corte Ingles effectively has a monopoly on the department store sector. The well established Spanish company trades from 69 department stores, with a presence in every major town and city and almost all regions of the country. M&S will have to change its tactics for the Spanish market as there is no way that it can compete with El Corte Ingles' scale and rigor. El Corte Ingles, whose brand is almost synonymous with retail in Spain, is in a completely different league to M&S in the country.

Furthermore, the department store operator's own struggles in its core market illustrate how tough it will be for M&S. El Corte Ingles' group sales for 2008 were down 3.5%, the first fall in the company's 70 year history, with the department store division declining 4.6% to E9.7 billion. With the outlook for retail in Spain extremely grim, Verdict is wary about the timing of this latest expansion effort. M&S pulled out of the market back in 2001 as its stores were losing money, and thus Verdict believes that the retailer's decision to re-enter in the current climate is questionable.

Source: Verdict Research

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