PRINT THIS STORY:

CHANGE TEXT SIZE:

U.K.’S DEBENHAMS, MARKS & SPENCER REGAIN LOST GROUND

By Curt Hazlett

Only a quick stroll away from each other on London’s Oxford Street, the flagship stores of Debenhams and Marks & Spencer look solid and traditional, as befits the two biggest and most respected names in British retailing.

But their unchanging facades are deceiving. In radically different ways, these department store chains have been remade over the past few years, becoming in the process the most talked-about retail transformations in Britain.

Debenhams’ rebirth came courtesy of the global boom in private equity, which led to the company being taken private in 2003. Leaner and more profitable, yet heavy with debt after three years of restructuring, Debenhams went back on the market in May in a much-watched initial public offering.

Marks & Spencer’s transformation has been more conventional but every bit as far-reaching. Under the direction of an aggressive new chief executive, the chain has cut costs, drawn younger shoppers into its stores and fattened its margins. The company is even toying with the once unthinkable act of changing the name on its storefronts.

Though the methods have been different, the result has been much the same: financial success. Debenhams’ IPO doubled the investment of its three private equity owners: CVC Capital, Merrill Lynch Private Equity and Texas Pacific. Meanwhile, Marks & Spencer’s stock has jumped 60 percent in the past year, and shopper visits to its stores have risen 23 percent. The reinvigoration of these venerable retailers is all the more compelling given their high standing among British companies.

Marks & Spencer was founded in 1894 and made its name selling exclusively British-made goods. Eventually, it became the largest clothing retailer in Britain and along the way a major food seller, as well. Marks & Spencer is now the largest retailer in the U.K., with 440 stores in Britain and nearly 200 franchised stores elsewhere in Europe, and in Asia and the Middle East.

Debenhams’ retailing roots go back to 1778, though its entry into the department store business did not come until 1919. (It was first listed on the London Stock Exchange in 1928.) Like Marks & Spencer, Debenhams became a retail icon — the second-biggest chain in the U.K., with about 100 stores there and in Ireland and nearly 30 franchises outside Britain.

Marks & Spencer ran headlong into trouble in the late 1990s. Its allegiance to British products made for prices that were higher than those of competitors’, and its merchandise appealed largely to older shoppers. The company’s refusal to accept credit cards or to operate on Sundays did not help.

All of that began to change following a hostile takeover in 2004. Though the bid failed, it left Marks & Spencer chastened. Management pared costs, strengthened merchandise lines and brought in a new chief executive, Stuart Rose, who focused on cutting prices and revamping the clothing line to attract younger customers. To strengthen the purchasing side, the chain opened offices in such apparel-making places as Bangladesh; Hong Kong; and Istanbul, Turkey.

Marks & Spencer also devised a new marketing slogan: Your M&S. The company slapped the words up over one of its London stores as a trial. If that goes well, the company says, all its stores could get the same treatment.

So far Rose’s strategy seems to be working. For the year ended April 1, pretax profits rose 35 percent while customer visits grew by 350,000 a week. Rose says the company will continue to tighten inventory controls, make its supply chain more efficient, improve service and modernize its stores. “M&S is beginning to regain its confidence, but we still have much to do to ensure that we sustain growth in the long term,” Rose told shareholders in May.

“Marks & Spencer seems to be willing to fundamentally challenge the recipe that it used in the past, which has been failing in all sorts of ways,” said Ian Clarke, a professor of marketing at Lancaster University’s Management School and vice chairman of the British Academy of Management. “They are experimenting with the formats of the stores and are putting a lot of effort into the merchandise mix. I think they’ve taken on board very squarely the criticism that has come through from the customers.”

Analysts have viewed these changes with favor. A recent Deutsche Bank research report said Marks & Spencer’s attention to fundamentals sets the company up for growth; the report also bucked the general consensus, suggesting that the stock market’s June pullback was a good opportunity to buy the shares. “The market perceives that M&S’s recovery has now petered out and it is no longer a recovery or growth stock,” the report said. “Frankly, we believe this perception is wrong.”

The Debenhams turnaround has been more complicated — and more controversial. The company was taken private in late 2003 following a bidding war won by Baroness Retail, a holding company created by CVC, Merrill Lynch Global and Texas Pacific. The sale price — £1.7 billion ($3.1 billion) — was supported by Debenhams’ management but vigorously opposed by many smaller investors, who considered it too low. (Debenhams’ three top managers owned a total of 10 percent of the company.)

The partners moved quickly to strengthen the company by sharply reducing capital expenditures and operating expenses. But their most audacious move may have been the sale and leaseback in February 2005 of all 23 of Debenhams’ freehold properties — some 3.3 million square feet of space — to British Land Co. for $913 million. All 18 of the new stores opened since 2003 have been leased.

The downside of the deal that took the company private was debt. The buyout was financed in part by borrowing, which also helped cover some $2.3 billion in dividend payments to the partners.

By most measures, the company that began trading again in May was healthier than the one delisted over two years earlier. Sales were 15 percent higher, and margins had expanded to 16 percent. On the other hand, debt was roughly 10 times greater.

The Debenhams IPO raised $1.75 billion. But it appears that institutional buyers were wary. Records show that of 10 institutions owning Debenhams shares in 2003, only three bought shares this time around.

Whatever the future holds for these retailers’ stocks, it is clear that the chains themselves have been fundamentally changed. “My sense of it [Marks & Spencer] is that people seem to be getting more interested in the stores,” said Lancaster University’s Clarke, who has done consulting work for the chain. “Clothing, for example, seems more fashionable now. In Debenhams, what’s notable is that there is much more of a boutique presence. They’ve been putting quite a lot of effort into changing the demeanor of the stores by getting some of the High Street boutique brands into them, so the makeup of the stores seems to be trendier.” All in all, he said, “now shoppers are applauding the changes with their feet.”