A tale of two retailers

Oxford Street, London, last week: Primark's flagship store was heaving, and hordes of tourists stood outside with the value-fashion giant's increasingly ubiquitous brown paper bags. But on the opposite street corner, at Marks & Spencer, tumbleweeds were blowing through its ground floor.

Yesterday, the numbers put out by M&S and Associated British Foods (ABF), which owns Primark, lentfurther support to the view that Primark has been powering ahead during the credit crunch while its rival has been taking a pounding.

M&S said its like-for-like general merchandise sales, of which clothing accounts for the overwhelming majority, tumbled by 6.2 per cent for the 26 weeks ending 27 September. Incontrast, ABF said that Primark'sunderlying sales grew 4 per cent for the year to 13 September and that,crucially, the growth was the same across both half-year periods. Of course, M&S, which generates half its sales from food, and sells clothing at significantly broader price points, is a different beast to Primark's volume and price-driven value offer.

But the stark difference in figures from the high street's two biggest clothing retailers by volume raised the question: why is Primark powering ahead during the credit crunch and why is M&S taking a beating?

Certainly, M&S seems to be heading for a rough ride until at least 2010, as the UK headstowards an inevitable consumer recession. For the 26 weeks ended 27 September, M&S's total adjusted pre-taxprofits fell by 34 per cent to £297.8m.

Sir Stuart Rose, M&S's executive chairman, said that trading since the end of September had been "volatile", which some City analysts translated into "awful", although its clothing sales benefited from last week's cold snap.

Sir Stuart said: "It is not a surprise that during the recent shenanigans on the [financial] market people were staying at home watching TV."

However, ABF's chief executive George Weston said that since 13 September Primark's underlying sales had continued at a "similar" level: "The things that affect our sales in the short run are the weather and thequality of our ranges. We are still trading well."

For the full year, Primark's profit increased by 17 per cent to £233m, although its profitmargin eased off from 12.5 per cent to 12.1 per cent.

Mr Weston denied that hiscompany is benefiting because its younger customer base is under less financial pressure fromrising mortgages and utility bills. Mr Weston said: "Our target market is 13 to 35-year-olds – women in particular – with children. I don't think that is a cash-rich group. We are not seeing muchdifference in different regions or demographics."

Of Primark, Nick Bubb, the Pali International analyst, says: "Their key skills are in buying to a price. They have got fantastic sourcing skills."

While City analysts believe Primark's growth may taper off over the coming year, Primark's strategy of selling fashionable products at extremely low pricing seems to make it less exposed to a downturn.

In contrast, as Sir Stuart never tires of saying, M&S is "the broadest church in the land", meaning it aims to sell clothes to most of the UK's population,although their core customer is much older than that of mostfashion retailers. He said that M&S "marginally" lost market share, based on value, or money going through the tills, in menswear and womenswear, but grew market share in lingerie and kidswear.

Across clothing and footwear, M&S's market share by sales value fellslightly, to 9.9 per cent for the 12 weeks to 14 September, down from 10 per cent in the same period last year, according to TNS FashionTrak. But by volume of sales, its market share edged up to 10.7 per cent, from 10.4 per cent a yearearlier. Sir Stuart said: "The benchmark for the business is that if you can maintain market share in a decliningmarket – because it is a declining market in a recession, you cannot defy gravity – that is not a bad place to be, and we want to do that on the basis of being a quality retailer."

For the 12 weeks to 14 September, Primark's market share in terms of total value of sales fell from 2.7 per cent to 2.5 per cent, while its market share by sales volume fell to 8 per cent from 9.1 per cent, according to TNS FashionTrak. However, Mr Weston vehemently denied that Primark's volumes or value had fallen, saying there are "no weak areas".

To a degree, City analysts say that M&S is a victim of the consumerrecession, but others believe it hasinflicted some of its own injuries.

Tony Shiret, the Credit Suisse analyst, said: "I think they have lost the confidence of mid-market customers. The positioning of M&S has changed quite a lot over recent years." He added: "He [Sir Stuart Rose] has not really done enough product development away from the premium lines."

For instance, Mr Shiret says that M&S's Per Una range has "gone off the boil" and its premium Autograph range, which is M&S fastest-selling brand, can sometimes lack availability.

Asked about Primark, SirStuart came out fighting and said: "Primark do what Primark do. M&S do what M&S do, and I don't see a weakness."

In fact, M&S is not the only fashion retailer who wants to avoid a direct scrap with Primark.

As Mr Weston says: "Our autumn range is better than last year, and at our prices they can buy what they like, such as a men's shirt from £3. I suspect that, given the growth, we are taking customers from all over the place."

Not so rosy

After Sir Stuart Rose got the top job he had always coveted at his former employer M&S in May 2004, he quickly set about revitalising the struggling high street giant, but stubbornly refused to use the "recovery" word for some time. Many saw his achievement of delivering annual pre-tax profits of £1bn in May as the crowning achievement of that recovery, but by that time the credit crunch and the sales rot at M&S, along with much of the high street, had already set in. Alongside how he manages the downturn, a key decision for M&S in its next financial year will be whether to cut its dividend. Nick Bubb, the Pali International analyst, says: "A few months ago, I thought a dividend cut would cost him [Mr Rose] his job, but now everyone is cutting their dividend. It looks almost certain it will have to be cut."