28th November 2016


17th September 2019

Perhaps the recent relegation of M&S from the FTSE 100 is in part a reflection of how much the shape and composition of the UK economy has changed over the last 30 years. At one time the fortunes of the company were often viewed as a barometer for the wider health of the UK economy. The long-lamented “The Money Programme” once ran an extended feature on the opening of an M&S store in Paris and how “sophisticated Parisians” were expected to react to a more mainstream “British” retail offer.

At the time, the company almost seemed imperious in the British high street. Unaccepting of credit cards other than its own, with a seemingly comprehensive understanding of the competitive environment and a reputation for quality at an acceptable and affordable price. In business schools around the world, MBA lecturers and students looked upon M&S as a model case study in how a company can get it right. 

Against this background one might think that ejection from the FTSE 100 is a development largely as a result of the hyper-competitive and fast-changing environment which has engulfed British retailing, the force of which no management team could possibly withstand.  Indeed, some might argue that this is nothing more remarkable than Schumpeter’s “creative destruction” whereby the composition of the FTSE 100 changes as the marketplace and business environment moves on and transforms.

Work published by Schroders (How the FTSE 100 has changed over 33 years – David Brett, 30 June 2017) reveals the following;

“From the time of its inception in 1984 at 1,000 points, just 28 of the original 100 remain listed on the index. UK-focused businesses and conglomerates have been replaced by international juggernauts.”

In other words, 72 of the UK’s largest companies back in 1984 are no longer part of the FTSE 100 index which, incidentally, is 2.6x the number of original constituent companies remaining within the FTSE 100. Notable ejections across a variety of sectors include:

  • Boots
  • The Burton Group
  • Cable & Wireless
  • Cadbury Schweppes
  • British Home Stores
  • Grand Metropolitan
  • Hanson Trust
  • Hawker Siddeley Group
  • Northern Foods
  • Scottish and Newcastle
  • Trafalger House
  • United Biscuits
  • George Wimpey

Some of the companies leaving the FTSE 100 have been removed due to mergers, de-mergers or an acquisition. For example, Boots which was founded in Nottingham in 1849 was taken private in 2007 when it was bought by a Swiss Private Equity organisation (Kohlberg Kravis Roberts) and Stefano Pessina. 

However, there is a danger that when viewed through this perspective, one might conclude that there is a degree of inevitability regarding continuing participation in the FTSE 100.

It should be emphasized that some companies have come out of the FTSE 100 due to poor management and strategy implementation.

The performance of M&S in terms of shareholder returns and profits is revealing. For example, a view of the company’s Total Shareholder Return (TSR) performance against the FTSE 100 index and Next plc reveals its sub-par trend vs the FTSE 100.

Since the end of 2014, the M&S TSR has lagged the FTSE 100 whilst in recent months Next plc, arguably a competitor, has forged ahead.  Given the length of time that M&S has lagged the FTSE 100, ejection from the index is neither a surprise nor particularly sudden.

Indeed, various profit measures reinforce the gloom.

Despite the falls in PBIT and Pre-Tax profits, the company is just on the right side of the line as defined by both measures albeit on much reduced scales. The picture changes significantly when all the costs of business are taken into consideration via the Economic Profit measure.

Economic Profit = Net Operating Profit After Tax (NOPAT) less a charge for ALL of the capital used by the business.

This is a more worrying picture of performance. Over the last four years, the company is not covering all of the costs of doing business.  Economic Profit (EP) has fallen from a position of value creation in 2010 with an economic profit of £217m to an economic loss of £380.3m in 2019.  Since 2016, the business has not been covering all of its costs of doing business.

From experience, we suspect that there are value creators and value destroyers within the portfolio, which do require different strategic remedies.  In fact, applying the same strategic agenda for the value-creating part of the portfolio to the value destroying elements would in all likelihood make the economic position even more challenged.  

If the management team is viewing performance through the inferior PBIT lens, there is a high likelihood that any strategic remedies or alternatives would either be wrong or at best be counter-productive.

Therefore, clarity of value creation and destruction using the correct metrics across the portfolio is vitally important to the successful development of the company’s strategic agenda. For a variety of reasons, we believe that economic profit, when applied to all of the company’s activities over time, provides that clarity.

In the graphic below, we observe a relationship between the rolling three-year economic profit performance between 2014 and 2019 and the total shareholder return (TSR) of the company on the capital markets.  This graphic strongly suggests to us that the capital markets are using current or recent performance as a base for their future expectations.

Given the decline in economic profit and TSR performance, one might expect a significant fall in gross margin over the period.

Not necessarily so. The gross margin level would appear to be reasonably steady.

Given the above, it is therefor fair to conclude that the decline in the company’s economic performance is not due to any pernicious fall in gross margin, certainly when using 2010 as a benchmark.  However, revenue in 2019 totalled £10.4bn against £9.5bn in 2010.  The economic profit performance of the business from 2015 is illustrated below.

Economic Profit movement is a not-so-insignificant £507.6m in the wrong direction, due to movement in Cost of sales and ‘Adjusted items’ values.

From the annual reports, it is difficult to uncover the reasons for the indicated “Cost of sales” increase totalling £221.3m between 2015 and 2019.  However, there is excellent disclosure regarding the “Adjusted items” line whereby expenditure has exceeded £400m in each of the last three years and over the last five years has reached £1,652.1m (£1.65bn). We have also included 2014 in the graphic below to give a sense of perspective with regard to the growth in such ‘items’.

The breakdown of ‘Adjusted items’ reveals some expensive strategic (re)programming (£1.21bn, 2014-2019) alongside other charges.

Like most things in life there is an issue of balance. Having expended £1.21bn over the last 6 years on “Strategic programmes” as part of the overall £1.69bn spend on “Adjusted items”, it would be difficult to accuse the management team of not taking the challenge ahead seriously.  Furthermore, they could be looking to “clear the decks,” and get the hard strategic choices over and done with whilst leaving the economic performance to improve over the coming years. 

We certainly hope so. The most recent Annual Report (2019) points towards change and improvement, as stated by M&S Chairman Archie Norman.

Highly capable management teams have come and gone with perfectly sensible plans and the long-term downward trajectory of the business has continued. Our failure to adapt, despite rapidly changing markets, means M&S now stands on a burning platform. So we are aiming to transform all the pieces of the jigsaw: the way we are organised, the way we work, our technology, our store base, our product, our supply chains and our value in the market.”

Whether the advice or the progress made is effective will ultimately be a judgement call for both the customer and the capital markets over time.  Hitherto the initial signals are not as positive as perhaps the senior management team would like:

Using the reported equity base as per the most recently released balance sheet, £1 of book equity is worth £1.17 at the end of August 2019 – 31% down from the position at the end of March 2019 of £1.69.  One might conclude that the capital markets are not expressing their unbridled enthusiasm for the current strategy by acquiring M&S equity capital.

Archie Norman was appointed as M&S Chairman in September 2017. He is undoubtedly an industry “big hitter” with an enviable and successful track record of corporate turnarounds.   In reading the 2019 Annual Report, there can be little doubt that there is an awareness of the need to change the business and move it forward.  In our experience, “the fish rots from the head” so the renewed focus from the Chairman is encouraging. 

However, as we have seen with Tesco (and is no doubt prevalent in other retail businesses), seeing the need for change and implementing it effectively are not always natural bedfellows. The Board and the management team will need to:

  • Re-focus the objective of the business in driving returns to shareholders; as well as considering a broader range of stakeholders
  • Understand more clearly what drives their share price on the capital markets
  • Have better visibility of the where’s and why’s of value creation and destruction in and across their businesses
  • Adopt a strategy process that works effectively
  • Align management reward more closely with driving returns to shareholders
  • Make large investments in developing senior managers to demonstrate sufficient “skill and will” to manage the value in the business.

Easy to say and difficult to do. We do hope that the business is successful.


Telling It Like It Is…

The cost of chasing football’s ‘Golden Ticket’.

23rd August 2019

As Dali might have said, it has been a surreal few days arguably being the “centre of attention”. In this, we are referring to our now-widely reported interaction with the EFL in 2017 given the recent and ongoing unfortunate events at Bury and Bolton.

The circumstances leading up to the infamous quote from the EFL of “Reports of this nature inflame the position and confuse the reality of the situation for supporters” were thus:

  • The second edition of our annual report into Premier League club finances was published during the summer of 2017. As part of that particular dataset going back to 2008, we could also see the economic profile of clubs which had gained promotion and those which had suffered relegation from football’s top tier (the Premier League).
  • Consequently, we applied our own proprietary measures to this data in order to establish the economic profit aspects of the various promotion campaigns and thus gain some insight into Championship financial dynamics and beyond.
  • At the time, we were very concerned at our findings and felt anxious enough to contact the EFL to express both our worries and also to offer our services in assisting the organisation in the potential formulation of a business strategy designed to alleviate the obvious problems at club level. After all, if there is a problem (and subsequent events have proved as much), surely it will need to be solved…
  • Naturally, we would argue that our work goes much deeper into the financial and economic performance of companies than a more traditional accounting perspective so we get to see a lot more detail than your average Finance Director.
  • Those familiar with our work will also recognise that ‘debt’ and ‘equity’ are not our primary focus. There are plenty of other sources for debt and equity information and we would expect the EFL to already have this information. In our presentation content, not once do we devote a slide to either debt or equity. In fact, why would we do so?
  • As many of our calculations and outputs are indeed proprietary, individuals on the receiving end of a presentation or data walk-through get to see the information for the first time – often there is a degree of shock or consternation as we tend to confront existing narratives and levels of transparency.
  • A letter was subsequently composed and dispatched to the EFL in September 2017 and to the organisation’s credit we received an email in reply shortly afterwards. The next agreed step was to have a conference call so that we could summarise some of our findings and explain the methodology that we had used.
  • During that conference call (with some of the EFL’s senior executives), our overwhelming impression was that the organisation’s key objective was more focused on preserving its image rather than trying to understand the problem or the implications of our work. Despite this, we arranged a presentation at the EFL’s office in London for the following week.
  • Many of the points raised by us in that presentation concerning the financial / economic direction of the game, the pool of clubs we felt that were going to pose problems from a financial perspective and the future challenges that the EFL as an organisation would probably face have either materialised or will emerge in the near future. Indeed, the last slide in the Oct. 2017 presentation is illustrated below:

Sadly, for all concerned, the EFL chose not to engage further and as part of Matt Slater’s story later that week about our report, the organisation chose to issue that reply.

Almost two years later, clubs struggle to pay bills and field teams whilst the competition organiser tries to regulate with a set of rules that clearly do not fit the operational requirements of the modern game. The area of football governance is crying out for reform and our data merely continues to confirm this view.

We have always been keen to re-engage with the EFL.  Indeed, following recent interviews broadcast on BBC News whereby Debbie Jevans, Executive Chair of the EFL, and our own John Purcell appeared separately but in the same report, we put a call into her office. That call has not been returned.

From our perspective, Debbie Jevans is in an extremely difficult position and deserves some sympathy. She has inherited an organisation which would appear to have lost its way but has almost certainly lost the trust of football supporters. The events described above took place before her tenure so it really is somebody else’s mess which she has to contend with.

However, our own frustration grows daily. We could see these events coming. Similar events will happen again. We remain eager to help.


5th July 2019Chopping Board – Knives out for former Tesco chief

25th May 2019 – Repeat Prescription – Few believed us the first time around regarding football’s financial plight…

19th March 2019Stuff and ‘Nonsense’ – Why the Economic Profit metric is the most transparent measure of business performance

13th March 2019Financial Fair Play – Guilty as Charged? – Our thoughts on FFP schemes and their key weakness

18th December 2018Long Division – The Post-Ferguson years at Old Trafford have come at the expense of declining economic and on-pitch performance

20th November 2018The Relegation Game – Tales of woe and economic performance at the wrong end of the Premier League table

9th October 2018A Different View – Why fans ought to be acutely aware of football’s financial dynamics

17th August 2018The End of the Beginning – La Liga heads west to conquer new worlds

9th August 2018Reaching for Sky – the sequel – Latest offer price for satellite TV company is good for shareholders, less so for prospective owners.

8th August 2018American Dreams – English Premier League economic dynamics and American money – is a Euro Super League the next step?

3rd August 2018Mall Administration – Retail Property Co. bonus payouts at odds with increasing shareholder value.

20th April 2018Goonernomics Part Deux – The departure of Arsene Wenger…

18th April 2018The Price of Everything – Tesco’s latest numbers offer little in value.

12th April 2018Say What? – WPP’s very mixed message.

14th February 2018In Case of Emergency – Premier League’s UK TV rights auction comes up short.

7th February 2018 – Lost in Transmission – Top Premier League clubs look beyond domestic TV rights.

4th December 2017A Billion here, a Billion there… – The Premier League reaches a major milestone, quietly…

25th November 2017Getting out of Toon. – Is Mike Ashley pitching the sale price of Newcastle United at the right level?

16th October 2017 – Goonernomics. How the ‘Bank of England’ club falls short of its North London neighbour.

25th September 2017 – Highlights. More record-breaking numbers from the biggest football club in the land, but no economic profit…

23rd September 2017Football’s Economic Back Pass. A guest blog for the Soccernomics website.

12th September 2017 – Crystal Balls-up. Changing strategic direction is not a good idea when you haven’t looked at the economics.

27th July 2017Football’s Summer of Money and the £65 pint of beer. The sport that just can’t spend enough.

11th July 2017Football Special. Observations following the launch of ‘We’re So Rich…’

9th May 2017Illuminating, non? Political energy lacks vision and power.

2nd March 2017Claudio’s Burden. The price of failure outweighs the price of success.

12th January 2017Shopping for Godot.A never-ending quest for value in Retail.

27th December 2016Reaching for Sky. Is Rupert Murdoch’s £10.75 per share a fair price?

6th December 2016Auld Lang Syne. A reminder from history of the damage that poor financial planning can cause.

1st December 2016Fork Handles? Four Candles? Tesco’s blurred strategic vision.

27th November 2016Football’s Instant Replay. Financial warning signals for the top English Premier League clubs.