M&S puts squeeze on mid-market rivals

THE DECISION by Marks & Spencer to slash prices by 25% on its spring ranges will have been greeted by groans in retail boardrooms across Britain.

Price cuts are by no means new to clothing but the scale of its action, coupled with the changing face of the sector, could have far-reaching consequences, particularly for the mass market mid-priced players.

In no uncertain terms, M&S has laid down the gauntlet in the battle for market share. According to a survey by Goldman Sachs, entry-point clothing prices at M&S have fallen to just 11% above the market average compared with more than 40% last year, making it 5% cheaper than arch-rival Next.

The move by M&S is hardly surprising but it could not have come at a worse time for the rest of the nation's clothing retailers, particularly those occupying the middle ground.

First, the UK consumer is showing increasing signs of playing hard to get - as evidenced by recent poor figures from the British Retail Consortium which showed retail like-forlike sales falling 0.3% in February.

On top of this, prices have been dropping consistently for some time. Womenswear prices have fallen by a quarter since 1987 while overall clothing price deflation has recently hit almost 3%. Clearly, then, the M&S cuts are not just part of a short-term tactical price war but represent the latest move in a long-term market shift to lower prices.

So why are prices falling? There are a number of contributory factors but severe competition undoubtedly lies at the heart of the issue.

The supermarket giants are leading the charge towards rockbottom prices. Tesco has been selling 30,000 pairs of jeans per week at prices as low as £4. Asda, whose clothing prices are now 50% below the market average, is now the leading clothing retailer by volume.

The success of other value-based operators is also having an impact. Be it designer branded players such as TKMaxx or predominantly own-brand outfits such as Matalan and Primark, value operators have emerged as formidable competitors to the middle market following huge improvements in product quality.

Consumers have also played a part in driving down prices. We are more savvy and less loyal to any particular brands than ever before. Not only are we prepared to shop around and seek out bargains, we now demand them.

Finally, middle market retailers have had to respond to cutthroat competition by passing on their own efficiency gains to consumers in the form of lower prices. These gains have come principally from ever-cheaper product sourcing and the ability to move the products through the supply chain more efficiently.

How can retailers respond to this pricing pressure and the sector's changing dynamics? Ultimately, price deflation is not a problem as long as margin is not being sacrificed - easier said than done when retailers are already having to deal with incessant cost pressures such as rising rates and increases in the minimum wage.

Renewed cost-cutting initiatives across the retail set-up are ongoing but the potential for supply-chain savings offers the greatest prize.

New Look has been quick to spot the opportunity - in a bid to develop a truly world class supply chain, reduce lead times and offer even cheaper prices, it has pulled together a specialist team headed by founder and managing director Tom Singh.

No doubt turning China into a key market for sourcing will be on Singh's agenda following the lifting of quotas on textiles at the start of this year.

Others such as Tesco and Bhs are also making great strides in getting cheaper products through the supply-chain faster without comprising quality.

The upshot is that ultra-low or declining prices are here to stay - good news for the consumer but a constant challenge for retailers.

Add in the impact of supermarkets, the value players and the fast-fashion experts such as Top Shop, Zara and H&M, and the squeeze on the middle market can only become more intense.

Yes, successful retailers will be able to respond through an intense cost focus, flexibility and further supply chain efficiencies, but for some the clothing sector is going to be a perilous space to play.

? Tim Sleep is Head of Retail at Ernst & Young