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Marks & Spencer
‘Occasionally, you’ll find a human being who’s so talented that he can do things that ordinary skilled mortals can’t. I would argue that Simon Marks —who was second generation in Marks & Spencer of England—was such a man.’
—Charlie Munger, The Complete Investor
In 1923, Marks & Spencer was a growing, profitable retailer in Britain. From its humble beginnings in the late 1800s, as a small outdoor stall in Leeds, founded and run by Michael Marks (Simon Marks’s father), Marks & Spencer grew into a dominant retail force. By 1923, the company had £677,000 in annual revenue and pretax profits of £59,000. Annual growth in revenues had been compounding at more than 9% for the previous few years.
Most owners would be delighted to be running such a business; Simon Marks was not. Simon was aware of the looming threat of the American F. W. Woolworth Company. Later, during the 1950s, Simon recounted the Woolworth threat:
“The size of their stores, the wealth of variety of the goods they offered to the public at up to 6d per article, was breathtaking. It was only a question of time when their red signs would dominate the high streets of the country and their name would become justly a household name for value and variety. It soon became obvious that changes in our own approach were essential if we were to survive.”
Marks & Spencer’s early growth strategy was to achieve high turnover and low profit margins, selling mainly to the growing unemployed population of Britain. There was little to differentiate Marks & Spencer from newer competition. Michael Marks had originally been able to grow the business by focusing on selling quality wares at a fixed penny price point. However, pricing discipline had been lost after World War I brought on price inflation in Britain. Fearing that efficient competitors from the United States were going to wage price wars against Marks & Spencer, and likely win, Simon Marks made one of the most remarkable pivots in business history.
As early as the 1920s, before Simon Marks’s pivot and at the initial public offering of Marks & Spencer, an investor could have identified Simon Marks as a special human being, someone who had the traits of an intelligent fanatic. In the early 1920s, a director from F. W. Woolworth had visited a Marks & Spencer store and, after observing its merchandise, pronounced the merchandise “lemons.” Although he was agitated, Simon agreed that Marks & Spencer’s offerings could be improved. He needed to figure out what to do, or his father’s legacy and his family’s business would be squashed.
In 1923, Marks confided his anxieties to a distant relative in the United States:
“I told him of my anxieties. How did others in the States counter their opposition? Could the businesses live side by side and still prosper? He encouraged me to make my first trip to the States and promised to give me introductions to some firms who were operating successfully despite the same competition.”
Simon Marks took the trip to the United States and did exactly what Sam Walton would do to his competitors roughly forty years later. Marks was open to observing and learning, borrowed his competitors’ best ideas, and followed through with fanatical focus. Fortunately for Simon, U.S. businessmen were more than happy to show strangers how they operated. He later said of the trip, “I learned many new things. It was my first serious lesson in the chain store art.”
Upon Marks’s arrival back in Britain, Marks & Spencer’s board minutes from April 2, 1924, stated, “The Chairman gave an exhaustive report upon his visit to America and his views on the general aspect of the stores.” That exhaustive report included all of Simon’s learning points:
“I learned the value of more commodious and imposing premises. I learned the value of checking lists to control stocks and sales. I learned that new accounting machines could help to reduce the time formidably, to give the necessary information in hours instead of weeks. I learned the value of counter footage and how in the chain store operation each foot of counter space had to pay wages, rent, overhead expenses, and profit. There could be no blind spots insofar as goods are concerned. This meant a much more exhaustive study of the goods we were selling and the needs of the public. It meant that the staff who were operating with me had to be reeducated and retrained.”
It did not take Simon long to put each learning point into practice. His main goals were to focus on larger store formats; to reintroduce pricing discipline, imposing a five-shilling maximum; and to introduce the inventory management system later called the Checking List System. To combat the commoditization of retailing, Simon Marks also decided to focus exclusively on merchandise where Marks & Spencer could add value.
Due to the high capital needs of expanding a retail business with its larger store format, Marks & Spencer needed to raise a significant amount of capital. The board chose to do an initial public offering in 1926, after the superstore format showed positive results—9% CAGR in gross profits over the previous five years. The IPO prospectus said:
“The business was founded thirty-eight years ago and now owns and operates a chain of stores and shops in London, its suburbs and most of the principal provincial towns in Great Britain. Marks and Spencer were the pioneers of the penny bazaar business, but altered money conditions with their accompanying influence upon public taste made it advantageous some years ago to concentrate upon a better class and more expensive type of article. This policy has proved highly successful, and the inauguration of a series of “super stores” has resulted in a great expansion of profit . . . The additional capital resulting from the present sale of Preference Shares will provide for the construction and equipment of further ‘super stores,’ having an extensive area and scope for the display of goods upon the most modern principles of merchandising. The Company is at present operating a large number of ‘super stores’ and is rapidly developing along these lines.”
Many of the private investors of the Spencer family, who had lost control years prior to Simon’s appointment, insisted on taking cash instead of shares for the new public company. Only Agnes Spencer, the widow of Marks & Spencer’s cofounder Thomas Spencer, was smart enough to continue partnership with Simon Marks, taking shares in the public Marks & Spencer Company instead of cash. She declared, “I follow whatever Simon does.”
To put her decision into perspective, Thomas Spencer’s initial £300 investment roughly thirty years prior had increased five hundred times. However, Agnes did not take her profits off the table. Agnes proved to be a shrewd investor and was rewarded handsomely for her insight into Simon Marks and his business abilities. A portion of her roughly £400,000 fortune was contributed to the Marks & Spencer Benevolent Trust in 1957, to provide retirement benefits for non-M&S pensioners, and the remainder was put into the Agnes Spencer Charitable Trust.
Agnes Spencer was not the only individual to identify Simon Marks as a special businessman and to see that Marks & Spencer had a bright future. Lionel Fraser, the banker enlisted to market the public offering of Marks & Spencer, said, “We were very proud of our early connection with Marks and Spencer. Even in those days, it was obvious to us that this concern had genius behind it.”
Simon Marks had been left a company with a deteriorating moat and a growing list of competitors. He had the prescience and boldness to take a comfortable situation, a profitable, growing Marks & Spencer, and to take risks to build a long-term competitive edge. From that point on, it could have been observed that Simon Marks had only one task—to widen Marks & Spencer’s moat every day for the rest of his life and to provide investors with uncommon profits.
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