Making sense of Machin

There’s more to my personal affinity with Marks & Spencer CEO Stuart Machin than the fact that our respective parents both chose the ‘ua’ form of Stuart to put on our respective birth certificates. By the sound of it, both our first ‘proper’ jobs in life were working in a supermarket: stacking shelves at M&S in his case, and peeling price stickers off goods whose prices were increasing at another large food retailer in my case (a task I subsequently learnt was illegal at the time – hence my vow of anonymity with respect to my former employer). Perhaps it was this unwitting brush with the inner workings of UK inflation that drew me into a subsequent career as an economist, unlike Stuart Machin’s journey up through the retail ranks.

Anyway, I like what’s been happening at M&S under Stuart Machin’s leadership as CEO. There’s the share price, if nothing else: up from under a pound just a few years ago to (briefly) four pounds at the end of last year. Meanwhile, last year’s ￡672.5m pre-tax profit at M&S marked the company’s best performance since 2011. Yes, the company initially struggled to adapt to the new competition it faced online in the new Millenium. Nonetheless, M&S has only lost money once since the year 2000 (in 2021, thanks to Covid), while the CFO of the day dutifully signs the accounts fifty-something days after the end of the Financial Year (fifty-one days later in nine of the last ten years), with no financial restatements of any negative consequence in at least twenty-five years. Racy it may not have been, but tortoise-like M&S has plodded steadily along, overtaking many a one-time hare in recent years, never mind the more rapid pace of transformation the company has seen since Mr. Machin took the helm.

But in his recent Sunday Times piece, Mr. Machin rather complained that retail was “being raided like a piggy bank”, and that prompted us to want to look at some numbers to see just how much truth there might be behind the issues he raised.

First, Employer National Insurance. Here, we looked FTSE100 constituents presenting their financials in GBP, with most of their revenues arising in the British Isles (so sales in the Republic of Ireland are usually included), broken down between retail and non-retail (see Figure 1). On this score, retail got a really good deal out of the historic Employer National Insurance arrangements, saving on average close to 4% of its wage costs just on account of paying lower Social Security related payments to all those part-time staff earning under ￡9,500 per annum. It’s true: the changes announced in November’s Budget will undo at least some of this cost advantage that was previously in retail’s favour, maybe as much as half. But we should see this prior state of affairs for what it was: a special deal on Employer National Insurance that favoured retail, but that is now being withdrawn. So on this score, at least, it was Retail that had preferred access to the government’s piggy bank in recent years, not the other way around.

Figure 1

By the way, even within Retail, M&S eked out an even better deal on Employer National Insurance than most (Figure 2).

Figure 2

Next up: Business Rates. Here, Stuart Machin called for a ‘proper review’ of the existing system (he isn't the first person to do this, to be sure). However, it’s also worth noting in this regard that the government has been relieving retail from its full Business Rates obligations continuously since early-2020 to one degree or another, and what is currently proposed (at least as I understand it) is merely the withdrawal of this Covid-related support programme, four years on from the last lockdown that initially caused the enforced physical trading shutdown (and which many M&S stored were immune from). Like Employer National Insurance then, this measure – withdrawing an existing relief – is rather the opposite of treating retail “like a piggy bank” but instead stopping it from continuing to avail itself of a government piggy bank.

To further bolster his case, Mr. Machin points out that it is particularly hard for retail to swallow the proposed cost increases now facing it given profit margins of only “3-5 percent”. Here, one needs to delineate very carefully between non-Food and Food Retail (which M&S straddles probably more so than any other retailer, to be fair). In their latest Financial Years, Tesco, Sainsbury’s and M&S reported an (unweighted) average pre-tax profit margin of 3.1%, just as threadbare as Mr. Machin says. But Next reported an 18.5%pre-tax profit margin in its latest Financial Year, right up there with the average for UK-focused FTSE 100 non-retailers of 19.7% (see Figure 3).

Figure 3

When Mr. Machin and I were both last working in Food Retail (late 1980s, admittedly), it was M&S that paid its staff best among the big retailers (￡2.50 per hour!), and it also offered the best benefits. Yet some of this relative largesse appears to remain today. Almost alone among big UK PLCs, M&S reports more than ￡50m in annual expenses relating to “Employee Welfare and Other Personnel Costs”. Just to be clear, M&S isn’t alone in reporting “other” staff costs, nor are its overall Staff Costs notably out of line with its Wage Costs. But M&S is alone (to our knowledge) in appending the label “staff welfare” to this particular line item in its Annual Reports.

Then there is Extended Producer Responsibility, and also the long-awaited Deposit Return Scheme in England & Wales (let’s call it the Bottle Bank, just for fun), where Mr. Machin appears to want to see rather less action from the authorities going forwards, if not none. A critic might say of this suggestion that what Mr. Machin really wants instead is a continued subsidy with respect to his company’s use of plastic and carboard packaging. If that’s true, not only does Mr. Machin not want to Retail to be a Piggy Bank, but he also doesn’t seem to want it to be a Bottle Bank either.

Like the UK government, Stuart Machin has stakeholders to manage. In the UK government’s case, it set out expectations regarding both specific policies and also fiscal rules. But Mr. Machin now appears to want the government simply to rewrite them, and we do wonder what his own stakeholders would have to say if he himself did something likewise with respect to M&S stakeholders. Saying, for example, that he would like to phase the payments due to M&S creditors rather than paying them as previously promised certainly would go down badly. Some might call it default, even.

Don’t get us wrong about Mr. Machin. We like him, we continue to rate him highly, and we applaud the continued regrowth of M&S taking place on his watch. But we much prefer corporate titans of the like of Mr. Machin to make their case to the government privately, without interrupting our weekend reading. In the end, the government gives, and sometimes the government even takes away, whether you bless it or not, and often with a lot to do about jobs and profits, though strictly in our case of an economic and not a biblical nature.