Comment: Marks & Spencer Faces Biggest Test Online

All eyes in the City of London will be on UK retail giant Marks & Spencer this week. Sales are expected to be down again. But observers should be looking for clues to the company’s future, not in its bursting stockrooms, but in its online sales.

Online spending is proving more than ever to be the saviour of forward thinking High Street chains. Clothing chain Next and department store John Lewis are two prime examples. Both have long established interest in the potential of online growth going back well over a decade.

At that time many at Marks & Spencer were still among those who gave the impression they thought internet was a fad. At most, something they would consider over time if their customers showed any interest. That came back to bite many a venerable old retailer (HMV to name one but clothing retailers were among the most guilty) and the British High Street is still suffering the consequences.

In 2007 M&S struck its deal with Amazon.com that would see the internet giant providing it with its online platform. Before then it did not have anything even approaching a comprehensive online offer – some home wares and other bits and pieces (read the 2006 annual report – the words ‘web’, ‘online’ or ‘internet’ merit barely a mention other than to direct people to corporate and shareholder information sources).

In 2007 then chief executive Sir Stuart Rose was talking about of sales of around £100 million (the actual figure was a little vague). He wanted sales of £500 million in five years. Last year it hit £559 million. So far, so good. But that is not to say it shouldn't have been far higher. Next's catalogue and online sales account for a third of its total revenue. For M&S that would be about £1.5 billion. The crutch in the form of the Amazon deal, some feel, has become more like a ball and chain.

New chief executive Marc Bolland in autumn 2010 said he wanted to deliver an additional £800 million to £1 billion to its internet sales by 2014 – next year. The company scrapped its entire set of targets less than a year ago because it said growth was being hampered by the recession. That growth target, looking back, seems ludicrously ambitious and would have required an estimated growth of around five-fold to £1.3 billion or more.

So, where are online sales now and where should they be? If they have exceeded £700 million by year-end (which happened last week) that will mean they have grown 25 per cent in the past year. That feels unlikely (they grew 18 per cent last year and half billion-pound units in any business usually face dwindling sales growth just by virtue of their sheer size).

Even so, that growth would only add 1.5 per cent or so to its overall sales, about 3 per cent to total clothing sales. Is that enough to counter a sales drop in its High Street clothing stores? Not this year. Maybe next spring when Marks & Spencer is released from its Amazon contract. But every year lost to under-achievement is another to catch up on later. The food business is going great guns for now but that won’t always be the case.

Marks & Spencer’s board needs to fix its online business and fast. The future isn’t waiting for them.