Good morning, and welcome to Marks & Spencer 2022/2023 half year results analyst Q&A. If you would like to ask a question, please signal by pressing star one on your telephone keypad now. Once again, press star one to ask a question. I will now hand over to Archie Norman for any opening remarks before we begin the Q&A. Archie, please go ahead.
Well, good morning, everybody. It's Archie here. I'm here with Stuart, Katie, and Eoin, all on standby to answer your questions. We're in our nice tall building in Waterside in Paddington. Look, you've all seen the film and the statement and so on, so I'm not going to repeat any of that. We're gonna take 45 minutes for questions, probably. If I can ask you please to, I know you've got lots of questions to ask, but we could do two questions each. You know, you can always come back if you want later on. Please introduce yourself because we know who you are, but not everybody does. I thought we'll just crack straight on. Now, shall we start with Charlie Mills from BNP Paribas? Charlie.
Ian, and everyone for taking my questions. I guess you introduced me already. I'll stick to two questions as you've requested. The first one is on the Clothing & Home side of the business. Obviously, there's a lot of moving parts in the sort of supply chain outlook. The dollar's clearly gonna build against you with respect to any headwinds as your hedges move forward. But I just wondered about everything else, what you're seeing with respect to factory prices, freight rates, and so forth, and therefore what you think is likely to be the outcome for next year. Then also secondly, a broader question on next year. You've clearly flagged that you think that the market environment is gonna be more challenging, but you've identified a very large number of cost savings.
I just wondered how you conceptually think about the trade-off between your market position, price competitiveness, and profitability in the year ahead. Thank you.
Yeah, well, let's take the first. Katie, you might want to. I mean, look, on sourcing and sourcing costs and supply chain, obviously it's something that everybody's watching very closely. It's extremely difficult to tell. I mean, the sterling devaluation against the dollar has changed again a bit for us. Katie, do you want to ramble on?
Yeah, morning, Charlie. Thanks. Thank you for the question. I'll try and not ramble on, actually. I'll try my very best not to. You asked a question on freight rates. Actually we've seen freight rates starting to drop. Obviously there was an all-time high during the pandemic when, you know, you couldn't get containers out of ports. Boats were sort of turning around depending on what people were paying. We've really seen that reduce substantially, and we'll renegotiate those again further to pass those cost savings on and through to customers. In terms of headwinds, we've still got a little bit of inflation in raw materials. There is a headwind on FX, as you know, and as you rightly called out.
We are very keen to work in partnership with our suppliers. I do think there's opportunity for us in Clothing & Home to work more strategically with our supplier partners to run more efficient manufacturing and flow the product more effectively, and I think that will help us in terms of cost price, and very importantly, making sure that we retain our position as number one in terms of value for money for customers. That's very important to us. We did mention in the cost savings that we will work very hard to ensure we deliver some cost efficiency through our supply chain, where again, I think that's quite a lot of opportunity. Thanks, Charlie.
Eoin, did you want to comment on the?
No, I think that's all right, thanks.
Shall I just chip in on the year? I mean, good morning, everyone. It's Stuart here, and thank you, Charlie, for that. I mean, just to build on that, as we think about the next 12 months, of course, we're quite clear-eyed, but there's a couple of things we are taking action on. One, Katie talked about the cost, and on the Investor Day, we talked about our GBP 400 million target over these next few years. We've got line of sight next year to GBP 150 million. That does cover a number of areas from retail operations, supply chain for both Clothing & Home and food, simplifying the operations in the store support center and some of the other areas like technology, property, energy, and marketing. We're quite focused on taking action around costs.
I think what is important is we do want to retain our number one value perception on clothing, and we do want to retain the progress we're making on value in food as well. We're going to support value in both our businesses, but we've got quite a few levers in order to protect the P&L.
Great. Thank you very much.
Thanks, Charlie. Anne Critchlow.
Two questions, please from me. Firstly, on the transfer of sales from closed stores, what percentage goes to nearby stores, and what percentage goes online, please? Then secondly, on-
Let's answer that, and then we'll come to the next question. Stuart, Katie?
I mean, I should rather help on that question because it's a very hard question to give a sort of very specific answer because it depends obviously on the closure location.
I mean, typically about a third.
Yeah.
Yeah, typically we aim for about a third and it really depends a little bit on as I say, the location. Increasingly we're obviously getting more capture and online and maybe actually Katie can talk about things we've been trying to do to improve that.
Yeah. It's a great question. One of the things that we've been doing, you know, if you go back two or three years, we didn't do very much to recapture. We put a sticker poster in the store window and said, "We've now moved," leaving the customer to work out where to go, candidly. We now have a very strong communications package that we deliver, but it's actually underpinned by the amount of data that we have. Because of the number of Sparks customers we have, we know who those people are, we know where they shop, and we've got very high conversion levels. We can drive behavior across the two categories through delivering offers to encourage customers to go and visit the other stores.
Great. Thank you. Secondly, you talked in the presentation about introducing consignment drop ship sales to the third-party brands. Just wondering if you're aiming to get to basically 100% drop ship eventually, and you know, a bit more color around how you're doing that. Thank you.
Yes, of course. Listen, this is a labor of love for me. We started our third-party brands business last year. It's a bit Heath Robinson the way that we do it. We are very, very excited to be getting drop ship rolling out, which we hope to do at the start of next year. I would like eventually imagine that we would end up with nearly all of those third-party brands on drop ship. It protects the stock position. It allows you to move the product around. It facilitates a quicker returns process. That's sort of the direction we were heading. We'll obviously start by trialing it with 2 or 3 of the brands first of all, and then build up from there. Thanks for the question.
Thank you.
Thanks, Anne. Now, not least because he's the only person I can see on the screen who's been around nearly as long as me. We need to go to Tony Shiret.
Thank you, Archie, for those few kind words. Yeah, just a couple of things. I wondered in terms of the Clothing & Home online, you've made some comments about the operating margin relative to the overall clothing business in the past. Last seen, I think it was in line with the overall margin. I take it with the increase in sort of lower margin third party brands, it's now below that. Is that fair to say? I just wonder where you think the online operating margin in Clothing & Home is gonna settle relative to the Clothing & Home total margin. I'll give you another question in a sec after you've answered that one.
Yes. Thanks. Thanks, Tony.
Tony, I'll have a go and then I'm no doubt Eoin will have a go as a follow-up. There's a couple of things which are impacting online at the moment. The first is that we over-index on third-party brands online, quite substantially. The majority of our third-party brands come through the digital business, and the margin is diluted of third-party brands, but we think the customer is incremental to M&S, and we know the customer is incremental. Those third-party brands have a slightly higher return rate than Marks & Spencer's product because customers know Marks & Spencer's sizing. The brands have various different sizes and cutting blocks, and so there's a variety in terms of that.
The third area is that we've put substantial investments into digital and obviously a lot of that goes into dotcom and dotcom experiences, whether it's the question we were asked earlier on about investing in drop ship, whether it's investing in the app, a lot of those costs are borne by the online P&L in the business. Finally, and we mentioned this earlier on, we're looking at supply chain savings. There's substantial savings that we need to deliver through supply chain, and clearly that will also impact the online overall performance. Do you want to comment?
Yeah, no, I think that's the perfect answer, actually. I don't think we'll give a specific kind of guidance in terms of what we think the relative performance will be, but I don't think the gap should be as kind of wide as it would've been in the first half. Reflecting the areas that Katie just said.
The gap is sort of 4 or 5 percentage points. Is that sort of roughly the order?
Yeah, that's exactly what it was in the first half.
Okay, lovely. My second question is also about online, but food online. Ocado, same sort of question really. I mean, just wondering about marketing within Ocado Retail, and what sort of level of marketing spend there is relative to sales. As time goes by, I presume you haven't really had to market very much historically. Whether you think that your marketing is actually gonna become a more meaningful sort of factor and more meaningful percent of sales to Ocado Retail. That's the question.
No, very, it's a very good question, Tony. It's something actually, funny enough we were talking about yesterday because clearly, you know, a year ago as you say, marketing wasn't the issue and that was how you allocate slots because in effect you were rationing. This year has been totally different. It is already. Stuart, do you want to?
Yes. Thank you. Thank you, Tony. I mean, I'll start with saying we're actually confident in the medium to long term of Ocado. We think it's as I said at the investor day, I don't think we've scratched the surface yet, and Hannah's got her work cut out no doubt, but we were very keen to see a reset. To your question on marketing, I mean, it's a bit higher than we actually would want. It's a bit too high. It's been running about 3% of sales and that has been 150 basis points higher than last year. As part of the review and reset, Hannah is looking to drive better ways of customer engagement.
Plus I think there's work, you know, more opportunities for us to work closer together with M&S to unlock the M&S customer base as well, and not just rely on just TV advertising. It's definitely part of the reset agenda, Tony.
So you-
Tony, can I add to that? You know, we think, as Stuart said, that we understand specialist service, that there is a lot we can do with the combined M&S and Ocado resource to help with the marketing. Funnily enough, Katie and I were just looking at search terms on the marksandspencer.com. One of the high frequent sales search terms you get on marksandspencer.com is Ocado.
Ocado, yeah.
Tells you straight away, you know, because we haven't, you know, hardwired those two together. Ocado marketing needs to be data-driven, and that means that probably there's a bit less TV advertising, as Stuart just said, and a bit more forensic data-driven. You know, we're not looking for general customers, we're looking for very specific customers for Ocado.
Do you think therefore that marketing costs longer term will come down or go up as a percentage of sales?
I think they will come down, Tony. Basically probably around 2% of sales by understanding some of Hannah's strategy at the moment.
Thanks.
Anyone want to add? Okay. Thanks, Tony. Now, while we're on the background theme, we better go to the great Clive Black.
Feeling very spring chicken-ish tonight after hearing Tony, Archie. Thank you very much. I'll just ask one question. The food margin was perhaps a little bit lighter than we anticipated in H1. Maybe could you give us some color where you see H2 going, if you can? Equally, the Clothing & Home margin was actually very robust in H1. I just wonder if that is the way you see the run rate, because you talked to us about an aspiration at the Capital Markets Day for a 10% margin. That would be most helpful. Thank you.
Well, I'll kick off, Clive, and Katie can chip in as well. Just dealing with food. I mean, we took action in the first quarter, and we made the decision to invest in value and not pass through the whole rate of inflation. We did that in order to keep our shape in the market. We felt that was critically important. The other thing to note is from Q1 to Q2, there was a 40 basis points improvement as we started to pass through inflation as well. We're pretty confident that the second half will deliver sales in line with our expectations, but also an improved margin into the second half as well. I think there's another couple of things just to call out on food. Obviously we invested in price for customers. We kept our value shape.
We think that was the right thing to do for all stakeholders. We did have a small amount of waste and stock loss higher than we anticipated, so we were slightly disappointed in that first quarter one performance. We also had logistics annualization costs over 1% overall cost growth in the half. Therefore, I think acquiring Gist was also quite a big thing for us because we wanted to get control of one of the biggest cost levers in the food business. I think that sets us up better, not only in H2, but also, further out as well. I'll let Katie comment on the clothing margin.
Yeah. Thanks, guys. I mean, my medium-term aspiration is always to target a margin of double digits, as you know. Absolutely determined to get there. I think there are a few headwinds we have to face into over the short term anyway. You know, dollar exchange rate, we talked about that earlier on, making sure that we manage our cost base effectively as we go into the second half and beyond. I think there are a few choppy waters ahead for the next period of time as we expect some of those costs from our suppliers to be passed on to us. But over the medium term, absolutely aiming for double digit, 10%, definitely.
Thank you. Can I just ask a supplementary to that, Archie, to extent that are you harvesting the Gist benefits now? What's the timeframe for sort of full, reaping of that reward?
Thanks, Clive. Well, Stuart will respond to that. I mean, it's very early days. We only actually technically completed the acquisition, I think about 3-4 weeks ago.
Yes. A month ago.
Yeah.
Yeah.
Yeah.
Just to build on that, Clive, thank you for that. The first thing is the management fee was removed from completion. That management fee is GBP 25 million per annum. That obviously stopped. In addition to that, we get a small amount of primary income, and we do think there are some synergies over the medium term. I think what's really good is the management team continue to stay in place. There's a very good way of working. I'm quite enthusiastic about how this could really accelerate the food transformation. It's a cost thing, but also a supply chain availability and all the other associated costs with it. I'm quite excited about things we can do.
As we said in the investor day, it's a GBP 50 million, medium-term target in cost savings, so a GBP 50 million annualized benefit in about year four or five. Thank you very much, Stuart. That's great. Appreciate that.
Thanks, Clive. Now, we'll go to Richard Chamberlain and then Simon Bolton. Richard.
Yeah, thanks Archie. Morning, everyone. Couple from me, please. First of all, I wonder what your sort of internal surveys are telling you at the moment about consumer appetite for Christmas and peak trading. Yeah, anything in terms of sort of trading down potential or people alternatively sort of treating themselves over the period. That's the first one.
Okay.
The second one.
Richard, let's take your first one while before amnesia sets in. It's a great point. We got lots of stuff on anecdotal stuff and survey stuff on Christmas. Stuart, do you want to-
Yeah, I mean, thank you, Richard. I mean, we're quite encouraged. It might change as we go into the new calendar year, but all of our customer insights and data and listening groups are really saying our customers are looking forward to a good Christmas. In fact, it's more positive than it was last year. Over two-thirds of families that we survey, you know, 67% of our family survey says they want to protect Christmas celebrations and be with their family and make the best of it. I think there's also some good stats coming out that over half of our customers are saying they're going to reduce spend on eating out, but they are looking for value. I think that's where we are set up very strongly.
I mean, even in our food and our gifting, we've done so much work on quality, but also value. I think we're well set up on Christmas Food to Order in our food business. That has already got off to a pretty good start, I mean, significantly up on pre-pandemic levels. That's good. We've invested in value for key Christmas lines as well. That's in addition to the Remarksable Value campaign in our food business and the Lowered Price campaign in our food business as well. In broader terms, in gifting, we now have 30% of our overall gifting under GBP 10 and 70% of our gift shop across stores and online at GBP 20 or less. We can be quite confident that those sales are going well. We think we're well set up.
Our customer feedback is saying they want to celebrate over Christmas, and we're doing everything we can to win in the market.
Okay, thank you. That's very helpful color. My second one is wonder what your sort of planning assumption is for staff cost inflation for next year. I guess another way, we have to sort of wait to see how the minimum wage shakes out and then expect you know M&S staff costs to go up in line with that.
Yeah, Richard, obviously, it's a very big question. I'll let Stuart respond directly. We can't know that fully until we get into March, April next year. I think the minimum wage issue is a big issue for government now. I mean.
Mm-hmm
Now the government's taken upon itself the decision about minimum wage. It used to be left for Low Pay Commission, and it's a time when, on the one hand, you want to give people at that, you know, the lower end of the income bracket an uplifting income. There's a lot of political pressure around it. Be interesting to see. This year, Stuart, we're at 7.5%?
Yeah, there's a 7% uplift. I mean, just to build on Archie's point, Richard, we invested GBP 15 million to support our colleagues in this cost of living crisis, as you probably know.
Mm-hmm.
I mean, 40,000 of our colleagues had an hourly pay rise that took them to GBP 10.20, and that's a 7.4% uplift over the year. In addition, I mean, we didn't necessarily plan for that before, but we are planning now for what that might look like next year in terms of inflation. I think that's why we're also taking action on our cost out plans in advance, so we're almost ready for that. We do think we're pretty competitive on the GBP 10.20, and we also have supplemented. We know we have the good discount for our colleagues at 20%. We have some other benefits as well, helping our colleagues in our stores in particular and our distribution centers. We are planning now, hence our cost out program to get ready.
It's hard to see wage inflation that end of the market running below 5% for next year. You know, I'm not making a forecast, but yeah, I think we can all see the same thing. Yeah. Okay. Thank you.
Okay. Thanks very much, Richard. Simon.
Bolton, Numis. I'll go for a couple, one at a time. First one's a super quick one, hopefully. Just, when that GBP 150 million cost saving bridge, does that include the Gist Management Fee? And how many other parts of that bridge may be directly associated to the work you're doing around Gist?
Yeah, good question.
It's a good question. Why don't I give that a go? It doesn't. No, I mean, it's really cost efficiency initiatives, right? I mean, the loss of management fee wouldn't be in that space. But there are areas in the GBP 150 that are kinda related to how we can kind of, you know, things that, as Stuart's always spoken about, how we can leverage the Gist ownership and how we can kinda drive more efficiencies, particularly in the.
In the network. Yeah, it partly in there, but not the management fee.
Correct.
Just a word on Gist as context. As Stuart has said this earlier, it on the one hand, there's some immediate benefits for management fee, et cetera, and there's some good work going on integration and some issues, things we can do on transport, probably, et cetera. We should see Gist as a long-term program. You know, the reason why we're taking control of it is to enable us to rebuild the network over time. It has to be the right thing to do, but it does mean there's going to be some expenditure as well associated with that. Sorry, Simon, so you've got another question.
Yes, please. The second one was just, it sounds like with respect to that GBP 150, you've been doing a decent amount of work on kind of P&L opportunities going into fiscal 2024. Is there anything from a cash flow perspective, in terms of areas for kind of savings on CapEx or working capital that we should be mindful of, both across the second half of this year, but also as you look into fiscal 2024?
Yeah, actually, well, I wanna have a go at that. I think from a CapEx perspective, I don't think there's anything outside of the envelope that we sort of have been guiding to. I think a large amount of what we've, you know, what we've been spending on has been actually focused on driving efficiency in, for example, in our supply chains. That includes technology spend in areas like forecasting, et cetera, and so on. I don't think there's gonna be much outside of the kind of the capital envelope that we've been guiding to.
There might be some one-off costs in the range of sort of, you know, GBP 20 or so million type of thing to help support the cost efficiency initiative, as you'd expect there will be.
Okay, great.
The payback on those would be obviously very, very strong.
Can you give any sense, kind of, obviously, a decent working capital outflow in the first half for reasons we understand, but where your head's at with regards to kind of full year with that regard, or is it a point in time metric, so not the easiest?
Yeah, it's always hard to do that. I mean, we did expect, I mean, that there would be a working capital outflow this year, largely because of the contraction in payment terms for our Clothing & Home suppliers. In this half year, we did have a higher level of stock than we would've hoped to have had certainly at the statement date. Some of that is phasing. Some of it's actually inflation that impacts both Food and Clothing & Home. In general, stock flow has just been actually a lot better in Clothing & Home, which has meant that we've actually received stock earlier than we had originally planned for.
Okay, great. Thank you.
Thanks, Simon. Let's go to Jamie Fletcher, and then we'll go to after that, Jeff Lowry. Jamie.
Hi. Morning, everyone. This is Jamie Fletcher from the Analyst. Just one question from me. With the recent falls in equity markets, a lot of your peers have launched share buybacks, and I guess those management teams seem to think that valuations are compelling at these levels. Given the balance sheet is in the best shape in years, why haven't you launched a buyback?
You know, Jamie, it's a good question. We said in a statement that the board, you know, is looking at all the capital allocation issues. Given the amount of uncertainty in the environment, you'll understand that we've taken a view that we're not going to take a view just yet. We will have more to say that by the year end. I think chairman ruminating on the share price is not very interesting to anybody. I mean, we think our share, you know, we think we're very undervalued as a business, and we trade on a substantially low multiple of EBITDA. But there's no point in us banging on about that.
You know, markets are where they are, and we're a sort of metaphor in the markets to U.K. consumer retail, and that's not the most fashionable place to be. Stuart, can you
Yeah.
Do more elucidating on it?
Not really, but I mean, look, Jamie, we're always thinking about capital returns, and the priority for us at the moment is business improvement, growth, and we know we have plenty of opportunities, and we all know that. I think the balance sheet, you know, it's in good shape, but we're mindful, as Archie said, of the uncertainty. We recognize at some point we need to start capital returns.
Okay, anything else, Jamie?
No, that's great. Thanks very much.
Thanks. Appreciate it. Jeff?
Yeah, morning. Just one question, please. Do you need to own the entirety of Ocado for it to fulfill its potential? When are the decision moments for you around that? Thank you.
Well, Jeff, you know, straight for the jugular as usual. We honestly don't, you know, well, I anyway, my attitude is I don't think we should be worrying about that right now. As a board, you know, it's a question that comes up, but I don't encourage people to fret over it. We're really pleased to be in the joint venture. You know, if you go back four years, we never thought it'd be possible. You know, the moons aligned, enabled us to do the deal. We're very excited about the future. It's been a bit of a bumpy ride to date, both ways. Ocado are very committed to it. Tim Steiner is very committed to it. We're very committed to it. It is what it is.
as Stuart said, we have only just begun to scratch the surface.
No, I think that's right, Archie. I mean, Jeff, I don't think we have to own all of it. But I think it's how we take advantage of both strengths, the M&S brand and the Ocado Group technology. As Archie said, and I've said many times, we've only just scratched the surface. I don't think we have to own it all to realize all of the opportunities and the benefits. You know, the short term in the next 12 months might be a bit tricky for Hannah and the team, but we're very confident in the medium to long term of the JV.
In theory, Je ff, there's nothing that we can't do through the joint venture that we wouldn't be able to do under different circumstances. Joint ventures are sometimes hard work. I mean, we know that it's a bit more complicated, but having the absolutely wholehearted commitment of Ocado Group and Tim Steiner, you know, it is their showcase, actually, there are advantages in that too.
I mean, the bottom line is, are you really comfortable half the incremental value you bring to it leaking away?
I think we think that incremental value comes both ways, actually. You know, it's not just a one-way street. As we said, we do get value. Although our whole alignment of when we did the deal originally, the whole view was it'd be a fully aligned joint venture, both sides, 50/50, sharing the stewardship, sharing the benefits. They consolidate, we learned in the initial period. We do get other benefits from it, and a lot of those are still to come, particularly Stuart around, you know, the buying volume.
Joint buying, joint sourcing.
Yeah.
Using customer data.
You know, as I said, I think there's so many things that, as part of Hannah's reset, there's some good opportunities for both brands.
Great. Thank you very much, team.
Thanks, Jeff. Now let's go to James Grzinic and then, Adam Cochrane. James.
Thank you, Archie. Morning, everybody. Just a couple of quick ones. Firstly, I guess, can you update us on where the food business, where price perception is there, from consumers? If you perhaps give us a little bit of a summary of the journey of recent years and if anything has changed in recent months. Secondly, I just wanted to check whether-
James, Stuart's limbering up to answer that question. Take that because we spent a lot of time internally, not just looking at price, but also value perception, because obviously the two are not quite the same. Stuart.
Well, look, James, I think the first thing to say is all of us are very focused on value for the customer, and I say this internally all the time, which is, you know, value is in the DNA of M&S. M&S was never a premium brand. It was always a brand on great stylish clothing, great quality in clothing and great quality in food, a leader in innovation, but at the best possible price we could give our customers. That's what we've been focused on for the last few years. The good news, as you know, on clothing is when we're leading as number one on value perception, that helps the overall M&S brand as well. On food, it's now not a detractor anymore. That is testament to the work we've done on remarkable pricing.
I think that's been a really strong program. Customers, you've probably seen all of the social media just this week, by the way, and all the local press where customers are absolutely recognizing the value. Our Remarksable program is 140 lines priced in line with the main supermarkets. We have our Fresh Market Specials program. We've just launched 100 favorite items locked in price until January 2023. Interestingly, we launched a bigger pack better value program just on 40 products. It's quite amazing. The best-selling one of those was the 1.5-kilogram beef lasagna, which sold just in the first week, 500,000 items. Mainly now bigger stores, by the way, but as we go to bigger family shops and bigger stores, I think that gives much opportunity. It's not a detractor.
I think what we still have to focus on, though, especially when consumers are looking at the whole food market and all they hear about is price and cost of living prices, of course, everyone will suffer when it comes to value perception. One other small point, I think in our most leading categories like convenience, where we are best in market, the customers are slightly less price conscious and less price sensitive.
Just to follow on from that, Stuart, I presume your view would be that, you know, the rate of investment in gross margins wouldn't necessarily have to be of the sort of magnitude that we've seen in H1, because quite clearly, if I look at your mainland grocery peers' gross margins, they were flat at worst.
Yeah, I mean, I think quarter one was quite transitional. I mean, one thing we didn't have in quarter one that other people did have is the benefit of petrol margin. That's why we did, you know, we decided to invest in value in Q1, especially when the price was really on top of people's mind. Again, as we entered quarter two, although we were slightly behind the market on pass-through, we did increase our margin by 40 basis points. I think that's going to balance out better, especially in the second half as well.
Understood. Yeah, point well made on fuel margins. I guess my second one was around energy costs. I think at the recent CMD, you talked about GBP 100 million incremental energy costs next year. Is that still the view as you start thinking about the moving parts for next year?
Well, yeah, why don't I have a little go at that? I mean, obviously, at the Investor Day, things have improved since then. I mean, clearly energy markets still are quite volatile into next year. There's a lot of risk premium in the forward prices, particularly into winter of next year. It's very hard to kinda call exactly how it's going to outturn. We are planning for that order of type of headwind for next year. Part of the energy, part of the cost savings is also focused on energy consumption as well, energy consumption reduction.
I think, James, we're slightly paranoid on purpose on this because we're sort of predicting the worst and hoping for the best. I drove past a store the other night and in one store all the lights were half off, and I rang up immediately, jumped into the store thinking we were trying to save energy by turning the lights off. Good to know we weren't, but the reason I say that is 80% of our energy is in our store estate, and refrigeration's a big one, lighting's a big one. We don't want to do the wrong thing. We don't want dark shops with refrigeration on. We have got a program which we're slightly paranoid about, i.e., we're onto it every day, which is the consumption and what we can do to be more energy efficient.
It's top of our mind, and as I say, we're through our cost program, we're sort of anticipating the worst, so we're very focused on it.
Understood. Thank you.
Okay. Thanks, James. Appreciate it. Now we're tracking towards our full time, but we've got three questions left, so we'll try and give good time to them all. Adam Cochrane, shall we come to you and then Johanan, Georgina, Johanan then?
Hi, good morning. Thanks for taking the questions. The first question is on volumes. As you look forward, we probably expect some volume decreases next year. Would any volume related cost savings be in addition to the GBP 150 million that you've already outlined, please?
Now that's a good question, Adam. I mean, obviously at the moment, prices across the food markets. If you really look at it, everybody's seeing volume declines right now.
Yeah.
even though our like-for-likes and our trading's been quite good in value terms, you want to be analytical. We're shifting, you know, fewer boxes.
Yeah.
There should be some savings in that.
There will be, but the 150 is not a-
No.
It doesn't think volume reductions. It's true cost reduction.
Yeah.
In addition, Adam, to your point, especially when it comes to colleague resourcing in stores, it's volume adjusted.
Yeah, great. The second question is slightly tougher. I've had lots of discussions about what your actual guidance is for 2023. I know you've reiterated it's the same as it was at the full year results. Would you be able to put some numbers to those adjustments that you're making? Then the second part of that is, are you incrementally more cautious on FY 2024 than you were before? Is that the indication of the discussions that we're having here that the consensus is probably a bit too ambitious as we look at next year? Thanks.
I'll let Eoin respond to that if he wants to. Are we incrementally more cautious? I think that cuts both ways. I mean, like most people in the market, we probably feel that trading so far has not, well, it's not met our worst fears, put it that way. We haven't seen, particularly in Clothing & Home, the drop-off in demand that some people would have expected. Now, some of that's market share. You know, it's not the market as a whole. We think that our sort of customer in Clothing & Home has probably got a little bit more resilience. We said that in our presentation. Not to say they're not going to be impacted.
At the same time, like everybody, you know, the volume of noise around what's happening next year with the macro factors and so on is, has not reduced. We're, you know, cautious, put it that way. Confidently cautious. I don't know. Eoin .
Yeah. Well, I think, you know, just to remind what we said in May, we talked about just adjusting the base of the business by about GBP 80 million, which is relating to business rates, the position on Ocado at the time and the exit from Russia. Obviously, Ocado has deteriorated since then, per the guidance that Ocado Group gave the market in September. I think you have to reflect that into the guidance. But apart from that, we're actually saying we're pretty much thereabout from what we said in May, the mix has changed a little bit, but we're thereabout. I actually can just also just maybe touch on the.
I think we've been cautious about the potential downturn for 6-9 months, I would say. I don't think we're saying anything different really today than what we've been saying for a good long period of time. We're pretty clear that, you know, we've got to get the business set up to thrive in a challenging environment. You know, the cost saving is a big underpin in that, but there's lots of other activity. I personally don't think we're saying anything particularly new today.
No.
No.
Okay.
Okay, thanks, Adam. Anything else from you?
No, that's all. Thank you.
Okay, thanks. I appreciate it. Okay, Georgina, I'm told last time that I think you were the last question, and I may have hurried you along a bit, so please feel free to be expansive today.
Thank you, Archie. Thanks, everyone. I've got two questions, please. The first one is, you've been very clear that there was pressures on the food margin in H1 that won't reoccur to the same extent in the second half. Perhaps just to sort of help us in our modeling, could you be a bit more explicit or provide a number around, please? And just to understand, so when you're talking about those pressures not reoccurring, are you talking about like a lower level of sort of price investment, or are you talking about a lower level of sort of OpEx investment? Just a bit more color around that would be helpful, please. And then I have another quick question afterwards.
Okay, Georgina.
Funnily enough, I think when you're at times of high inflation, in some ways it's quite good for food retailing. Managing the process of what you pass through is difficult and managing it relatively and practically. We made some decisions in the first quarter which seemed the right thing to do for the customer at the time. Going forward, you know, I think the teams are dealing with this week by week, aren't they, Stuart? It's, you just have to be right onto it.
No, you're right. Look, I think we're well-placed because we start with well-placed for our customers and trying to do the right thing for the medium to longer term as well as the short term. Just a few things. As I said, in that first quarter to the second quarter, we did see an increase. So the trend is getting better, i.e., that 40 basis points. I also think, just to remind you, in the second half, we always have a better margin performance, in particular as we go through Christmas, and there will be a less increase in costs. The investments in the first half were sort of weighted more to the first half.
Half of our underlying sort of ex-rates cost growth shouldn't reoccur in the second half. I won't put a number on that, but the trend is better than it was in H1. As Archie Norman said, we're very focused on getting the balance between value, pass-through of inflation, and management of margin. I should mention the management of costs, whether that's energy, whether that's logistics, et cetera.
Great. Thank you. Then my second question was just around the Clothing & Home online business. I've seen you sort of helpfully split those margins out very explicitly on this occasion, with the breakdowns and everything. What I was just wondering really was when we come to think about the variable cost proportion of the OpEx mix, should we think about that being materially lower than we would for a pure play online retailer just given the multi-channel nature of the business? Like, can you sort of help us understand what the variable OpEx mix is in there, please?
Katie?
I mean, I'll just, I might just go up a level first, if I could, to give a bit of context around the dot com business. Our dot com business is not a pure play business, sort of full stop. It is an omni-channel proposition, and a huge number of our orders are collected in-store by customers because it's more convenient actually for them to collect. They don't have to sort of wait in for a courier. There are a series of variable costs that sit within the dot com business that clearly start with what you're spending on traffic to drive people to the website and to drive customers to the website. There's a couple of things that are quite important there in an omni-channel world.
First of all is the strength and presence of our brand because of our omni-channel presence. Our direct traffic to M&S is very high, so we don't have to pay a lot for that direct traffic. The second thing is that we have over 4 million people in our M&S app, and the app serves not just dot com, but also serves a series of services in store. Engagement with the app is very high. NPS on the app is very high, and that's a very cost-effective way of us holding on to customers in the app. The third area within the overall dot com margin, it's not a specific cost question, but I think it's quite important, is the mix of business that goes through dot com versus the stores.
We have a higher mix of third-party brands on dot com, albeit we curate those third-party brands. They're obviously bought at a wholesale rate, so the margin is slightly lower. In dot com, you also have a higher returns rate anyway, full stop. In dot com, you see that not just from us, but from our competitors. The mix of the products that we sell and the mix of third-party brands versus our own brands impacts your overall returns rate. The final thing in terms of cost is we have deliberately chosen to step up the level of investment that we've put into digital in M&S. It would be fair to say probably two or three years ago, we were playing catch up massively. We have pushed this very, very hard.
32% of our sales are in dot com now, and over a third of those sales come through the app. We think that we want to make sure that we continue to invest in the app and in capability to deliver a better conversion rate in dotcom. Our conversion rates are already quite good, but we think there's lots of opportunity to improve it. Finally, we've got lots of options for customers and for our business in terms of last mile costs. Whether that's click and collect in store, whether that's next day delivery from you, whether it's you want to drop a return off at one of your local food stores. Within about a 20-minute drive of about 90% of the U.K. population, and I think we can really leverage our store base very effectively.
Yeah.
Thank you.
Sure. Okay.
Very good.
Have you, Georgina? The overall point is what we're saying. I mean, the thrust of the point that we're making, Katie's making the presentation is that our dotcom business is profitable. It's a lot more profitable than the tail end stores. As we do the store rotation, move volume into dotcom, as we get the economies of scale, it's margin accretive for the business as a whole. Okay, we're just about done, I think. Georgina, do you want to come back on that?
Okay, thank you very much.
Okay, appreciate it. Now, we're over time, but we can carry on. A few other things to do later in the day. Last but not least, let's have Simon Irwin.
Morning all. Simon from Credit Suisse. A couple of quick ones for you. Firstly, should we read the Ocado reversal within the exceptionals as being evidence that you don't believe that the conditional payment is now liable over the next couple of years? Secondly, how are you thinking about pensions?
Simon, let's take that 'cause that's a-
Okay.
That's well spotted. Good question.
Yeah.
Eoin.
I mean, it's quite a technical point. I mean, we have to revalue the contingent consideration under accounting standards. Given current uncertainty, you know, the revaluation have to reflect a range of possibilities, etc. and so on. It's very early days really to take a kind of a hardened view really. We have to follow the accounting. You know, we're as Stuart has spoken, we're speaking lots with Ocado Retail at the moment. I don't think we can say much more than that other than, you know, the accounting has to follow the current position.
I was surprised by this, Simon. It's really a very technical accounting thing that maybe a few years ago you wouldn't have done. We really don't know beyond and you shouldn't read too much into that adjustment.
Right. Equally, I mean, you haven't told us you know what metrics the payment is conditional on, and presumably, you know, there must be a higher possibility that it won't be payable than there was two years ago.
Yeah. That's what the auditors have said.
Yeah, that's what that looks like. Exactly. Yeah.
How are you thinking about the pension at the moment, given where the surplus is and what flexibility that gives you around, you know, around payments in the balance sheet?
Yeah, good question. I mean, I've always said thankfully our pension scheme is in good shape for a kinda large U.K. defined benefit pension scheme. I think it's well managed and it's been well managed over a number of years. I think, you know, I don't think it gives us huge amounts of opportunities around the balance sheet. I mean, I think the main thing is thankfully, it's not a drain on the balance sheet or not a big drain on the balance sheet. You know, we still have some outstanding contributions from the Scottish Limited Partnership into the scheme that, you know, we're always looking at.
I think the main thing in the scheme is not a concern, if you will, rather than providing opportunity.
Okay. Just one final one for Katie. You mentioned the GBP 200 million investment in technology, and Sparks and everything that you're doing on that front, most of which has gone through the P&L. How would you expect those costs to work through over the next few years? I mean, have you done a lot of the upfront cost and some of this should naturally decline or do you see areas where you're gonna have to continue to invest?
Very good question, Simon. That's a question we're asking, Katie.
Yes. I feel like I'm having my appraisal, Simon, so thank you so much for ending the call with an upbeat appraisal. Look, I think I'm just gonna sort of split this into three things. The first is putting our foot down on everything that we do within the digital channels. This is where the customer is. We have invested behind our belief that the app is the gateway to all things Marks & Spencer's, and we have already set an ambition out around the number of app users we would like to have. Their spend is very high. Their recency, frequency, value is strong. I would expect we would continue to invest in digital and in personalization. Our aim is to get to 100% personalized experiences for customers on dotcom.
We've built a customer data platform which we are starting to, I don't know if I can use this word really, but I will weaponize over because I think it has quite high accretive value for the business. There is a block of things that we're investing to improve the overall customer digital experience. There's a whole block of things that improve the underpinnings related to digital that we will have to continue to do, where we have some legacy systems that we have to call on in order to change customers' experiences. Earlier on, we were asked about drop ship. That's a great example of how it talks to a lot of legacy systems.
There is the quite large technology investments actually in food ordering for the food business, the food ordering system, and actually in terms of our forecasting systems for Clothing & Home, where we're going to have to start to look at those, and those are big investments. Overall, do I expect that spend net to go down over the next few years? I do actually, because I think we can start to drive efficiencies as we migrate to the cloud and change some of our providers. I expect that number to reduce over time. I think we're at the zenith at the moment, as I keep being told by my chairman, we're at the zenith. It's all to play for, but thank you for the question.
Thanks, Katie.
Good stuff. All right. Thank you.
Okay. Thank you, Simon. Stuart, anything before we close? Anything you wanted to add?
No, but appreciate the questions today and look forward to catching up soon.
Yeah. Good questions, everybody. Thanks for joining us and, obviously the team are available through the day for any subsequent things and phrases, points by the pound. Thanks very much. Have a great day.
Okay. Bye.