Challenges Big and Small and Come Through Them by Supporting Each Other and Working Together

AT A GLANCE

FOR OVER 135 YEARS OUR EXTRAORDINARY COLLEAGUES AND CUSTOMERS HAVE FACED CHALLENGES BIG AND SMALL AND COME THROUGH THEM BY SUPPORTING EACH OTHER AND WORKING TOGETHER

M&S is a British value for money retailer, focused centres, our warehouses and in our supply on own label businesses, including Food, chain – who have worked tirelessly to deliver Clothing & Home, in the UK and internationally. for our customers. Today we operate a family of businesses, selling Together we have strived to secure the high-quality, great value own-brand products future of the business and, as we emerge, in the UK and in 62 countries, from 1,519 stores our “Never the Same Again” programme and 44 websites globally. will accelerate our transformation and fulfil our potential to deliver long-term, sustainable In the face of an unprecedented global crisis, and profitable growth for our investors, the best has been brought out of our 78,000 colleagues and wider communities. colleagues – across our stores, our support

Cover image In April, rainbow bags-for-life started appearing in our stores. Priced at 20p, M&S is donating the entire Read more on p10 Read more on p12 Read more on p27 Read more on p50 10p profit to NHS Charities FOOD CLOTHING & HOME FINANCIAL REVIEW COVID-19 RESPONSE Together to aid its Covid-19 response.

£10.2bn -1.9% £67.2m -20.2% 22.5% +1.8% Group revenue Group profit before tax Percentage of UK Clothing & Home sales online -70.7% -21.2% 3.9p £403.1m (18/19: 59%) Total dividend paid for 2019/20 Profit before tax and 63% APM adjusting items Food: Value for money perception -48% 1.3p -2.6% (18/19: 68) Basic earnings per share £1.46bn 68 STRATEGIC REPORT APM Net debt excluding lease liabilities Stores: Net promoter score1 16.7p -29.5% 57 (18/19: 54) APM Adjusted earnings per share M&S.com: Net promoter score1

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Access to more detailed Strategic report Financial statements and interactive content 02 Chairman’s letter 112 Consolidated financial statements The money saved on 04 Chief Executive’s statement 116 Notes to the financial statements printing and postage 07 Our strategic priorities 172 Company financial statements 08 Market context 174 Notes to the Company will help lower our costs 09 Business model financial statements 10 Food 179 Group financial record Reduces our carbon 12 Clothing & Home 180 Glossary footprint and saves paper 14 International & Services 16 Channels 183 Notice of Annual General Meeting Join our Digital First community 18 People & culture and sign up for online 20 Engagement & decision-making 198 Shareholder information2 communications only, in time for 22 Plan A 200 Index next year’s report. It’s much less 25 Non-financial information statement fuss, much more interactive and 26 Key performance indicators 1. Net promoter score (NPS) equals the percentage of you’ll be helping M&S to reduce 27 Financial review ‘promoters’ minus the percentage of ‘detractors’. its impact on our environment. 33 Risk management 2. Shareholder information forms part of the Directors’ Report. To register, visit shareview.co.uk, 34 Principal risks and uncertainties a secure platform provided by our Registrar, Equiniti. From the Governance ALTERNATIVE APM home page, simply click ‘Portfolio’ PERFORMANCE MEASURES followed by ‘Open Portfolio Account’ and follow the on-screen 44 Chairman’s governance overview The report provides alternative performance instructions. You will need your 46 Our Board 48 Board activities measures (APMs) which are not defined shareholder reference number and or specified under the requirements of activation code to register; these 50 Governance in action: Covid-19 response International Financial Reporting Standards have been posted to you in this as adopted by the EU. We believe these APMs year’s Notice of Availability. 54 Board composition and provide readers with important additional meeting attendance information on our business. We have included Covid-19 response timeframe 55 Leadership and oversight a glossary on pages 180-182 which provides On page 50 we set out the 56 Board review a comprehensive list of the APMs that we use, timeframe for the Company’s 57 Nomination Committee Report including an explanation of how they are response to Covid-19, which 59 Audit Committee Report calculated, why we use them and how they DIRECTORS’ REPORT DIRECTORS’ extends beyond the 52 weeks 66 Remuneration overview can be reconciled to a statutory measure where relevant. to 28 March 2020 covered by this 72 Remuneration in context report. Within the strategic report 74 Remuneration Policy ‘Our Action in Response to 81 Remuneration Report Covid-19’ is not confined to the 93 Other disclosures reporting period but we have 98 Independent auditor’s report indicated where the financial impact of these actions relates to the 2019/20 financial year. Annual Report & Financial Statements 2020 01

Dear Shareholder, Financial highlights Although much of this report is about All In This Together the results for the financial year 2019/20, We implemented a number of these now seem to relate to a previous Below -70.7% social-distancing measures throughout the age. The Covid-19 pandemic has since shopping journey in our stores to help keep 3.9p swamped our lives and the way we our customers and colleagues well. Total dividend paid for 2019/20 operate the business. At the time of writing we are in the midst of lockdown. Our focus has been first on the safety of our colleagues and customers and on supporting vulnerable people and healthcare workers. Second on securing our business, cash flow and liquidity and planning our way through the clearance and storage of surplus stock. And thirdly on ensuring we learn from the crisis and come out stronger, faster and more competitive when we emerge. Very sadly, we have lost two colleagues to the virus and others are in hospital. “We have drawn up Our thoughts and prayers have been with them and their families. More broadly, our “Never the Same the M&S family of colleagues has rallied together magnificently in the crisis. Again” programme Our business has been operating continuously since 1884, including to harness our new through two world wars. In the 1939-45 war 100 stores suffered bomb damage and habits and use the 16 were destroyed. With the support of the most passionate and dedicated workforce lessons of this crisis in UK retail, we will trade through the crisis, to make what feels serving our customers throughout. From a financial point of view, the 2020-21 like three years year is likely to be a lost year. Although progress in one.” we have taken drastic measures to secure cash flow and maximise sales, Maintaining our Archie Norman, Chairman it is inevitable we will emerge with more debt than we had planned and make standards for customers losses for a large part of the year. Whilst it We’ve increased hygiene measures is a challenge to forecast the future, our Above across our stores to give our customers scenarios are based on a prolonged period confidence when they shop with us – such as of social distancing, trading limitations cleaning baskets, trollies and self-checkout and depressed demand. We have taken tills every hour. steps to obtain substantial concessions from our banks and secure liquidity for the likely duration of the Covid-19 crisis and to underpin the recovery strategy. There is a saying sometimes attributed to Winston Churchill, “never waste a good crisis”. Our business is now operating in ways we have never operated before. Remote working is only a small part of it. Multi-tasking in stores, delegation of authority, fast decision-making, an action orientation irrespective of hierarchy, and brilliant communication direct to the front line. At the same time, the way our

02 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XIFCXXXXXOurXPeople_v196 Modification Date: 27 May 2020 6:43 pm customers live and shop has changed beyond recognition and these behaviours will not fully revert any time soon. We are determined to make our ways of working permanent and accelerate the aspects of our transformation necessary to thrive in a new consumer landscape. The manner in which our colleagues have been galvanised to act with pace and agility gives us confidence we can emerge stronger, as a faster, more streamlined business. This is why we have drawn up our “Never the Same Again” programme to harness our new habits and use the lessons of this crisis to make what feels STRATEGIC REPORT like three years progress in one. The acquisition in the year of a 50% share in Ocado Retail, supported by shareholders through a rights issue, gives us access to the UK’s fastest growing food channel and is a strategic driver of growth for our Food business. The crisis has created a step change in demand for online grocery and we will commence supply to Ocado in September, making the M&S food range of over 6,000 products available online for the first time. We are now, after two and a half years of transformation, on the verge of completing a much stronger management team, most notably with the arrival of Eoin Tonge as Chief Financial Officer, Katie Bickerstaffe as Chief Strategy and Transformation Director, and Richard Price as Managing Director, Clothing & Home, together with many others. I wanted to thank all our colleagues for their loyalty in one of the toughest years in our history, the leadership team for working flat out through the crisis, and the Board for being continuously engaged. Supporting our Alison Brittain is standing down after over six years; she has been a major force hardworking colleagues for change and we will miss her. Katie Bickerstaffe is joining the executive team Above We supported our hardworking colleagues, as well as customers and but with Tamara Ingram and Sapna Sood communities, during the crisis. All our frontline joining the Board, we will still have a very colleagues, including those working in strong, diverse and engaged Board. our Castle Donington distribution centre, Finally, it has not been a happy year for received a 15% additional pay reward. our shareholders, including all those on the Board and management team who are heavily invested in the Company. To provide for an uncertain outlook, we have had to make difficult decisions to secure the future of your business. Helping We appreciate your patience and are determined to accelerate the changes manage social we committed to and make M&S the distancing special business we know it can become. in store Yours sincerely,

Left Our colleagues greeted customers at the entrances of every store and managed the number Archie Norman, Chairman of customers shopping during busy periods.

Annual Report & Financial Statements 2020 03

Last year’s results reflect a year of Outperformance in Food “I have never been substantial progress and change including The UK Food business outperformed the the transformative investment in Ocado, market as changes to range, value and prouder to work for outperformance in Food and some green customer communication took effect: shoots in Clothing in the second half. revenue increased 2.1%, with like-for-like this business. The However, they now seem like ancient sales1 up 1.9% strengthening throughout history as the trauma of the Covid crisis the year, including an estimated 0.3% care and commitment has galvanised our colleagues to secure benefit from the effects of Covid-19 in our colleagues the future of the business. The way our March. Operating profit before adjusting people have rallied to support our items1 increased 11.2%. Value perception have shown to our customers and communities has been awe improved, resulting in growth in volume inspiring. From the outset we recognised ahead of value at 3.3% and increased customers, their that we were facing a crisis whose effects market share. and aftershocks will endure for the teammates and our coming year and beyond: whilst some We set out the Food strategy 18 months customer habits will return to normal ago, rebuilt the leadership team and communities has others have changed forever, the trend started to reposition M&S Food to broaden towards digital has been accelerated, and its appeal and move to ‘trusted value’. been inspiring to see.” changes to the shape of the high street The programme was picking up brought forward. Most importantly momentum before the crisis struck Steve Rowe, Chief Executive working habits have been transformed and the progress made is set out in and we have discovered we can work in a the Food section of this report. faster, leaner, more effective way. I am Ocado Retail positioned strongly determined to act now to capture this and for growth deliver a renewed, more agile business in a world that will never be the same again. The valuable purchase of 50% of Ocado Retail positions the business strongly for Good progress on transformation growth in online grocery, the UKs fastest 2019/20 growing channel. We reported a first Prior to the Covid-19 impact, both major time net income contribution for Ocado businesses were making good progress Retail to group profit of £2.6m for the in implementing the transformation 7 months to 1 March 2020, with the early programme with Food outperforming the contribution reflecting the limited period market and despite teething issues in since completion. This is the contribution changes to men’s clothing ranges, kids, to group results prior to switchover to M&S womens, and lingerie starting to show supply on 1 September, which we expect to sustained, improved performance. drive volume growth for M&S Food. In recent years, we have made a number We have been working closely with Ocado of structural changes to the basic Retail to create a ‘one business’ mentality infrastructure of the business including which includes common operating closing 54 of our legacy shared stores, procedures, business plan, and shared migrating off mainframe infrastructure to talent. The value of the investment we cloud-based systems and implementing have made has been further reinforced new warehouse management systems. by the strong growth reported by Ocado These changes have been instrumental in Retail since lockdown, with growth for enabling the business to react effectively the most recent 9-week period of 40.4% in the early weeks of the crisis. reported at its AGM on 6 May. To illustrate more clearly the family of Reengineering Clothing & Home accountable businesses operating model, The UK Clothing & Home business for the first time we are breaking out the experienced a year of substantial operating profit after relevant costs reshaping, resulting in some encouraging of three business streams: UK Food, performance indicators in the second half. UK Clothing & Home, and International. However, revenue declined 8.3% overall, This demonstrates the strength and with like-for-like revenue down 6.2%, balance of the combined businesses including an estimated 2.2% adverse which has been a major source impact from Covid-19 in March. Online of resilience in the crisis. revenue was level. Operating profit before adjusting items declined 37.0%, largely 1. APM as defined in glossary on page 180.

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© 2019 Friend Studio Ltd File name: Strategic_XIFCXXXXXOurXPeople_v196 Modification Date: 27 May 2020 6:43 pm driven by lower sales, gross margin trading has substantially outperformed In addition to these savings, we are headwinds related to sourcing and the scenario. exploring the potential for other changes, promotional mix and the impact of including a more streamlined support The scenario has the following core the crisis. centre, changes to leadership structure assumptions relative to our original and negotiations with landlords on First-half trading was affected by poor 2020/21 budget: commercial terms on lease contracts. availability in Womenswear, and in the –– UK Clothing & Home, 70% decline in second half by teething issues with the Actions to stabilise cash flow revenue for the four months to July move to a more contemporary style exceeding £500m and only a gradual return to original and fit in Menswear. However, as detailed budgeted levels by February 2021 In view of the steep increase in working in the Clothing & Home section of this impacting annual revenue by c.£1.5bn. capital resulting from unsold stocks we are report, towards the end of the year experiencing a cash outflow during the performance, prior to the effects of –– UK Food, 20% decline in revenue for the lockdown period and expect to draw on Covid-19, in Womenswear and Kidswear four months to July, with revenue level our credit facilities in the months ahead. was encouraging, Menswear saw thereafter, impacting annual revenue

Under the Covid-19 scenario, drawings STRATEGIC REPORT improving sales trends and Lingerie by c.£0.4bn. are estimated to peak in early autumn held its market leading share. –– International – Clothing & Home at c.£600m, although our current Changing the model in International revenue to follow a similar pattern to performance would suggest a lower figure. To reduce risk, maximise liquidity, As detailed on page 14, the first phase UK Clothing & Home with a significant and enable a return to growth in the of transforming the International business decline in April due to closures, future, steps have been taken to underpin has been the move away from direct impacting annual revenue by c.£0.2bn. cash flow and reduce working capital. ownership to a franchise and joint venture The table below sets out the revenue model working with strong partners in assumptions in the scenario by –– Capital expenditure for the year has high-potential territories. The focus now is quarter, showing the variance to at this stage been reduced to c.£140m, on localising ranges and reducing prices, the original budget. saving c.£195m in cash outflow in and will increasingly be on developing the current year against budget. sales online globally. International REVENUE AT CONSTANT CURRENCY Only essential and short payback revenue at constant currency decreased investment focused on growth has 2.5%. Operating profit before adjusting been retained, such as the new ambient % change to items declined 15.2% to £110.7m, largely budget Q1 Q2 Q3 Q4 FY food depot, investment in online as a result of trading conditions in March. UK Clothing fulfilment and site development, & Home -74 -61 -40 -6 -46 and the Digital & Data programme. ACTION IN RESPONSE TO COVID-19 Food -20 -6 – – -6 –– Cash management initiatives including Over £1bn of actions including £500m International -51 -20 -9 -9 -22 in-year deferral of corporation tax, of planned cost reductions and further VAT and duty payments and likely actions to manage cash under scenario In the light of the prolonged partial or savings from lower corporation tax planning for Covid-19 total lockdown envisaged in our Covid-19 paid for 2020/21. scenario, we have taken actions totalling The Covid-19 crisis started to have an c.£1bn relative to the original budget –– As previously reported, there will be impact on the business in the first week to reduce costs and manage cash, while no final dividend for 2019/20 and the of March with reductions in UK Clothing protecting our transformation plans and Board does not expect to pay a dividend & Home sales, which declined by 6.2% and trading potential. for the current financial year, using the 26.9% the week after. With the onset of funds instead for balance sheet support lockdown, the effect on sales, colleagues Substantial cost reduction of in the region of £340m. and customers in both businesses has c.£500m in 2020/21 Liquidity and additional headroom been dramatic. Clothing sales at the –– Non-essential spending has been secured for 2020 and 2021 lowest point dropped to 16% of their level reduced at all levels. For instance, a year ago. Without the resilience of the we expect Clothing & Home marketing It was an immediate priority for the combined food and clothing business to be down £50m for the year, pay levels company to secure its debt facilities to model and the extraordinary loyalty of and recruitment have been frozen, provide for the cash requirements colleagues, the impact on the business saving c.£40m, and technology costs modelled under the Covid-19 scenario would have been even more profound. will be down c.£40m. described above and given the risk in an uncertain market to ensure there is My belief has been from the outset that –– Costs which are largely related to sales downside protection under even more the direct impact of the crisis on sales volume are being managed down, adverse sensitivities. Therefore: and stock flow will last at least 12 months for instance, Clothing & Home logistics and that subsequent demand may be down c.£60m, colleague costs –– Formal agreement has been reached depressed. In a challenging environment post-lockdown saving c.£40m, and with the syndicate of banks providing to forecast accurately, the business is International costs saving c.£30m. the £1.1bn revolving credit facility to being managed against a “Covid-19 remove or substantially relax covenant scenario” created in the early weeks of –– Fixed property-related charges are conditions for the tests arising in lockdown, reflecting a very substantial expected to decline, with service September 2020, March 2021 and reduction in sales. This scenario has been charge reductions, rent costs and September 2021. stress tested and even in the event of a other occupancy cost savings down by –– We have confirmed that we are longer and deeper lockdown, the group c.£20m before any more far-reaching eligible to access funding under maintains sufficient liquidity. Although changes to the store portfolio. the government’s Covid Corporate we will be drawing on our available credit –– Government support measures, Financing Facility and been allocated facilities in the coming year, under the including business rates relief of an issuer limit of £300m. scenario the business will have significant c.£172m and the Coronavirus Job liquidity headroom throughout the next Retention Scheme of c.£50m, will 18 months. We are pleased to note that further support this year’s outcome. in the first six weeks of the new year,

Annual Report & Financial Statements 2020 05

–– As a result of these actions, we expect The combined impact of lockdown, A significantly renewed management to have considerable headroom under social distancing and depressed demand team will implement our Never the Same our available facilities in 2020/21. While is likely to continue through the year. Again programme, and in the coming we will experience a cash outflow in weeks this team will take shape with a Recent trading performance the first half of the year as sales reduce number of important arrivals. Katie and we pay for our previous stock The first six weeks trading has been ahead Bickerstaffe has joined as Chief Strategy commitments, we would expect this of the Covid-19 scenario particularly in and Transformation Director and Eoin to partly reverse in the second half of Food and online. Tonge arrives as CFO in June. Richard Price the year. –– Store sales in UK Clothing & Home were joins as Managing Director Clothing & Home in July, with new Head of Clothing & –– Under the Covid-19 scenario, drawings reduced to a trickle due to the closure Home Supply Chain Paul Babbs and against our available facilities would of space, running down 98.8% year on Head of Clothing & Home Online Stephen be in the range of £300m–£350m by year at the lowest point. In-store sales Langford both joining in May. Property the end of 2020/21. of essentials increased from £252k per week in the first week of lockdown to Director Will Smith arrives in May and –– The cancellation of the final dividend £1.4m per week by week six. Helen Milford joins as Store Operations of c.£130m will generate further cash Director in June. Craig Lovelace joins as savings after year end. –– Although online Clothing & Home has Finance Director of Food in June. traded throughout, demand in the initial Experience to date has been ahead of the weeks for clothing was very low with a Our response to Covid-19 is explored Covid-19 scenario against which we set gradual uplift since. In the last three throughout this report but in short, I have strong cost and cash management plans weeks, online sales have been running never been prouder to work for this and has outperformed the scenario by c.20% up year on year. business. The care and commitment our over £150m year to date, with actions colleagues have shown to our customers, planned to further improve our cash flow. –– Standalone Simply Food stores have their teammates and our communities If sustained, this leaves the Group well traded strongly, up on average 17% with has been inspiring to see. M&S has faced positioned to exit the crisis with limited a positive trend in many Retail park this crisis in the same way we have met drawdown against its facilities in 2020/21, stores which typically have direct challenges throughout our history. Each with a further saving of the final dividend access. In the earliest weeks of lockdown member of the M&S family has pulled in the early months of the next year. this was offset by lower sales in travel together and responded with agility and We intend to adopt a dynamic approach franchise units (c.5% of revenue) and the pace to show our customers that they can to investment using sustained cashflow closure of in-store hospitality and cafes trust M&S to be there for them and their outperformance to capitalise on strong (c.4% of revenue). In the last three weeks community in the ways that matter most, investment opportunities under our overall Food sales have on average and I would like to extend my personal ‘Never the Same Again’ agenda. been level. thanks to them all. They are what makes this business special. Management of excess Clothing & –– We also experienced an initial adverse Home stock margin mix as demand shifted towards While there are many uncertainties, we are ambient grocery sales, although this is Like all fashion retailers, one of the biggest confident we will emerge from this period now diminishing. challenges arising from the crisis is the in a strengthened competitive position. backlog of unsold stock for spring/ Never the Same Again We have a strong Food business – soon to be stronger as our products become summer 2020 and the forward pipeline During the crisis, we have all had to work available on Ocado.com and, although ordered for autumn/winter. We closed differently and consumers have rapidly there is some way to go, there is progress 2019/20 with Clothing & Home stock of changed shopping habits and may never being made across every aspect of our c.£500m and at that time had committed shop in the same way again. We intend to Clothing & Home business. In a consumer forward orders of £560m scheduled to use the learning from the crisis and, as set environment that will never be the same arrive in the following six months. As the out on the opposite page, we have drawn again, we will accelerate parts of our lockdown eases, a large proportion of up our Never the Same Again agenda to transformation in response and learn current season stock will remain unsold accelerate our transformation. and demand for many categories is likely from our crisis actions to ensure that to be weak. We have acted quickly to We have: M&S is changed for good. improve this position. –– Committed to never be the same again –– We have cancelled late summer stock in culture, organisation and work habits. which will no longer be required, –– Taken immediate steps to ensure that reducing forward commitment the “change of gear” of the last few at cost by £100m. weeks endures. Steve Rowe, Chief Executive –– Of the balance of stock and forward –– Started to bring forward the aspects of orders, c.£400m is year-round basic our transformation necessary to thrive product where M&S trades strongly and in a changed consumer landscape and which will be carried forward at low risk. become an online winner in Clothing & –– Of the unsold seasonal stock, we have Home and Food. As made clear on page made arrangements to hibernate 10, the Ocado relationship is an integral around £200m until spring 2021, part of our strategy to bring M&S Food secured storage facilities and planned into the online and home delivery for the cost of these actions. market, which we expect to be even more vibrant as a result of the crisis. –– We have therefore taken a charge of £145.3m in adjusting items to reflect the cumulative impact of the combined handling, clearance, hibernation and write-off of the stock.

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The aim of our transformation is to restore M&S to sustainable, profitable growth and this has not changed. However, in the new landscape – where the way we work and how customers shop may never be the same again – we are learning from the crisis to ensure that M&S is changed for good.

WHAT WE ARE LEARNING FROM THE CRISIS STRATEGIC REPORT The crisis illustrated how differently we –– Support colleagues have learnt to –– Online has for a period been our only can use technology, run stores, and make improvise their routines at lower cost significant clothing business and this decisions fast. In a business with a history of with no detriment to trading standards. has illustrated the need to be leaner, slow cultural change we intend to use these –– Our strategic relationship with Microsoft and more integrated to compete with lessons, to ensure that as lockdown eases, has been highly effective supported online pure plays. we are never the same again in culture, by Teams. –– The reduction in forward order volumes organisation and work habits. For instance: –– In stores, given the need to furlough and in clothing has forced the need to change –– A smaller top team has made decisions redeploy colleagues, valuable lessons ranges to buy more of less from fewer faster and more efficiently, delegating have been learned about our ability to core suppliers. trading and operating management to multi-task and increase the pace of business unit heads. Working groups, work with no adverse impact to service. committees and elaborate management processes have been disbanded.

WHAT WILL NEVER BE THE SAME AGAIN

The following steps have already been taken Director, and Chief Financial Officer –– Digital is being consolidated under a to ensure that the ‘change of gear’ of the last Eoin Tonge who is arriving in early June. single transformation team bringing few weeks endures: –– Central support costs and headcount together data, online and technology. –– On 14 May, we announced changes to the will be examined at all levels, delegating –– The direct-to-the-frontline, tech-enabled business leadership structure with the decisions to business unit and communication, combined with increased formation of a small executive board category heads. flexibility in working patterns, will become consisting of the operating MDs together –– In stores, multi-tasking and more flexible permanent. with Katie Bickerstaffe, who has now started management structures will be integrated as Chief Strategy and Transformation into the way the business operates.

ACCELERATING THE TRANSFORMATION PROGRAMME

We will accelerate aspects of the –– Establishing a store estate for the new –– Turbocharging growth to become an transformation to increase our relevance world with the replacement of ageing online winner in Clothing & Home and in a new consumer environment, including: stores already under way and shift in Food. The sharp growth of online grocery –– The move to ‘trusted value’ in Clothing & relationships with property providers during the crisis is evidence of this, as is the Home and option count reduction and to go faster. strengthening performance of our online supplier concentration brought forward. –– The longstanding issues in Food Clothing & Home. –– The reduction in range and shift towards distribution will be tackled to capture fast moving product at great value value in our Food supply chain, with the necessitated by the crisis will result roll-out of the Vangarde programme and in a permanent reduction of 20% in addressing the contract and relationship autumn/winter store option count. with Gist. –– The role of the sourcing offices will be increased so that sampling, ordering and quality issues are dealt with offshore. –– A faster “near-sourcing” supply chain will be developed, to enable a test and re-order of seasonal fashion lines, particularly for the online business. STEP THREE

STEP TWO MAKING M&S SPECIAL STEP ONE SHAPING RESTORING THE FUTURE THE BASICS

2018 2019 2020 2021 2022

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The retail industry has changed dramatically in a few short weeks, and has in some ways become unrecognisable from the one in which we traded for the vast majority of 2019/20.

In 2019 retail sales declined for the first In contrast, early 2020 saw consumer An overview of the Food and Clothing time on record, with the British Retail confidence beginning to return, although markets in 2019/20, as well as a brief Consortium reporting a 0.1% contraction this did not translate into significant sales assessment of the Covid-19 impact across the sector due to political for retailers. that followed, is below. instability and increased consumer caution (Source: BRC-KPMG). FOOD MARKET

The grocery market returned growth of response, which was well received by our increasingly agile in launching and 2.7% for the 52 weeks ended 22 March customers. Vegan food also continued executing food delivery online in a short 2020 to grow to £117.6bn (Source: Kantar) to become a more popular choice space of time. In the absence of an with Covid-19 impacting consumer among UK consumers, with 86% of online offer, M&S rolled out several spending in Q4. Home delivery and plant-based meals eaten by non-vegans. quick solutions – including online online maintained its position as the food box deliveries and a temporary UK’s fastest growing channel at 5.5% Covid-19 impact partnership with Deliveroo – to help year-on-year growth, versus 2.5% in March 2020 was the biggest month isolated customers access essentials store (Source Kantar). M&S maintained of grocery sales on record (Source: (see Food section on page 10). a 3.4% market share across the year, Kantar) as the impact of Covid-19 As we look ahead, we expect the with the four largest supermarkets drove consumers to increase spend on crisis-driven change in behaviours of together holding a 59.6% share, discount grocery prior to the UK commencing customers such as the rapid adoption of retailers capturing 11.4% and Ocado lockdown on 22 March. Immediately online food shopping, and fewer, bigger Retail a 1.2% share. following the government’s measures, spend and frequency of visits dropped shopping trips to continue at least as Key consumer trends included the rise as consumers followed guidance to stay long as the Covid-19 crisis remains. of environmental awareness driving close to home. The market experienced The switchover of our products consumer choice and spend, with unprecedented levels of demand for onto Ocado Retail’s platform from our own research revealing 75% of online grocery deliveries at the height of September 2020 will mean we are consumers were actively seeking to the crisis with the country impacted by competitively positioned to service reduce their use of plastic packaging. lockdown, and retailers needed to be accelerating demand in the UK’s We trialled a refillable grocery initiative in fastest growing grocery channel.

CLOTHING & HOME MARKET

The clothing market declined by 5.7% clothing retailer, maintaining our clothing market was discounted, the year-on-year for the 52 weeks to 05 April market-leading position across largest proportion, outside of Black 2020 to a total value of £33.3bn Womenswear and Menswear, closely Friday in 2019, for at least eight years. (Source: Kantar). Consumers spent followed by Next and Primark. For M&S our online operations continued less on clothing throughout the year to trade as robust social distancing – with disposable spend focused instead Covid-19 impact measures to help keep our colleagues on experience. As a result, the sector Covid-19 rapidly accentuated the well were implemented, and customers experienced a move towards spend on headwinds and spending habits the continued to purchase essential activewear and athleisure, reflecting a clothing sector experienced through products required during this time (see consumer shift towards casual dressing FY19/20. Bricks and mortar retailers were Clothing & Home section on page 12). and focusing on healthy everyday required to shut stores and operations The outlook for the UK’s clothing sector lifestyles. We launched Goodmove, in response to government measures, remains uncertain at present, but we a new athleisure range, to access this including our outlet stores and C&H fully anticipate consumer behaviour to growing trend, which delivered sections of larger stores, resulting in follow the recently established trends encouraging results. greater numbers of consumers making purchases online. Additionally, consumer for the coming months ahead and Online continued to be the fastest spend was concentrated on different limited customer appetite. Online growing channel against declining spend categories reflecting life at home purchasing activity will only continue offline, growing 2% points to account and changing behaviours, such as to grow, with the impact of social for 29.9% share of total clothing sales loungewear, babywear, and bedding distancing likely to linger on. We are across the market (Source: Kantar), with products, and away from formal and boosting our online relevance to meet purchases on laptops the largest online suiting. The market broadly reacted that demand by rolling out brands channel and mobile the fastest growing, to the closure of UK stores by heavily on M&S.com and an additional 850 particularly in womenswear spend. discounting items, peaking in w/e 29th Clothing & Home products on Ocado M&S continues to be the UK’s largest March where over half of the UK online from September.

08 Marks and Spencer Group plc

M&S serves about 31 million customers every year from across the UK. We operate a family of accountable businesses of Food, Clothing & Home, International, Services and Property, and the strength and balance of our combined business model has been a major source of resilience during the Covid-19 crisis.

OUR CUSTOMERS A FAMILY OF ACCOUNTABLE BUSINESSES

M&S serves about 31 million customers every year from M&S operates a family of parallel businesses each trading value STRATEGIC REPORT across the UK. Our Food, Clothing & Home and other for money ranges. Each is led by its own integrated management retail businesses are focused on developing products team, with functional accountability for their divisions, including and services for our target ‘family age’ customers and marketing, supply chain, finance and online. beyond, who we reach through a channel network of We predominantly sell own-brand products manufactured 1,519 stores and online services in the UK and across and marketed exclusively under the M&S brand with quality, 62 international markets. innovation and trusted value at their core. OUR COLLEAGUES Food: M&S Food sells sustainably sourced, fresh, convenient products of outstanding quality through We employ over 78,000 colleagues across our office, five main categories: protein deli and dairy; produce; operations and international teams, who demonstrate ambient and in-store bakery; meals dessert and frozen; extraordinary passion for the business, deliver great hospitality and ‘Food on the Move’. customer experience through our channels, and bring extensive technical skills, giving us strength in areas Clothing & Home: M&S sells stylish own-brand such as ingredients, sourcing, size and fit. clothing and homeware through our principal product departments: Womenswear, Menswear, Lingerie, Kidswear and Home. International: M&S exports the best of M&S Food THE GROUP and Clothing & Home around the world in select target markets across Europe, the Middle East and Asia. Customers purchase our products through a network of mainly partner-led or owned businesses in territories NTA CCOU BLE B with growth potential, or through online-only channels in F A US O IN growing markets such as Australia and the United States. LY ES I S M E A S Services: Through M&S Bank (operated by HSBC), F NNE CHA LS we provide a range of financial services, including credit cards, current account and savings, insurance and mortgages. M&S Energy is a competitive fully

Food Customers Clothing renewable energy source provider (operated by Octopus). & Home Property: We operate an active Property Development team to maximise the value of our property assets M&S.com Stores through investment and development opportunities.

Colleagues Property Services: Bank and OCADO Energy Ocado M&S holds a 50% investment in Ocado Retail, a relationship between M&S and Ocado, which from September 2020 will roll out M&S Food and Clothing products across the International platform for customers to purchase online, enabling access for the Group into the UK’s fastest-growing grocery D IGITAL & DATA sales channel.

DIGITAL & DATA THE GROUP Our Digital & Data central function provides support across Our central team includes Group Finance, Corporate the business, ensuring a seamless customer experience, Governance, Strategy and support functions such as improving customer personalisation, embedding digital across Communications and HR. The Group supports the our stores and shopping missions, revamping our loyalty business as a whole, setting direction of its growth strategy, proposition and ensuring that we are at the forefront of the allocation of capital and overseeing cost efficiencies. latest innovation and trends.

Annual Report & Financial Statements 2020 09

compromising our quality point of improving availability and running stores Financial highlights difference. We lowered prices on over more efficiently. 500 lines, with a focus on staple products Since completion in August, we have – such as reducing our Super Soft Vitamin +2.1% worked closely with Ocado Retail to create D White Loaf from £1.15 to 65p. In June, a one-business mentality and, even we introduced Fresh Market Specials, £6.0bn through the crisis, continued a laser focus to showcase our great value across fresh UK Food revenue on preparations for launch in September produce, meat and fish, and featured 2020 to drive faster growth. We completed products saw significant sales uplifts. a detailed line-by-line review of the This investment was partly offset by +11.2% existing c.4,000 Waitrose products and, the reduction of complex, multi-buy from 1 September, we will launch with a £236.7m promotions and cost reductions. As a compelling range of over 6,000 M&S Operating profit before adjusting items result, M&S Food is now at its most price lines, complementing the 55,000 Ocado competitive for several years; a basket of and branded products, leveraging our PERFORMANCE THIS YEAR comparable lines is consistently cheaper unique capabilities in sourcing and new than our key competitors, resulting in In 2018, we outlined our far-reaching product development. plan to protect the magic of M&S Food – improved price perceptions. our industry-leading quality, sourcing We have started to build a more ACTIONS IN RESPONSE TO COVID-19: standards, convenience and innovation commercial pipeline of relevant HELPING TO FEED THE NATION – while modernising the rest of our innovation and broaden our appeal to a operations to create a more efficient wider range of shoppers. Our award- Throughout the crisis, we have taken Food business and restore it to growth. winning Plant Kitchen range helped decisive action to mitigate supply chain We said we would do this through: attract a significant number of new disruption, respond to changes in consumer shopping behaviour, support –– Driving frequency of shop and customers. In September, we introduced our Cook With range featuring simple the vulnerable and health and social care broadening appeal beyond special workers, and play our part in feeding the occasions through trusted value, ingredient and meal solutions to help busy families cook fresh meals fast. nation. The Food business experienced more relevant innovation and strong trading in standalone Simply Food family-focused marketing. This year’s marketing has been stores – particularly those with car parking –– Modernising the Food supply chain more family focused with clearer – but this was offset by the closure of cafés to improve margin and reduce waste. communication of value. In November, and the stores located in travel hubs. we launched Re-Marks-able Value – a new –– Building more strategic supplier way of talking about our great value Responding to changing customer partnerships to buy better and lowering everyday prices where featured products shopping behaviours: In line with costs to invest in improved value, are price benchmarked against key government restrictions, customers while maintaining quality. competitors while upholding M&S’s embraced a ‘shop local’ mentality and we temporarily closed franchise stores –– Enabling more customers to shop renowned quality. Our sponsorship of ITV’s Britain’s Got Talent took M&S in travel locations and a small number our full range – developing bigger, of owned stores, and redeployed M&S better, fresher Food stores with a Food into over eight million homes each week, while in July our Little colleagues to busier Foodhalls. Store renewed in-store experience and manager-led local communication via through the relationship with Ocado. Shop campaign helped attract more family customers. social media helped highlight the M&S The UK Food business outperformed Foodhalls open to serve their community the market, increasing UK Food sales We opened five ‘test and learn’ renewal with social-distancing measures in place by 2.1%, as changes to range, value and stores across different formats to and support for vulnerable customers customer communication took effect. encourage bigger basket shops by through reserved shopping hours. Like-for-like performance was up 1.9% and showcasing more of the M&S Food offer. Within each store, we extended the Range adjustment and protecting strengthened through the year, including availability: In response to customer an estimated 0.3% benefit from the effects square footage of Food trading space and created a fresh market feel, with a sharper demand, we increased volumes on of Covid-19 in March. Operating profit grocery, cooking ingredients and before adjusting items increased 11.2%. focus on our value, and the categories that support a fuller family shop, such household cleaning products. To enable The Vangarde supply chain programme suppliers to focus on high-demand demonstrated the opportunity to reset as frozen, bakery and household goods. Early performance has been encouraging products, we initially rested some lines the store operating model and reduce and, where necessary, temporarily waste and improve availability. In August, with strong sales, and we are now optimising the concept in order to support introduced branded goods in areas we completed our investment in 50% of such as pasta and rice, while temporarily Ocado Retail, which will provide M&S further roll-out with a more efficient renewal model. placing purchasing restrictions on a small with a profitable, scalable presence in number of items. Following a difficult online grocery from September 2020. The Vangarde end-to-end supply initial period, and utilising our strong During the year, we worked to make chain programme has been rolled out supplier relationships, food availability M&S Food more price competitive and to 90 stores and the team has improved very strongly. improved value perception, without demonstrated scope for reducing waste,

10 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XIFCXXXXXOurXPeople_v196 Modification Date: 27 May 2020 6:43 pm Rapid introduction of new online solutions to help serve isolated Challenge To provide customers with customers: We’re All In Supporting isolated customers who essential groceries, we introduced a cannot shop in store. temporary partnership with a delivery This Together app provider, initially at 120 BP franchise M&S response stores, and in May, we extended the service In under two weeks we launched to selected town and city centre sites our first online Food Box, and by May offered a range of eight, and included a broader product range. spanning cupboard essentials Alongside this, we quickly introduced online through to fresh meat and vegetable M&S Food Boxes, as explained opposite. options and convenient ready-meals and Made-Without versions. The first Supporting our suppliers: At its core, boxes were targeted to customers protecting the magic is about protecting over 70 identified by our Sparks the quality and provenance of our food

loyalty programme. We used STRATEGIC REPORT through the strength of our supplier capacity within our Clothing & Home partnerships. Our 10,000 British M&S distribution network to help us Select Farmers have been put under increase volumes and dispatched immense pressure following the collapse over 2,500 boxes per day. of hospitality sales, labour shortages Number of Food Boxes and increased absence. M&S stood by its dispatched per day longstanding commitments to British sourcing and paying a fair price for milk, and introduced new initiatives and promotions on products like steak to help M&S Select Farmers manage excess stock. 2,500 In addition, we extended our funding platform for smaller Food suppliers to access immediate payments from our by the strong growth reported by Ocado ·· Agreeing through Ocado new banking partners to support cash flow. Retail since lockdown, with growth for supply agreements with major the most recent 9 week period of 40.4% branded suppliers to improve M&S NEVER THE SAME AGAIN PRIORITIES reported at its AGM on 6 May. competitiveness in branded sourcing. The impact of Covid-19 has affirmed our –– Continue working with Ocado Retail –– We will accelerate our end-to-end strategy to create an even better value, to ensure a compelling offer at the supply chain transformation by differentiated Food business and grow switchover on 1 September through: resolving our Gist relationship and through the roll-out of the Vangarde the volume opportunity by enabling more ·· Adding over 6,000 M&S lines to Ocado programme. This will reset our operating customers to shop our full range. While from September compared with model to help deliver a positive step the shape of trading has been affected c.4,000 Waitrose lines. In all cases, we change in our waste and availability by the change in customer shopping believe M&S product, quality, date life levels, through better forecasting and patterns during Covid-19, we maintain and price will be equivalent or better allocation, depot process changes, more our belief that we have an opportunity to than the current offer. double the size of the M&S Food business timely delivery windows, fill processes in the medium term. To achieve this we will: ·· Finalising product data sets for online and stock counts. Having begun at trading, supply chain processes for our York Vangarde store, we rolled out –– Develop a winning online Food business direct to Customer Fulfilment Centre the principles to 90 stores and the through the successful delivery of the deliveries and switchover procedures programme will be delivered nationwide, Ocado switchover which is critical to for September. enhanced by a new ambient food depot. bring M&S Food into home and online We expect this to open ahead of ·· Delivering synergies for M&S starting delivery. The value of the investment we Christmas 2020 to improve availability this year and building to not less than have made has been further reinforced during this peak trading quarter. £70m in 36 months from inception of supply. STRATEGIC KPIS

Like-for-like sales Value for money perception Like-for-like sales performance improved The proportion of customers who rated us and strengthened through the year as highly on value for money. We reduced the we outperformed the market. price of over 500 lines by 10% this year to ensure ‘trusted value’. +1.9% 23 18/19 (18/19: 59%) 19/20 19 63% Availability Quality perception Backing our We continued our drive to improve The proportion of customers who rated availability and reduce waste through us highly on quality. Our Food strategy of 10,000 M&S Farmers the Vangarde programme, designed ‘protect the magic’ includes maintaining the to improve the running of our stores. quality our Food products are famous for. Above We ran a six-week TV, digital and in-store campaign to encourage support for (Level) (18/19: 85%) British farmers in the midst of the Covid-19 crisis to put a spotlight on the incredible 93.3% 86% food our nation’s farmers produce. Annual Report & Financial Statements 2020 11

In Womenswear, we took action to simplify continued to make changes – announcing Financial highlights our ranges; the number of options was the closure of the final two regional reduced by 11% and we increased volume distribution centres. This move will help -8.3% on our top 100 lines resulting in strong improve flow of product through the uplifts. We focused on hero categories supply chain and therefore availability £3.2bn and saw what is possible when we back nationwide for customers shopping in UK Clothing & Home revenue our best-performing categories with store. We know our performance remains contemporary fits, clear price architecture, held back by limitations in supply chain supportive marketing aimed at our family capability and our current processes still -37.0% customers and relevant innovation. In add cost and complexity. Led by Paul Denim, we increased our market-leading Babbs, our new Head of Clothing & Home £223.9m position and have seen a sales uplift of Supply Chain, we will act at pace to Operating profit before adjusting items 10% across two years. We also launched improve the planning, flow, visibility Goodmove – a great-value, stylish and complexity of deliveries. PERFORMANCE THIS YEAR activewear range developed on M&S’s strength in performance fabrics and ACTIONS IN RESPONSE TO COVID-19 Last year, we set out plans to address sports bra innovation – designed to the historical challenges of our Clothing broaden appeal and capitalise on the Following the lockdown announcement business and the action required to start fast-growing athleisure category. Early on 22 March, our Clothing & Home store the reversal of its declining performance. sales were strong resulting in an improved operations were packed down within We outlined how we would build a more 16% growth in this category in the first 24 hours. This, combined with subdued confident Clothing business focused on three months. customer demand, resulted in store sales contemporary, wearable stylish clothes, being reduced to a trickle. Although online underpinned by great quality and value. Lingerie held its leading market share at Clothing & Home traded throughout, To do this, we said we would: 27%, including our highest ever Bra market demand in initial weeks for clothing was share, with a strong performance from very low with a gradual uplift afterwards. –– Restore style and value credentials Collection, and an increased rate of sale and broaden appeal to a family as option count marginally reduced. In The following actions were implemented to age customer. Kidswear, under a new leadership team, mitigate risk and support our operations. –– Reduce the proliferation of range the shift away from ‘Sunday best’ to more Supporting online distribution at and options. casual ranges at better value resulted in Castle Donington: We acted quickly to like-for-like sales growth in the second half. implement hygiene measures and support –– Substantially increase high-volume for colleagues at our online distribution wardrobe staples in key categories Teething issues held us back in Menswear centre. The high levels of automation at such as denim and school wear. as we transition to a more contemporary style, but we do not expect these issues the site have been beneficial for the –– Target one third of sales online by 2022. to be repeated. Hero categories started implementation of social distancing so that we can help keep our fantastic –– Modernise our end-to-end supply chain. to see improving trends after Christmas, and knitwear like-for-like sales grew by distribution centre colleagues well and –– Trade more effectively in season – 5.6%, following a strong marketing effort, maintain service and redivert capacity with a first price, right price mentality. in contrast to further declines in formal to support Food operations. –– Continue to reduce the quantity of clothing experienced alongside the Decisive action on stock management, sale merchandise. broader market. supporting long-term suppliers: We took fast action to manage stock and costs In 2019/20, UK Clothing & Home sales As set out on page 17, M&S.com to secure the business for the future. decreased by 8.3%, with like-for-like performance was level, with our We cancelled all late summer stock revenue down 6.2% including an estimated percentage of UK Clothing & Home production from 24 March. Around 2.2% adverse impact from Covid-19 in sales online at 22%. Issues in Clothing & £400m of remaining stock and forward March. Online revenue remained level. Home availability and conversion as orders is year-round ‘essentials’ product, Operating profit before adjusting more customers chose to shop on and this will be carried forward into future items declined 37.0%, largely driven by mobile impacted the first half of the seasons. Of the unsold seasonal stock, lower sales and gross margin and also year. Performance improved somewhat we made arrangements to hibernate a the impact of the crisis. Following a in the second half as initial steps proportion until Spring 2021 and secured challenging start to the year, we made were taken to improve the customer storage facilities. We adjusted supplier up for lost time through the second half, proposition and Search Engine payment terms to improve our working taking decisive action to trade the ranges Optimisation (SEO) prior to the adverse capital position. However, with the through shorter clearance periods and trading impact of Covid-19. M&S.com is impact of Covid-19 felt acutely across improving availability. For the 8 weeks to be re-organised under new leadership the garment industry, we put in place ended 22 February UK Clothing & Home as part of the post-Covid programme. measures to support our long-term like-for-like revenue increased 0.3%, Supported by the new mezzanine, suppliers, who remain as important to our driven by stronger trends at M&S.com, our distribution centre Castle Donington business as ever and we will continue to up until the beginning of the crisis. had a strong Christmas performance – work in partnership with them through the including its biggest day on record – crisis. We paid for all shipped products and sending 417,000 customer parcels. offered pre-payment for the vast majority 12 Marks and Spencer Group plc Within our stores logistics network we

‘All In This Like-for-like sales Style perception Like-for-like sales for 2019/20 were adversely The proportion of customers who rated Together T-shirt’ impacted by availability in H1. However, us highly on style. We are reengineering before the impact of Covid-19, the eight our Clothing & Home business towards Below M&S Ambassador Holly Willoughby weeks ended 22 February showed more contemporary fit and style as well launched our ‘All In This Together T-shirt’ in aid encouraging signs of improvement with as improvement to our core ranges. of NHS Charities Together and it sold out on like-for-like sales increasing 0.3%. the day of launch. (18/19: 58%) -6.2% -1.6% 18/19 63% -6.2% 19/20

Value for money perception Clothing & Home space

The proportion of customers who rated us We continue to make good progress in STRATEGIC REPORT highly on value for money. We are accelerating reshaping our store estate for customers. our move towards trusted value for customers. (18/19: 65%) -2.3% 18/19 10.7m sq ft 67% 19/20 10.4m sq ft

NEVER THE SAME AGAIN PRIORITIES forward ensuring more strategic of orders and committed fabric – commercial partnerships. The reduction the most expensive cost for a supplier. The crisis has rapidly altered customer in forward order volumes has forced We continued to offer vendor finance behaviour for the future, with sharp the need to change ranges and buy and letters of credit enabling suppliers growth in online channels. This will likely more of less from fewer core suppliers. to get immediate access to cash. We continue at least in the coming months continue to work with the Ethical Trading ahead, and to respond and adapt: –– The role of the sourcing offices will Initiative, the International Labour be increased so that sampling, ordering –– We will broaden relevance and and quality issues are dealt with Organization and remain committed increase online growth by introducing to our community projects. offshore and we will bring forward the complementary guest brands to implementation of a fast ‘near sourcing’ Following a trial, we rolled out a store M&S.com and large store formats. supply chain to enable a test and pick model to 83 stores to service M&S. Additionally, we have agreed with Ocado re-order approach to seasonal com protecting online availability on Retail that around 850 core Clothing & fashion lines. core products such as babywear and Home products – such as school wear clearing stock. and underwear – will be available on –– The strengthening of our leadership the site from September and around team with the arrival of Richard Price Adapting the M&S.com journey to reflect 1,600 core Clothing & Home lines per (Clothing MD), Stephen Langford customer behaviours: We were agile to year will be available on the site. (Head of Online) and Paul Babbs customers’ needs and updated the site (Head of Supply Chain) will help us architecture to make it easier to shop –– The move to more trusted value will fulfil our priorities at pace. Through popular categories such as leisurewear be accelerated with an opportunity delivering these actions we believe we and kidswear. As set out on page 17, to further reshape our buy and will emerge from the crisis with a much we optimised site performance and set up permanently reduce Autumn/Winter more focused and relevant range a dedicated SEO working party to improve store option counts by 20%. Supplier offering substantially better value. search rankings. To drive longer-term concentration activity will be brought customer loyalty and engagement during the lockdown phase, we highlighted the benefits of the M&S app resulting in three Challenge times as many weekly downloads of the app by new customers. We’re All In This Customers and colleagues asked M&S if there was a way we could Adapting our customer propositions: Together create a product range so they We introduced contactless delivery as could do their bit and show support standard and made changes to customer for the NHS. service to reflect lockdown, including M&S response extending our returns policy to 90 days The team moved quickly to produce and lengthening the collection widow for a fantastic range of T-shirts for the Click & Collect orders. We kept customers whole family with all profits going to updated on service changes through a NHS Charities Together. Our dedicated Covid-19 page on M&S.com. designers came up with the distinctive design in 24 hours – and Readjustment of our logistics network: we repurposed stock and sent it to Following the suspension of store the printers and launched on the deliveries, around 3,000 logistics network web within a week. Holly Willoughby colleagues were furloughed. We worked (see above) launched the campaign with our third-party logistics providers and the T-shirts sold at a rate of one and offered wage support while they per second. Further batches sold quickly supported by M&S Food waited for support from the government’s Ambassador Amanda Holden, who Coronavirus Job Retention Scheme. used the artwork as the cover of her The number of furloughed colleagues was charity single. reviewed weekly as we progressed into the new financial year to ensure cost-saving was balanced with the need to support Annual Report & Financial Statements 2020 13 online trading and food operations.

PERFORMANCE THIS YEAR five transactional websites, including Highlights our flagship website in India – our key Last year, we said that the actions we owned market – and now sell online had taken in closing loss-making stores to customers in 44 different countries. -15.2% and changing the business model to Our e-commerce sales channels £110.7m focus on working with partners in select performed strongly with online retail markets with the potential for growth Operating profit before adjusting items sales growing +26% on last year to £103m, had resulted in us making headway in our and we saw further growth in online sales transformation. However, we were clear following store closures in markets as a we had further to go to improve our local result of Covid-19. relevance and competitiveness. We said we would do this through: 85 ACTIONS IN RESPONSE TO COVID-19 1 Net promoter score –– Expanding in strategic, scale markets. The impact of Covid-19 has mirrored the Our International business recorded a net promoter score for the first time in line with –– Modernising our store estate in a spread of the virus from China and South the wider business and will continue to low-cost way to improve our East Asia, where we have a presence in measure future progress against this. customer experience. Hong Kong, Singapore and Malaysia, to the Middle East, impacting operations –– Strengthening market right pricing and in the UAE, Saudi Arabia and Dubai and further localising ranges to become (18/19: 39) then Europe. By the end of the financial more competitive and grow volume. year, it had resulted in 382 stores closures, 44 –– Continue the roll-out of our almost 80% of the estate. International websites international online channels. We took a number of actions to support Over the past year, the International our International colleagues, partners business has faced significant headwinds and customers: including stock efficiency management Supported our partners: Established by franchise partners resulting in reduced partner and operational support teams shipments, political unrest in Hong Kong with daily crisis calls and identified and France, and – most significantly – alternative ways to deliver our products Covid-19. This disruption, combined to customers while meeting local with weak performance in Ireland, resulted government guidance, including the in revenues for the year declining at launch of a Deliveroo partnership constant currency by 2.5%. Trading in France. conditions deteriorated significantly in March with a number of markets or stores Reinforced our online sales channels unable to trade due to the virus, resulting for customers: Optimised our existing in operating profit (before adjusting items) e-commerce sales channels in key declining 15.2% to £110.7m. markets like in Czech Republic where we supported the acceleration of customers In line with our priorities, throughout the shopping online through promoting both year we drove local relevance through our own flagship website, and the leading market right pricing in select markets, local e-supermarket, for customers to with average selling prices dropped by continue purchasing M&S products. -12%, boosting sales by +2% and volumes by +15%. Alongside this, we continued to Responded to increased product drive greater localisation of our products demand: Worked with suppliers and to meet the needs of our customers in partners to maintain supply of fresh food key markets, such as in India where 25% products in our Asian markets through of Womenswear and Menswear is now sourcing alternative delivery routes specifically designed for the market. to market. Above A range of Covid-19 measures across our international store estate We expanded and modernised our store Boosted operational support for were introduced to follow local estate to 481 stores, opening 47, 18 in partners: Delivered international buying government guidance and keep our owned and 29 in franchise markets, fairs for partners, which are usually colleagues and customers well. as well as modernising 24 and closing 10. attended by over 100 people in the UK, online for the first time so partners were Our international e-commerce channels able to continue reviewing and selecting are divided into direct shipments from the products to sell in their markets for the UK, sales on third-party marketplaces and year ahead despite restrictions on travel. sales fulfilled by franchise partners on their own websites. This year, in line with our strategy, we launched an additional 1. Net promoter score (NPS) equals percentage of ‘promoters’ minus the percentage of ‘detractors’.

14 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XIFCXXXXXOurXPeople_v196 Modification Date: 27 May 2020 6:43 pm Provided colleague training and support: –– Reduce costs and improve support for Ran online training for colleagues affected further growth in 2020/21 by prioritising by locally enforced lockdowns in visual investment in the Hemel Hempstead merchandising and store management export centre to avoid inventory courses to upskill with high engagement being double handled through the STRATEGIC REPORT and participation rates. UK network and deliver a more accurate and efficient service for NEVER THE SAME AGAIN PRIORITIES our international partners. The double-digit growth in International SERVICES online sales achieved since Covid-19 signals that we have potential to achieve We continued to provide our customers a step change in this area, as well as with a range of services through our wider Above We modernised 24 additional continuing to improve and develop family of businesses, including financial stores across our international estate the localisation of M&S internationally. services through M&S Bank (managed this year, including One Raffles Place in Our priorities will be: by HSBC) and fully renewable electricity Singapore, which features a range of via M&S Energy (in partnership with digital services for customers. –– Turbocharge our international Octopus). M&S Bank & Services income e-commerce proposition as the before adjusting items was down £10.2m crisis drives more customers to shop to £16.8m. This was predominantly online, which we have begun with the result of an increase in bad debt improvements in our online service provisioning due to a higher risk of for customers through Covid-19, customer default. M&S Bank income after and attain faster growth rates in adjusting items decreased £1.9m to £4.2m. these channels, which operate attractive contribution margins. Following the onset of Covid-19 our Services businesses also continued –– Adapt to changing customer to support customers through measures behaviours, with social-distancing such as introducing priority access for measures encouraging less contact, NHS and emergency services on our by prioritising efficient store telephone lines, or offering guidance modernisations, such as our One Raffles on fraud protection during this time. Place store in Singapore. In this store we have digitally enhanced operations which now include features such as Mobile Pay Go for a contact-free shopping experience for customers.

Left We are looking to expand our international online channels as more of our international customers choose to shop for the best of M&S online through our flagship sites, such as in Greece.

Annual Report & Financial Statements 2020 15

STRATEGIC KPIS STORES & PROPERTY

PERFORMANCE THIS YEAR –– Introduced a range of social-distancing Footfall (average per week) and hygiene measures in stores to Last year, we said we had made progress (18/19: 18.6m) help keep our customers and in reshaping our store estate to reflect colleagues well, including regular 18.0m rapidly changing customer habits and handwashing breaks, perspex screens address years of underinvestment. at checkouts, additional cleaning of But we had further to go and would Transactions (average per week) trolleys and baskets. continue to focus our attention on: (18/19: 11.4m) –– Introduced dedicated shopping hours –– Accelerating the pace of our store for elderly and more vulnerable 11.9m estate reshape. customers, as well as NHS, emergency –– Expanding our reshape programme services, and health and social Net promoter score1 to include redeveloping sites to care workers. make the most of our existing space. (18/19: 68) –– Began engaging landlords with the –– Beginning to look at our new aim of introducing flexibility on 73 store formats. property costs to help us manage our overall cost base. Good progress was made on the store 1. Net promoter score (NPS) equals percentage of reshape programme, with 54 of our legacy –– Deferred closure of two stores to ‘promoters’ minus the percentage of ‘detractors’. shared stores closed to date out of 110. later in the year to support communities Spend on UK store space was down as and continue to provide our 13 fewer owned Food stores opened customers access to our full range compared with the prior year. of Food products. Our transformation requires well-located –– Reduced facilities and equipment We’re All In This stores reflecting how customers want to activity to mirror an anticipated decline shop today. An example of this would in upcoming new store activity – Together be the move of our Rochdale store to including permanently removing the new Riverside development, an area substantial costs from storage and Keeping all our customers that is family-focused, in a convenient maintenance of our equipment. and colleagues well location with a great mix of leisure and We moved quickly to help keep our retail facilities plus car parking. NEVER THE SAME AGAIN PRIORITIES colleagues well as they worked and to help our customers get the things they We empowered store colleagues and Addressing our ageing store estate to needed and feel confident shopping increased efficiency through industry- meet the rapidly changing customer by introducing strict hygiene protocols leading technology. In partnership behaviours remains an important part and investing in social distancing. Our list with Microsoft, we rolled out our Teams of our transformation programme and of measures was extensive, including platform to deliver more seamless to accelerate this we will: comprehensive hygiene routines for communication between stores and –– Progress the emphasis of our store items such as trolleys and baskets, support centres. The move has given store putting in new equipment such as reshape programme towards the managers greater access to data to run perspex screens at till points, and using relocation of ageing stores as the insight-driven stores and bring the voice signage to encourage contactless downturn creates opportunities for of the stores back into the heart of M&S. payment where possible. new sites. As outlined on page 10, we saw –– Maintain our dialogue with landlords on encouraging early sales results commercial terms on lease contracts. from the five renewal ‘test and learn’ Food stores opened in the year. –– Prioritise capital expenditure to focus on essential and short payback Our Property Development team began investments focused on growth as we proactively researching ways to unlock move towards extension of the food and maximise value out of our property renewal formats and redevelopment portfolio through active management proposals for a few of the older, larger of the estate and using space effectively. city centre stores. ACTIONS IN RESPONSE TO COVID-19 –– Fast-forward the expansion and integration of technology into our –– Quickly responded to government store environments to support our guidance, closing all Clothing only colleagues in stores. outlets, packing down our Clothing & Home sections in 24 hours and suspending M&S Bank Bureaux, cafés and other in-store services in our large stores. 16 Marks and Spencer Group plc

PERFORMANCE THIS YEAR ACTIONS IN RESPONSE TO COVID-19 Percentage of UK Clothing & Home sales online Last year, we said improvements had been –– Prioritised the wellbeing of our made to M&S.com to bring us back to level colleagues and quickly revised our +1.8% but were clear there was more work to M&S.com operations and supporting 22.5% do to become a Digital First business. services, such as our distribution We outlined the required changes to centres, to follow government

enhance the operational performance of social-distancing and hygiene Traffic (visits per week) our digital channels and address the slow guidelines (see further detail in +8.0% progress towards creating a Digital First Clothing & Home section on page 12). culture. These included: 9.5m –– Adapted M&S.com journey to – Improving search functions and reflect rapidly changing customer – enhancing the end-to-end journey behaviours, including trading our site STRATEGIC REPORT Net promoter score1 to get the customer to the product with refreshed architecture focused (18/19: 54) they want faster. on the required goods most searched for by customers such as kidswear, –– Creating a joined-up operation between 57 bedding, towels, loungewear. M&S.com and stores by adding more collection points and improving –– Temporarily suspended event-focused fulfilment times on Click & Collect elements of our Food to Order to enable and giving colleagues on the shop greater operational focus on customer floor the technology they need fulfilment and new initiatives such as (e.g. ordering product and checking the launch of contactless delivery stock for customers on the shop floor across Clothing, Home, Food and We’re All In This using tablets). flower orders. –– Engaging customers with a more –– Adjusted delivery timeframes as Together personalised experience across digital needed for the extra measures in products and marketing place to keep all colleagues and Challenge: With many customers unable communications. customers well. to shop in a store while self-isolating, M&S wanted to provide a way to help –– Fast-forwarding progress to become a –– Expanded our Mobile Pay Go payment volunteers shop on behalf of the most data-driven digitally enabled workforce facility to a further 100 stores to vulnerable customers in their and leverage our external partnerships further help minimise contact during community. to help get us there. payment process. Response: We created the M&S ‘We’re Online revenue growth for the year All In This Together’ E-Gift Cards so NEVER THE SAME AGAIN PRIORITIES was level and was showing improvements customers – or their family or friends – can purchase online and email the in the second half before Covid-19 As a result of the crisis, we must take barcode to volunteer shoppers to use significantly impacted performance in the opportunity to accelerate the as payment in our stores – removing the Q4, particularly across Clothing & Home. construction of M&S.com into a winning need to exchange cash or payment Digital is being re-organised under a online proposition, as Covid-19 forces transfers. This was a simple way for single transformation team, bringing more customers than ever to permanently volunteers to pay without cash or a together data, online and technology shift shopping preferences to online. payment card and we received over as part of the post-Covid programme. The crisis resulted in M&S.com trading 1,000 orders for the E-Gift Cards within for a period as our only significant the first two weeks of launch. Operationally, we improved aspects of the online customer experience, such as Clothing business and showed us the extending order cut-off time to 11pm for need to be leaner, faster and more Click & Collect and midnight for next day integrated to compete with pure-play delivery. Our online distribution centre online competitors. at Castle Donington delivered our best Our new post-Covid ambition for the performance over Christmas with peak Group will therefore be to drive at least week despatch up 18% overall, including one third of sales online and our priorities the biggest ever despatch day, with no will be to: operational issues. –– Reorganise M&S.com under new However, we have yet to harness the leadership to drive improvements. growth a digitally enabled organisation can create. To rectify this, we established a –– Fracture the old ‘stores first’ mindset central Digital & Data function to provide and treat M&S.com as our biggest and support across the business, ensuring a best store. seamless customer experience and –– Roll out well-known brands across our improving personalisation, embedding M&S.com and large store platforms digital across our stores and shopping as a start in broadening our appeal. missions, revamping our loyalty proposition and ensuring we are at the –– Unlock the potential of our colleagues forefront of the latest innovation and by accelerating our Digital First trends. We also continued to work with behaviour changes across the business. our external partners, such as Microsoft and Founders Factory, to act as a catalyst for change and drive our aim to become a Digital First business forward.

Annual Report & Financial Statements 2020 17

A year ago we set out our culture that we want to create as part of the transformation, drawing on the values of the past in a modern way to establish a renewed and reinvigorated workplace. We were clear that we want to make M&S the most engaging, involving place to work in UK retail, with a fast-moving, empowered organisation and flat organisational structure. Our plan was based on: –– Transforming our organisational design to a family of accountable businesses to drive ownership, pace and commerciality. –– Creating empowered, responsive and commercial leaders who are close to the frontline. –– Putting the voice of the stores back at the centre of the business. Above Our colleagues’ commitment to our customers, communities and each other in the crisis has –– Creating a culture of plain speaking. been phenomenal. –– Moving away from hierarchy to an organisation that welcomes argument mix of fresh eyes and talent we have to manage shifts as well as viewing and and challenge and respects all promoted from within M&S. logging the completion of tasks. colleagues equally. We have made initial progress in An involving, engaging culture where building a wider leadership team, moving everyone can get on TRANSFORMATION PROGRESS from a ‘senior leadership group’ to a This year, we launched new clear Transforming our organisational design ‘transformation leadership team’, but we behaviours, after extensive collaboration have more to do to devolve accountability with colleagues. They are ‘talk straight’, In the past year, we have halved the and create a sense of shared mission. number of our central offices in ‘own it and get it done’, ‘make every London and Manchester and moved to Putting the store voice at the heart penny count’ and ‘all in for the customer’. segmental reporting for each business of the business Talk straight really resonated, reflecting the need to encourage plain speaking, unit in line with our model of accountable Trading areas of the business have begun and the business tone of voice has started business units supported by a smaller to work more closely with the stores. There to become more direct. corporate centre. are now weekly buyers and sellers calls Creating a team of empowered, where store and the commercial teams Our colleague representative body BIG responsive and commercial leaders review the prior week’s trading and (Business Involvement Group) attends develop action plans, and a weekly store the PLC Board and Operating Committee We have continued to attract world-class feedback call on how plans are landing. regularly, providing a link between the talent and have built a strong team over business and frontline. However, despite Business-wide programmes now begin the past year. Katie Bickerstaffe joined its strengths, the organisation and culture in stores rather than being developed the executive team as Chief Strategy and of BIG has been overly formal. Over the centrally. The Vangarde supply chain Transformation Director, Eoin Tonge will past six months, BIG has begun to efficiency programme is named after start as Chief Financial Officer in June and transform so it can better engage and the York store where it was developed Richard Price will be taking up his role as involve colleagues and partner the before being rolled out by operators Clothing & Home Managing Director. business on its transformation. themselves in a test and learn approach. We have also welcomed new leaders into To better track sentiment, we have moved The roll-out of the Microsoft Teams key positions. Will Smith joined as Property from an annual colleague survey to a communication platform has been Director in May from Asda, Helen Milford monthly digital pulse. The results are transformational in connecting joins as Store Operations Director from shared with colleagues and give a regular colleagues, to each other and to the J Sainsbury on 1 June, Paul Babbs is soon read on morale. Ownership has moved centre. Teams has launched across all to arrive as Head of Clothing & Home from HR to leaders and an easy-to-use UK stores and 800 digital champions have Supply Chain from Adidas, Stephen online action planning tool has been been trained to support colleagues with Langford arrived from George at Asda to introduced to help managers respond the transition. Teams is available for all be Head of Clothing & Home Online in May to results and embed tracking of action colleagues on their personal devices and Craig Lovelace joins the Food team as plans into performance management. and 43,000 are now using Teams to Finance Director from N Brown. These new Every quarter, there is a ‘deep dive’ to look stay connected. We are also rolling out leaders make up c.40% of the leadership at cross-business unit patterns, and after functionality so colleagues can use Teams team – providing diverse experience and a the first full quarter of results in Q4,

18 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XIFCXXXXXOurXPeople_v196 Modification Date: 27 May 2020 6:43 pm engagement levels were at 81% and ACTIONS IN RESPONSE TO COVID-19 –– Digital communication direct to the colleague Net Promoter Score (NPS) frontline has driven high levels of was at 12 – providing a baseline for the –– Our colleagues’ commitment to our engagement and created a dialogue next quarter. customers, communities and each other and momentum that we do not want in the crisis has been phenomenal. to lose. Developing our people has moved on There has been a positive acceleration this year. The Food business introduced in our culture change and we have NEVER THE SAME AGAIN PRIORITIES Academies to develop core technical skills captured the lessons to ensure that and courses to support behavioural and old habits aren’t reverted to. –– Prior to results, we announced the leadership skills such as resilience and business will be led by a smaller –– The business has taken care to support emotional intelligence. However, progress executive team to drive a faster pace all colleagues. Every colleague who has has been too patchy and more needs of action and increased focus on needed to self-isolate, including those to be done to standardise and improve transformation priorities. our approach. required to shield themselves for 12 weeks, has been able to do so on –– All decision-making bodies will be

We have continued with the Marks & Start full pay. Store colleagues remaining at re-set following this shift and the role of STRATEGIC REPORT programme, which has supported 20,000 work supporting the business have been the wider Transformation Leadership people on their journey to work. It benefits rewarded with 15% bonus pay for the Team will be clarified and redefined. us in many ways, including the diversity duration of the lockdown period. of our workforce with 25% of participants –– The re-set of our colleague having a disability and 20% from the BAME –– Colleagues have shown great flexibility communication will be embedded to community. This year saw our biggest ever and teamwork with 4,500 colleagues support our aim of creating the most level of PRIDE support, and we became moving overnight from hospitality and engaging, involving and dynamic the first UK retailer to introduce sunflower C&H operations to our Foodhalls, and place to work in UK retail. This will lanyards into all stores, which helps 25,000 store colleagues voluntarily include designing and developing a customers and colleagues with hidden being furloughed in under a week. new induction programme, graduate disabilities. We retained our recognition Colleagues have multitasked and taken programme and leadership framework as a Times Top 50 Employer for Women on different roles and we will look to to attract, develop and retain for our promotion of gender equality. embed this way of working permanently. top talent. However, we need to do more on our –– The focus on costs has driven clarity –– Robust performance management and approach to diversity and inclusion and of purpose, decision-making and rewards frameworks will be launched to this is an area of focus. commerciality, and teams have been drive accountability, commerciality and empowered to act and deliver plans pace. Underpinning this, a new People IT Data-driven decision-making regardless of hierarchy. Office-based system is being developed to remove Becoming a data and digitally enabled colleagues have worked effectively unnecessary process and move to a business is at the core of our from home and the roll-out of Teams more self-service model for managers transformation and is covered on page 17. has been accelerated so that most and colleagues. Tablets have now been rolled out to every business units are now at over 90% store management team so they can usage and colleague events have access the information they need to been hosted virtually. run their stores – including store-level profit and loss accounts.

COLLEAGUE REPRESENTATION MEASUREMENTS

Total employees1 SENIOR MANAGERS FROM GENDER PAY GAP Female ETHNIC MINORITIES 3,219 (18/19: 12.5%) ,0 (18/19: 5%) Male 12.9% 22,286 8% Our Gender Pay Gap, the percentage We remain firmly committed to our target of difference between average hourly earnings having 50% women and 15% BAME colleague for men versus women, increased this year Total senior managers1 representation in our senior management team but remained lower than the UK average. by 2022, and we continued to expand and Female support our range of colleague diversity 2 (41%) 126 networks across the business this year. Male 4 (59%) ENGAGEMENT COLLEAGUE NET PROMOTER SCORE

Total Board1,2 (18/19: 81%) Female 81% 12 3 (37.5%) 8 The proportion of our colleagues who feel The first full quarter results of our new Male proud to work at M&S and enjoy what they do. monthly digital colleague pulse, following (62.5%) the move away from an annual colleague survey to better track colleague sentiment throughout the year. We will continue to report against these revised measurements in future. 1. As at 28 March 2020. 2. For details on changes to Board gender diversity since year end see page 46.

Annual Report & Financial Statements 2020 19

S172(1) REPORTING STAKEHOLDER PRIORITIES

The directors are bound by their duties under the Companies Act 2006 (the SHAREHOLDERS CUSTOMERS “Act”) and the manner in which these have been discharged, particularly their duty Engagement with our institutional and Ensuring the customer is at the heart of every to promote the success of the Company private shareholders is an ongoing process, decision is crucial to the Board’s strategy. for the benefit of its members as a whole, occurring through a range of channels including This year, we have focused on our customers forms a core theme of this report. face-to-face meetings at investor days, calls by offering trusted value and a wider range The following pages comprise our with the management team, private shareholder in Food, moving to a first price, right price Section 172 statement, setting out how panels, our AGM and through a range of approach with improved availability in Clothing the directors have, in performing their shareholder specific communications issued & Home, reshaping our store estate and duties over the course of the year, had by email. The transformation strategy has been improving our website to serve customers regard to the matters set out in Section shaped with M&S’s long-term success in mind however they want to shop. We engage directly 172(1) (a) to (f) of the Companies Act 2006. and for the benefit of our members as a whole. with customers through social media and have We have integrated our reporting on how Examples of long-term planning include the implemented a range of measures to protect our stakeholders have been considered growth opportunities presented by Ocado and their safety and promote social distancing to in terms of our business model and the liquidity preservation measures taken as a minimise the risk of Covid-19 spread. governance throughout this report: result of Covid-19, including suspension of Key priorities: Great quality and value Board activities, see p48 and p49 dividend payments (see page 43 for more detail). products; having good availability across Plan A, see p22 to p24 Key priorities: Delivering sustainable, profitable product lines in the right sizes; a store estate growth over the longer term. and online offer that are easy to shop. Our response to the Covid-19 crisis, see p50 to p53 Throughout the Strategic Report on p2 to p43 COLLEAGUES COMMUNITIES Our colleagues are the heart and soul of Preserving the links we have established with OUR APPROACH the business and central to its success, the communities we serve is an important The Board is responsible for leading so properly incorporating their views into factor in the Board’s discussions and has helped stakeholder engagement, ensuring Board decision-making is essential to our shape, for example, our approach to reducing that we fulfil our obligations to those transformation, of which culture change is a plastic packaging, food waste, charitable impacted by the business. We believe key plank. To achieve this, the role of our initiatives that our customers can support and, that considering our stakeholders in key Business Involvement Group (BIG) network in particular, the store renewal programme. business decisions is not only the right has been redeveloped with a more regular While the benefits of new store openings are thing to do, but is fundamental to our presence at Board and Remuneration clear, we recognise that closures are a sensitive, ability to drive value creation over the Committee meetings. Feedback, suggestions albeit necessary, course of action for a business longer term and to make M&S special and concerns from colleagues across the increasing the proportion of sales it delivers again. Now, as we enter a new financial business are also considered through channels online. Careful management of this process has year in the midst of a global pandemic, such as our Monday trading calls, Talk Straight been a significant area of focus for the Board. balancing the needs and expectations monthly colleague engagement and the Key priorities: A fair contribution to society of our stakeholders has never been a Suggest to Steve initiative. The Board receives and the economy; a socially responsible more important or challenging task. regular updates on these topics. business; a strong presence in the community On these pages, we have grouped our Key priorities: Providing an inclusive and through a properly shaped store estate. stakeholders into six key categories diverse place to work; amplifying the colleague and have provided an overview of their voice in company decision-making. interests, their concerns and the ways in which the Board acted with regard to these groups when taking its key strategic SUPPLIERS PARTNERS decisions and shaping the transformation strategy throughout the year. These have Our long-term supplier partnerships are an Our digital, franchise and JV partners have been provided within the context of our important part of being able to innovate been an important feature of Board discussions, nine strategic pillars to present more and offer trusted value to customers. In 2019, from the participation of senior members clearly how our stakeholders are integral we focused on improving our supply chain; of the Ocado team at Board meetings to to delivering our strategy. an essential facet of our strategy and one that leveraging the expertise of our digital partners can only be driven forwards through continuing, to make better use of technology in our close engagement with our suppliers. Looking transformation. Into 2020/21, we have worked ahead, the launch of Ocado and our ambition in partnership with the UK government, COVID-19 to grow online to one third of sales presents banks and other food retailers to secure The Covid-19 pandemic has had a significant, mutually beneficial volume growth both the continuity of UK food supplies and significant impact on all of our opportunities that we will continue to work with the future liquidity of our business. stakeholders since it emerged towards our suppliers to achieve. Key priorities: A corporate partner that the end of the financial year. This impact Key priorities: Prompt and accurate payment responds to concerns and acknowledges and how we have responded to for goods and services; driving mutually jurisdictional and technical expertise. protect our business and manage the beneficial volume growth. expectations of our stakeholders is set out in full on pages 50 to 53.

20 Marks and Spencer Group plc

During the year, as the Board made decisions implementing our strategy, the different interests of our stakeholder groups, and the impact of key decisions upon them, were considered. The following page provides an overview of how decisions taken in furtherance of each of our strategic pillars, primarily prior to the Covid-19 outbreak, were influenced by, and impacted, our six stakeholder groups. While not an exhaustive list, these examples give a flavour of how integral our stakeholders are in the Board’s decision-making process.

TRANSFORMING RESHAPING THE RANGES CREATING A HIGH-QUALITY 1 OUR LEADERSHIP 4 AND CUSTOMER PROFILE IN 7 STORE ESTATE FIT FOR CLOTHING & HOME THE FUTURE

New appointments at senior levels We reset the vision for our future A key area of Board focus has been and our work to improve the flow of target Clothing & Home operating model, shaping our estate so that our store

incoming talent with expertise in key with a new governance model and formats are right for the communities we STRATEGIC REPORT areas such as design, digital and data will programmes of work providing clarity for serve. The Board ensures our geographic enhance our ability to deliver sustainable colleagues on where we want to be as a reach is such that customers across the UK growth for investors and colleagues. business and how we plan to get there. don’t have to travel too far to shop with us. Colleagues told us that their role in Through reshaping our buy and The impact of our stores programme delivering the transformation was often becoming more digital and data driven on colleagues and communities is unclear, so we developed a set of clear, in doing so, we provided colleagues with significant. Where possible, we aim to relatable behaviours, with supporting tools to improve buying from suppliers, redeploy colleagues to other stores in training to help them – the benefits of achieving double-digit reductions in the event of a closure, while new stores which are now being realised. options across Clothing & Home. provide great employment opportunities Our new Code of Conduct Working with suppliers to implement in local communities. strengthens the governance processes logistical improvements, including Customer data was crucial to that underpin key Group-level policies, more frequent, better planned deliveries shaping the Food renewal programme standards and technical procedures and moving to a single-tier network, and the ‘test and learn’ store format that support and protect our colleagues, will improve product availability trialled to date. suppliers and partners. for customers.

BUILDING GREATER PROTECTING THE MAGIC MODERNISING OUR FOOD 2 ACCOUNTABILITY 5 AND MODERNISING THE 8 AND CLOTHING & HOME REST IN FOOD SUPPLY CHAINS

A new framework of delegated Improved our range and value Growing online to one third of authorities, including P&L accountability, proposition for customers through Clothing & Home sales depends on the for each of the family of businesses was continued price investment in high- capacity and capability of our network to established to remove bureaucracy and volume lines and improving our deliver. We have invested in our key sites, better serve customers, suppliers and product innovation pipeline. upskilled colleagues and stress-tested partners at business unit level. Completion of the acquisition our supply chain, but recognise there is The Board oversaw support for of 50% of Ocado Retail brought significant more to do. suppliers by ensuring compliance with opportunities for growth in volumes and Ocado will add significant volume our ethical and environmental principles sales, as well as synergy-linked savings. into the supply chain, challenging the through training, conferences, workshops Each will benefit our customers, suppliers business and our suppliers while being and other development opportunities. and shareholders over the longer term. beneficial over the longer term and Engaging with colleagues directly The restructuring of the marketing improving optionality for customers. shaped the reset of the role of BIG and team to sit within Food has resulted in a We continue to ensure that our strengthened the colleague voice at new family-focussed programme to global supply chain is robust, with viable M&S, with BIG attendance at three Board broaden customer appeal, including business continuity plans in place, meetings and one Remuneration sponsorship of Britain’s Got Talent. including no over-reliance on one Committee meeting during the year. supplier or geography.

BECOMING A DIGITAL REBUILDING COST SAVINGS OF AT FIRST RETAILER PROFITABLE GROWTH LEAST £350M BY 2020/21 3 6 IN INTERNATIONAL 9

Improving the technology Completion of the roll-out of market Prior to Covid-19, we were on track to available to colleagues, such as the right pricing and launch of local flagship deliver our planned cost savings, a leaner Honeywell devices supplied in stores, websites has improved our value and cost base and better operational has helped equip colleagues with the availability propositions internationally. efficiency in the interests of our investors. necessary insight to play a greater part in Board directors and members of the Simpler store management commercial decision-making. We intend International leadership team regularly structures, tailoring staffing to activity to continue to invest in technology and meet with key international partners to and investment in new technologies have leverage our new digital partnerships to discuss progress and any areas of concern. improved colleague productivity and the drive further improvements in this area. Worked closely with our key customer experience while reducing cost. Invested in our digital capabilities, international partners and suppliers to Achieved efficiencies in the including speed and functionality agree appropriate supporting measures e-commerce carrier network, office improvements to our app and websites, during times of significant economic and warehouse space closures and to grow online to one third of Clothing & difficulty, including the ongoing other property savings. While beneficial, Home sales and deliver shareholder value Covid-19 crisis. these have a significant impact on our over the longer term. colleagues and suppliers and need to be managed sensitively.

Annual Report & Financial Statements 2020 21

Plan A is a multi-year sustainability –– Conducted a detailed review of Plan A Towards the end of this process, the transformation plan that has been considering the views of colleagues, business’s focus was rightly on managing updated several times (2010, 2014 and customers, shareholders, pressure the impact of Covid-19 on colleagues, 2017) to reflect the evolution of our groups and campaign bodies, and customers and communities – particularly business and the risks and opportunities conducted a benchmarking exercise the most vulnerable and healthcare that social and environmental issues against the wider consumer goods workers – through the pandemic. pose for us. and retail sector. Therefore, confirmation of Group-level governance and sign-off on targets –– Created a simplified framework that: PERFORMANCE THIS YEAR will now be completed in 2020/21. ·· Is aligned to the business strategy; Supplementary information detailing our Our transformation programme aims performance on a range of environmental to return M&S to sustainable, profitable ·· Has clear deliverables owned and and social issues is included in our 2020 growth and to deliver long-term value for actioned by each business unit; Plan A report available here corporate. all stakeholders. Our priority has been to ·· Maintains our position as a committed marksandspencer.com/sustainability. evolve Plan A to reflect our new operating sustainable retailer; and model and to embed the programme into the core strategy rather than continuing ·· Provides a programme to build to exist in parallel with our operations. competitive advantage in selected Over the past year we have: areas and to engage our customers on the issues that matter to them. –– Begun the transition to a new Plan A operating model to embed sustainability into our business units.

PLAN A FRAMEWORK

Areas of focus Relevant Sustainable PEOPLE –– Human rights and combating modern slavery Development Goals Everyone can belong, and get on –– Access to employment –– Colleague health and wellbeing –– Diversity and inclusion We want the people working in our business and our supply chains to have a voice, and to progress. –– Accessibility We support the causes our customers care about, –– Ethical trading standards and the communities where we trade. –– Improving lives of workers in supply chains –– Community engagement

Areas of focus Relevant Sustainable PRODUCT –– Sustainable raw materials Development Goals We source with care and nothing –– Reducing food waste we make will go to waste –– Animal welfare –– Farming standards We source our products responsibly, working closely with our suppliers to ensure high standards. –– Health and nutrition We ensure no food or clothing goes to waste.

Areas of focus Relevant Sustainable PLANET –– Net zero emissions Development Goals Our actions today protect the –– Sustainable manufacturing planet for tomorrow –– Reducing, reusing and recycling packaging –– Zero waste to landfill We are driving down greenhouse gas emissions. We reduce, reuse and recycle. We work with the factories we source from to take good care of the planet’s natural resources, while being open about the progress we’ve made.

22 Marks and Spencer Group plc

ACTIONS IN RESPONSE TO COVID-19: The simplified structure of our new NEVER THE SAME AGAIN PRIORITIES ALL IN THIS TOGETHER Plan A operating model helped us to deliver a quick and coordinated response As we emerge from the Covid-19 crisis, Last year, we agreed that one of M&S’s to the crisis. As set out on page 50, the there will be many uncertainties, but we core behaviours was to be “all in for the Operating Committee took ownership for believe customers will be looking even customer”; working as one M&S team, decision-making and set the direction for more to brands they can trust and have giving all of our effort all of the time and the Company’s collective response, and confidence in to offer value through being guided in everything we do to each business unit was represented within trading ethically. As a result, we will deliver for the customer. In response to the CMT by an operational lead who took use the new Plan A framework to build a Covid-19, this didn’t feel quite enough to accountability for delivery. The central programme to engage customers and reflect the huge challenge faced across Plan A team provided the consistent link demonstrate that M&S understands – the entire M&S family – our colleagues, to charity partners and recipients of our and is taking action on – the issues that customers and communities. To reflect support – such as the NHS – and reported matter to them most. this, we brought together our response the needs and requirements of each The first priority is to embed the new under the banner ‘All In This Together’ beneficiary to the operational teams. framework and set the new targets that as a way of sharing what we were doing will drive change and a more sustainable with our stakeholders and directly across Quick decision-making, supported by the future for M&S. the whole M&S family. extraordinary efforts and attitudes of all members of the M&S family, enabled us to launch new services and initiatives to support our customers, support our suppliers, help the most vulnerable in our communities and do our bit for the UK’s NHS heroes. The graphic above provides a snapshot of that support.

Annual Report & Financial Statements 2020 23

PLAN A MEASUREMENTS

Measurement Progress RAISING MONEY FOR CAUSES THAT Donations raised with our customers -33% on 2018/19 MATTER TO OUR CUSTOMERS* and employees. £6.6m (against restated figure)

VOLUNTEERING HOURS Paid hours of volunteering provided -2% on 2018/19 by M&S colleagues. 46,398

MARKS & START Number of UK work experience placements -27% on 2018/19 offered to people from disadvantaged groups 1,863 in the community.

DONATIONS OF SURPLUS FOOD Equivalent number of meals donated +86% on 2018/19 to charities. 5.2 million meals

RECYCLABLE PACKAGING % M&S product packaging classified as +7% on 2018/19 easily recyclable in the UK. 77%

WASTE TO LANDFILL % of operational waste from UK operated stores, Zero in 2018/19 offices and warehouses sent to landfill. Zero

M&S GREENHOUSE The gross carbon dioxide emissions from 338,000 -6% on 2018/19 GAS EMISSIONS (CO2e) M&S operated stores, offices, warehouses and delivery fleets worldwide. tonnes CO2e

* Funds raised with our customers and colleagues in 2018/19 have been reduced by £1.6m due to one of the fundraising lines being incorrectly counted twice in last year’s calculation. Figures are reported in our 2020 Plan A report.

STREAMLINED ENERGY AND CARBON REPORTING

ENERGY AND TRANSPORT FUEL CONSUMED GREENHOUSE GAS (GHG) EMISSIONS

This year Last year This year Last year 2019/20 2018/19 % 2019/20 2018/19 % (MWhs) (MWhs) Change (000 tonnes) (000 tonnes) Change UK operations 827 864 -4% Direct emissions (scope 1) 173 167 +4% International operations 191 19 Level In-direct emissions from Group 846 883 -4% electricity (scope 2) 165 193 -15% 1. 2019/20 data for our International operations is estimated. Total gross/location-method The principle measures taken to improve energy efficiency scope 1+2 GHG emissions 338 360 -6% in 2019/20 include new refrigeration shelf-edge technology, GHG intensity per conversions to LED lighting and the trialling of new 1,000 sq ft of salesfloor 18 19 -5% fan technologies. Procured renewable energy 143 202 -29%

Subsequent reporting on environmental Total market-method scope and social performance is available here 1+2 GHG emissions 195 158 +23% corporate.marksandspencer.com/sustainability Procured carbon offsets 195 158 +23% Total net scope 1+2 GHG emissions 0 0 – GHG emissions are from operationally controlled activities in accordance with WRI/ WBCSD GHG Reporting Protocols (Revised edition) and 2015 Scope 2 Guidance using 2019 BEIS conversion factors. The reduction in Gross/ location-method figures are due to the lowering of UK grid electricity carbon intensity. Whilst the higher market-based figure is due to the electricity at some locations no longer being classified as renewable. For full details, please see 2020 Plan A Report.

24 Marks and Spencer Group plc

During the year, a new Code of Conduct was developed and this is effective from 1 April 2020. Further details can be found on page 60. The statements below reflect STRATEGIC REPORT our commitment and management of People, Human Rights and Anti-Bribery and Anti-Corruption in the last 12 months.

PEOPLE suppliers, supporting local communities ANTI-BRIBERY AND and ensuring good working conditions for ANTI-CORRUPTION We are committed to providing our everyone working in our business and colleagues in the UK and overseas with a supply chains. We are committed to M&S is committed to the highest safe and healthy working environment building knowledge and awareness on standards of ethics, honesty and integrity. and an organisational culture which human rights for all of our colleagues Our Anti-Bribery and Anti-Corruption promotes diversity, inclusivity, personal and suppliers; encouraging them to speak Policy outlines the expected standards development and mutual respect. up about any concerns without fear of of conduct that colleagues, contractors, We want people to enjoy coming to retribution, the outcomes of which also suppliers, business partners, and any work and for the workplace to be free enable us to comply with legislation and other third parties who act for or on behalf from discrimination, harassment and meet the expectations of shareholders. of M&S are obliged to follow. The Policy victimisation. We have a Board Diversity also includes detailed procedures around Policy as set out on page 58. Our Modern Slavery Statement is published giving and receiving gifts, hospitality and here corporate.marksandspencer.com/ entertainment; procedures for engaging Read more on our commitment to people: modern-slavery-statement new suppliers and partners, specifically –– People Principles corporate. Read more on our commitment to those who are based in higher-risk marksandspencer.com/ human rights: jurisdictions, and standard contract people-principles –– Human Rights Policy corporate. clauses; and clear reporting channels, –– Code of Ethics and Behaviours marksandspencer.com/human-rights including confidential reporting. For colleagues who work in areas that may corporate.marksandspencer.com/ –– Code of Ethics and Behaviours pose a higher risk we provide mandatory code-of-ethics corporate.marksandspencer.com/ Anti-Bribery and Anti-Corruption code-of-ethics –– Responsible Marketing Principles e-learning. The Company will consider corporate.marksandspencer.com/ –– M&S Global Sourcing Principles taking disciplinary action against anyone responsible-marketing corporate.marksandspencer.com/ who fails to comply with its Anti-Bribery –– Equal Opportunities Policy global-sourcing-principles Policy up to and including dismissal. The outcomes of this are that any corporate.marksandspencer.com/ –– Code of Practice on Ethical Trading potential incidents reported internally equal-opportunities corporate.marksandspencer.com/ or to the confidential whistleblowing ethical-trading HUMAN RIGHTS hotline are followed up and full –– Child Labour Procedure investigations launched where such M&S has a long history of respecting corporate.marksandspencer.com/ action is deemed appropriate following human rights in the UK and standing child-labour-procedure preliminary enquiries. All investigations up for those values internationally. are subsequently reported to the –– M&S grievance procedure for Food Our commitment to human rights is Audit Committee. reinforced in our Human Rights Policy and Clothing & Home supply chains and Code of Ethics and Behaviours and, corporate.marksandspencer.com/ Read more on our commitment to Anti-Bribery and Anti-Corruption: for all suppliers and business partners, in grievance-procedure – Anti-Bribery and Anti-Corruption Policy our Global Sourcing Principles. We are also –– Confidential Reporting Procedures – a signatory to the principles of the United corporate.marksandspencer.com/ corporate.marksandspencer.com/ Nations Global Compact. We strive to whistleblowing-policy anti-bribery-policy be a fair partner by paying a fair price to –– Code of Ethics and Behaviours corporate.marksandspencer.com/ code-of-ethics –– Confidential Reporting Procedures corporate.marksandspencer.com/ whistleblowing-policy

Annual Report & Financial Statements 2020 25

FINANCIAL

GROUP PROFIT BEFORE TAX (PBT) APM GROUP REVENUE & ADJUSTING ITEMS £10.2-1.9% £403.1m-21.2% 16/17 10.6 16/17 613.8 17/18 10.7 17/18 580.9 18/19 10.4 18/19 511.7 19/20 10.2 19/20 403.1

Group revenue decreased 1.9%, largely as a result of lower Group profit before tax and adjusting items was £403.1m, down 21.2% UK Clothing & Home sales. It is estimated that Covid-19 impacted on last year. The decline includes an estimated impact from Covid-19 Group revenue by £83.5m in March 2020 relative to forecast. of £51.9m in March.

APM APM RETURN ON CAPITAL EMPLOYED (ROCE) ADJUSTED EARNINGS PER SHARE (EPS) 10.0% 16.7 -29.5%

16/17 13.7 16/17 30.4 17/18 14.0 17/18 27.8 18/19 11.8 18/19 23.7 19/20 10.0 19/20 16.7

The decrease in ROCE largely reflects the decrease in earnings Adjusted basic earnings per share decreased 29.5% to 16.7p largely before interest, tax and adjusting items. due to lower adjusted profit year on year and the increase in weighted average shares outstanding.

APM APM DIVIDEND PER SHARE FREE CASH FLOW (PRE SHAREHOLDER RETURNS) 3.9 -70.7% £225.0m

16/17 18.7 16/17 585.4 17/18 18.7 17/18 417.5 18/19 13.3 18/19 580.8 19/20 3.9 19/20 225.0

We paid an interim dividend 3.9p on 10 January 2020. The Board has The business generated free cash flow before shareholder returns of announced the decision not to pay a final dividend for 2019/20 and £225.0m, down on last year, driven by lower adjusted operating that it does not anticipate paying a dividend for the 2020/21 financial year. profit, lower depreciation, working capital increase and higher capital expenditure.

Prior year comparatives have been restated for the adoption of IFRS 16 Leases. Refer to note 29 of the financial statements for detailed restatement tables and APM Alternative performance measures as outlined on page 01. associated commentary.

26 Marks and Spencer Group plc

GROUP REVENUE IN GROWTH IN Q4, PRIOR TO FULL YEAR FINANCIAL SUMMARY COVID-19 EFFECT IN MARCH 30 March 19 STRATEGIC REPORT Q4 group revenue declined 2.6% at constant currency largely 28 March 20 Restated1 Change reflecting the increasingly adverse impact of Covid-19 on revenue 52 weeks ended £m £m % in March relative to forecast. For the 8 weeks ended 22 February Group revenue 10,181.9 10,377.3 -1.9 group revenue increased 2.8% with UK Food like-for-like revenue UK Food 6,028.2 5,903.4 2.1 up 3.7% with strengthening volume growth and UK Clothing & UK Clothing & Home 3,209.1 3,499.8 -8.3 Home like-for-like revenue up 0.3%, driven by stronger trends at M&S.com. International growth in the 8-week period largely International 944.6 974.1 -3.0 reflected the timing of shipments as franchise partners called summer product earlier than last year. Group operating profit before adjusting items2 590.7 725.6 -18.6 % change at constant currency FY Q1 Q2 Q3 Q4 Jan/Feb UK Food 236.7 212.9 11.2 Food 2.1 0.8 1.5 1.5 4.8 4.1 UK Clothing & Home 223.9 355.2 -37.0 Like-for-like 1.9 0.4 1.4 1.4 4.6 3.7 International 110.7 130.5 -15.2 Clothing & Home -8.3 -7.8 -8.2 -3.8 -15.7 -1.7 Other 19.4 27.0 -28.1 Like-for-like -6.2 -5.5 -5.9 -1.8 -13.8 0.3 Total UK sales -1.8 -2.3 -2.2 -0.6 -2.2 2.2 Interest on leases (133.4) (147.2) 9.4 Like-for-like -1.1 -1.8 -1.4 0.1 -1.6 2.6 Net financial interest (54.2) (66.7) 18.7 International -2.5 2.8 -4.4 -1.8 -6.4 8.9 Profit before tax & Total Group -1.8 -1.9 -2.5 -0.7 -2.6 2.8 adjusting items 403.1 511.7 -21.2 Total M&S.com Adjusting items (335.9) (427.5) 21.4 (Memo only) 1.2 0.8 -0.4 2.5 1.3 11.1 Profit before tax 67.2 84.2 -20.2 UK Clothing & Home Profit after tax £27.4m £45.3m -39.5 online (Memo only) -0.2 -0.5 -0.6 1.1 -1.3 12.1 Adjusted basic earnings See glossary for definitions. Prior year revenue has been restated per share2 16.7p 23.7p -29.5 for the reclassification of localised websites from Clothing & Basic earnings per share2 1.3p 2.5p -48.0 Home to International. Dividend per share2 3.9p 13.3p -70.7 Net debt £4.03bn £4.08bn -1.2 Notes 1. Prior year comparatives have been restated for the adoption of IFRS 16 ‘Leases’. Refer to note 29 of the financial statements for detailed restatement tables and associated commentary. 2. Earnings per share and Dividend per share have been restated to reflect the bonus factor adjustment resulting from the rights issue (refer to notes 1 and 8 of the financial statements for further information). There are a number of non-GAAP measures and alternative profit measures “APM”, discussed with this announcement and a glossary and reconciliation to statutory measures is provided on page 180. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to adjusting items table below for further details.

Annual Report & Financial Statements 2020 27

COVID-19 IMPACT The table below sets out the drivers of the movement in operating profit margin before adjusting items, which Group revenue decreased 1.9%, largely as a result of lower UK increased 0.3%: Clothing & Home sales, including an adverse revenue impact of c.£83.5m in March which we largely attribute to Covid-19. % Group statutory profit before tax declined 20.2% to £67.2m. This was largely driven by a decline in Clothing & Home operating 2018/19 operating profit margin 3.6 profit as a result of lower sales. Statutory profit before tax Gross margin -0.5 includes an estimated total impact of £264.7m for Covid-19. Store staffing 0.3 This comprises a trading impact of £51.9m in March which we Other store costs 0.3 largely attribute to the pandemic, in addition to £212.8m of charges in adjusting items which includes the recognition of Distribution and warehousing -0.2 additional inventory provisions of £157.0m and the impairment Central costs 0.4 of stores and goodwill of £49.2m. 2019/20 operating profit margin 3.9 As part of its scenario planning to mitigate the effects of Gross margin decreased 50bps which was more than expected, Covid-19 the Group is planning a significant reduction in costs as continued investment in price and inflationary headwinds were and a number of cash management initiatives, which are not fully offset by reduced promotions and the programme to detailed on page 05 of this report. lower costs. The reduction in gross margin was more than offset by operating REPORTING OF ACCOUNTABLE BUSINESSES costs, which reduced overall and as a percent of sales. Store During the year, the Group completed a comprehensive review staffing and other store costs were slightly down as efficiencies of the way operating costs are allocated between the businesses, more than offset the pay review and cost inflation. Distribution allowing management to review the operating profit of each costs increased largely due to cost inflation, impacting margin. business. As a result, the Group now recognises three operating The reduction in central costs was largely driven by lower segments, being UK Clothing & Home, UK Food and International depreciation, partly due to a system write off in the prior year. (previously UK and International). This allows the financial information to align to the way the business is managed and UK: CLOTHING & HOME holds leadership appropriately to account. The review has resulted in a reallocation of £13.3m of central costs from the 30 March 19 28 March 20 Restated Change previous UK segment to International (£12.6m) and M&S Bank 52 weeks ended £m £m % (£0.7m). In addition, certain M&S.com flagship websites, which last Revenue 3,209.1 3,499.8 -8.3 year generated £37.5m of revenue and £2.9m of operating profit before adjusting items have been reclassified from UK Clothing & Operating profit before Home to International. adjusting items 223.9 355.2 -37.0 Operating profit margin 7.0% 10.1% UK: FOOD UK Clothing & Home revenue declined 8.3% and operating profit before adjusting items was down 37.0%. We estimate an adverse 30 March 19 28 March 20 Restated Change effect on March revenue of £78.1m and operating profit of 52 weeks ended £m £m % £43.8m, largely related to Covid-19. Revenue 6,028.2 5,903.4 2.1 Like for like revenue declined 6.2%, of which an estimated Operating profit before 2.2% related to the adverse movement in March, largely due to adjusting items 236.7 212.9 11.2 Covid-19. After a disappointing first half, revenue performance Operating profit margin 3.9% 3.6% both in store and online began to improve in the second half, supported by better availability and growth in key categories in UK Food revenue increased 2.1% and operating profit before Womenswear and Kidswear. Menswear experienced some initial adjusting items increased 11.2%, due to lower costs. We estimate problems as the range moved towards a more contemporary a positive effect on March revenue of £17.7m and operating profit style and fit. of £3.7m, largely related to Covid-19. The table below sets out the drivers of the movement in Clothing Like-for-like revenue was up 1.9%. Performance was particularly & Home operating profit margin before adjusting items which strong in quarter four with growth of 3.7% in the two months to was down 3.1%: February before increased demand related to Covid-19 in March. As we executed our strategy to broaden appeal and make M&S % more accessible to more customers by removing promotions and lowering prices, total full year volumes were up 3.3%. As expected, 2018/19 operating profit margin 10.1 the contribution from new space was largely offset by full line Gross margin -1.2 store closures. Store staffing -0.5 Other store costs -0.6 Distribution and warehousing -0.3 Central costs -0.5 2019/20 operating profit margin 7.0 Gross margin decreased 120bps which was more than planned, as a result of sourcing headwinds including raw materials and labour and the adverse impact of higher than expected promotional sales and shorter clearance periods.

28 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XPlanXAXXXXXFinancialXReview_v115 Modification Date: 27 May 2020 7:21 pm Operating costs were down in all areas, although increased as a International revenue decreased 2.5% at constant currency with percent of sales. The decline in store staffing costs was largely operating profit before adjusting items down 15.2%. We estimate driven by efficiency programmes, which more than offset the pay an adverse effect on March revenue of £23.1m and operating review. Other store costs were driven by lower depreciation and profit of £11.8m, largely related to Covid-19. cost savings such as the move to a single maintenance vendor. In owned markets, a weak trading performance in the Republic In distribution, reduced costs from the move to a single tier of Ireland was partly offset by continued growth in India driven by network and in our online operations more than offset inflation 17 new store openings, although opening costs impacted profit. and channel shift. Central cost declines were largely driven by Franchise shipments declined as a result of investment in lower lower depreciation with efficiencies reinvested in increased prices, partner driven stock efficiencies and political unrest in marketing and the build out of digital operations. Hong Kong, although trends improved in the second half. M&S BANK AND SERVICES NET FINANCE COST M&S Bank and services income before adjusting items was down £10.2m to £16.8m. This was predominantly the result of 30 Mar 19 28 March 20 Restated Change STRATEGIC REPORT an increase in bad debt provisioning due to a higher risk of 52 weeks ended £m £m £m customer default. M&S Bank income after adjusting items Interest payable (80.5) (80.3) (0.2) decreased £1.9m to £4.2m. Interest income 8.6 8.0 0.6 OCADO RETAIL Net interest payable (71.9) (72.3) 0.4 On 5 August 2019, the acquisition of 50% of Ocado Retail was Pension net finance income 23.6 25.8 (2.2) completed. Ocado Retail Limited is an associate of M&S as certain Unwind of discount rights are conferred on Ocado Group plc for an initial period of on Scottish Limited at least five years from acquisition. Partnership liability (6.9) (8.8) 1.9 The investment in associate is recognised at a cost of £769.0m. Unwind of discount This incorporates initial consideration of £560.9m paid in cash on on provisions (4.9) (7.9) 3.0 acquisition, contingent consideration of £202.4m and transaction Ineffectiveness on costs of £5.7m. The contingent consideration is conditional on financial instruments 5.9 (3.5) 9.4 reaching agreed earnings and capacity targets. Net financial interest (54.2) (66.7) 12.5 The M&S share of Ocado Retail Limited profit for the period Net interest payable from acquisition to 1 March 2020 is £2.6m. Summarised financial on lease liabilities (133.4) (147.2) 13.8 information in respect of Ocado Retail Limited is below: Net finance costs (187.6) (213.9) 26.3

7 months to Net finance costs decreased £26.3m to £187.6m. This was 1 March 20 primarily due to a reduction in net lease financing costs and £m the reversal of ineffectiveness on a currency swap. In July we Revenue 979.7 issued a £250m bond partially refinancing a £400m redemption EBITDA before exceptional items 25.7 in December. In March 2020, in response to Covid-19, the Group’s Operating profit 10.9 long-term credit rating was lowered by Moody’s Investors Service and Standard & Poors to Ba1/BB+ respectively. This should result Profit after tax 5.1 in an additional c.£15m of annual interest costs, payable following M&S 50% share of profit 2.6 the next coupon payment, on Bonds issued under the Group’s On 6 May 2020, Ocado Retail Limited reported 40.4% revenue EMTN programme. growth for the 9 weeks to 3 May 2020. GROUP PROFIT BEFORE TAX For further detail on Ocado Retail Limited please see note 30 to the financial statements. Group profit before tax declined 20.2% to £67.2m. This includes adjusting items of £335.9m. INTERNATIONAL GROUP PROFIT BEFORE TAX & ADJUSTING ITEMS 52 weeks ended 28 March 20 30 March 19 Change Change Group profit before tax and adjusting items was £403.1m, down Revenue £m Restated £m % CC % 21.2% on last year. The decline includes an estimated impact from Franchise 392.6 409.2 -4.1 -3.8 Covid-19 of £51.9m in March. The profit decrease was largely due Owned 552.0 564.9 -2.3 -1.6 to the decline in Clothing & Home operating profit. Total 944.6 974.1 -3.0 -2.5 Operating profit before adjusting items Franchise 64.9 72.3 -10.2 Owned 56.7 70.8 -19.9 Corporate costs (10.9) (12.6) 13.5 Total 110.7 130.5 -15.2

Annual Report & Financial Statements 2020 29

ADJUSTMENTS TO PROFIT BEFORE TAX A number of charges have been recognised in the period relating to the implementation of previously announced strategic Consistent with previous years, the Group makes certain programmes including: adjustments to statutory profit measures, in order to derive alternative performance measures that provide stakeholders –– A charge of £29.3m (of which £11.6m represents the directly with additional helpful information and to aid comparability of attributable incremental impairment due to Covid-19) in the performance of the business. For further detail on these relation to store closures identified as part of transformation charges and the Group’s policy for adjusting items please see plans reflecting an updated view of latest store closure Notes 1 and 5 to the financial statements. costs. Further material charges relating to the closure and re-configuration of the UK store estate are anticipated as the 30 Mar 19 programme progresses. Following restatement for IFRS 16 Covid-19 28 March 20 Restated Change 52 weeks ended related* £m £m £m and the updated view of store closure costs, future charges of up to c.£110m are estimated within the next two financial years. Strategic programmes –– A charge of £13.8m in relation to the redundancy costs – UK store estate (11.6) (29.3) (216.5) 187.2 associated with the review of the support centre organisational structure and an updated view of ongoing costs associated – Organisation – (13.8) (4.9) (8.9) with centralising the Group’s London support centres. – Operational transformation – (11.6) (16.4) 4.8 –– A charge of £11.6m in relation to the transformation and simplification of supply chain and operations across – UK logistics – (10.2) (14.3) 4.1 Clothing & Home and Food. – Changes to pay and pensions – (2.9) (6.2) 3.3 –– A net charge of £10.2m as we continue to transition to a single tier Clothing & Home UK distribution network, including the – International cost of closure of two distribution centres. In February 2020 store closures next steps were announced with a further two sites expected to and close in the next two years, resulting in an expected additional impairments – (2.2) (5.3) 3.1 charge of c.£13m. – IT restructure – (0.4) (15.6) 15.2 Store impairment and other property charges of £78.5m Directly (including £24.2m representing the directly attributable attributable incremental impairment due to Covid-19) were recognised. to Covid-19 (163.6) (163.6) – (163.6) In response to the ongoing pressures impacting the retail Store industry, as well as reflecting the Group’s strategic focus towards impairments growing online market share, the Group has revised future and other projections for UK stores (excluding those stores which have property charges (24.2) (78.5) (103.5) 25.0 been captured as part of the UK store estate programme). Goodwill Charges of £12.6m have been incurred relating to M&S Bank, impairment – primarily relating to the insurance mis-selling provision, as well per una (13.4) (13.4) – (13.4) as further charges recognised in relation to forward economic M&S Bank guidance provisions recognised as a result of Covid-19. The charges incurred Group’s share of the total insurance mis-selling provisions of in relation to £327.6m exceeds the total offset against profit share of £242.7m insurance to date. Further costs of c.£100m, predominantly relating to the mis-selling and estimated mis-selling liability are expected and will be deducted Covid-19 forward from the Group’s future profit share from M&S Bank. economic guidance A charge of £16.8m has been recognised predominantly related provision – (12.6) (20.9) 8.3 to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail. Amortisation and fair value A credit of £23.5m has been recognised in the period relating arising from the to the release of a provision for employee related matters investment in recognised in 2017/18 following settlement in the period Ocado Retail – (16.8) – (16.8) for £0.6m. Establishing the investment in Ocado Retail Limited – (1.2) (3.4) 2.2 Remeasurement of contingent consideration including discount unwind – (2.9) – (2.9) Other – 23.5 – 23.5 GMP and other pension equalisation – – (20.5) 20.5 Adjusting items (212.8) (335.9) (427.5) 91.6 * Included within the total.

30 Marks and Spencer Group plc

© 2019 Friend Studio Ltd File name: Strategic_XPlanXAXXXXXFinancialXReview_v115 Modification Date: 27 May 2020 7:21 pm COVID-19 ADJUSTING ITEMS EARNINGS PER SHARE Following the declaration by the World Health Organisation Basic earnings per share were 1.3p (last year 2.5p), due to the of the Covid-19 global pandemic and the subsequent UK and decrease in profit year-on-year and the increase in weighted International government restrictions, Clothing and Home has average shares outstanding. The weighted average number of been unable to trade from full line stores, M&S outlet stores shares in issue during the period was 1,894.9m (last year restated and a number of Food franchises have temporarily closed and for the bonus factor related to the rights issue: 1,698.1m), trade in Food has had to continue with social distancing measures reflecting the issuance of 325m shares following the completion in place. As a result, charges of £212.8m have been recognised of the rights issue. relating to the Covid-19 pandemic. The charges relate to stock Adjusted basic earnings per share decreased 29.5% to 16.7p provisioning, impairments of intangible assets, property, largely due to lower adjusted profit year-on-year and the increase plant and equipment and onerous contract provisions, in weighted average shares outstanding. cancellation charges and one-off costs. Should the estimated charges prove to be in excess of the amounts required, the CAPITAL EXPENDITURE release of any amounts previously provided would be treated STRATEGIC REPORT as adjusting items. 28 March 20 30 Mar 19 Change The impact that Covid-19 has had on underlying trading is not 52 weeks ended £m £m £m recognised within adjusting items. UK store remodelling 60.3 26.0 34.3 New UK stores 33.3 40.1 (6.8) The charges relate to: International 12.3 11.0 1.3 –– Stock provisioning: £157.0m. Supply chain 39.2 48.7 (9.5) –– Incremental impairments of intangibles and PP&E: £49.2m. IT & M&S.com 84.5 88.2 (3.7) –– Onerous contract provisions, cancellations, one-off Property asset replacement 102.4 69.0 33.4 costs: £6.6m. Capital expenditure Following a detailed assessment of all retail inventory, a charge before disposals 332.0 283.0 49.0 of £157.0m has been recognised (C&H: £145.3m; Food: £6.0m and Proceeds from International: £5.7m). The provision relates to items from previous property disposals (2.7) (48.1) 45.4 seasons which are unlikely to be saleable when stores reopen; Capital expenditure 329.3 234.9 94.4 items in the summer sale that are likely to be cleared below cost and the cost associated with hibernating stock to Spring/ Group capital expenditure before disposals increased £49.0m Summer 2021. The provision in Food includes charges related to £332.0m. to unsaleable seasonal goods as a result of the lockdown of UK store remodelling spend increased £34.3m largely reflecting activity in late March. the investment in five ‘test and learn’ trial stores. Spend on UK As a direct result of the Covid-19 pandemic, following a store space was down as 13 fewer owned Food stores opened reperformance of all impairment assessments using the cash compared with the prior year. flows in the Covid-19 scenario, incremental impairment charges Supply chain expenditure reflects investment in the expansion have been recognised of £49.2m (Store impairments: £24.2m, of the Bradford distribution centre. Spend has reduced due to the per una: £13.4m and UK store estate programme: £11.6m). significant prior year investment in the Welham Green national £6.6m of charges have been recognised relating to onerous distribution centre. contracts and other provisions, cancellation charges and IT and M&S.com spend decreased largely due to the completion impairment and write-off of intangible assets in the course of the technology transformation programme. Property asset of construction following project cancellations. replacement increased £33.4m due to the initiation of an asset replacement programme in stores. TAXATION The effective tax rate on profit before tax and adjusting items was STATEMENT OF FINANCIAL POSITION 20.7% (last year 20.7%). This was lower than the expected effective Net assets were £3,708.5m at the year end, an increase of tax rate due to an increase in the estimated deferred tax assets 50.2% on last year largely due to the investment in Ocado and of the Group which resulted from a change to the previously the increase in the net retirement benefit surplus. enacted UK corporate tax rate of 17% back to 19%. The effect of this increase is not expected to impact future years. The effective tax rate is higher than the UK statutory rate due to the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership (“SLP”) structure. The effective tax rate on statutory profit before tax was 59.3% (last year 46.2%) due to the impact of disallowable adjusting items.

Annual Report & Financial Statements 2020 31

CASH FLOW & NET DEBT Higher capital expenditure reflects the spend on ‘test and learn’ stores and the asset replacement programme in stores. 30 Mar 19 28 March 20 Restated Change Defined benefit scheme pension funding of £37.9m largely 52 weeks ended £m £m £m reflects the second limited partnership interest distribution to Adjusted operating profit 590.7 725.6 (134.9) the pension scheme. Depreciation and Adjusting items in cash flow during the year were £88.0m. amortisation before These included £22.7m in relation to the store closure adjusting items 632.5 702.6 (70.1) programme, £20.9m for organisational change, £15.4m for Cash lease payments (335.7) (312.7) (23.0) operational transformation, £12.6m for M&S Bank, £4.3m for Working capital (48.5) 61.1 (109.6) the technology transformation programme and £3.7m relating to distribution and warehousing. Defined benefit scheme pension funding (37.9) (37.9) – During the year, a Rights Issue was completed, raising proceeds Capex and disposals (325.9) (264.8) (61.1) net of costs of £574.4m, for the purpose of funding the acquisition of 50% of Ocado Retail which completed on 5 August Financial interest 2019. The cash paid for the investment in Ocado Retail and and taxation (171.1) (184.7) 13.6 associated transaction costs of £577.8m does not include the Investment in associate adjustment to the consideration on the finalisation of the Ocado Retail Limited (577.8) – (577.8) completion statement currently held as a receivable of £11.5m. Investment in Joint Venture (2.5) (2.5) – After the payment of the final dividend from 2018/19, the interim Employee related dividend for 2019/20 and the reduction in outstanding share transactions 9.7 14.3 (4.6) discounted lease commitments due to capital repayments, Proceeds from rights issue net debt was down £50.2m from the start of the financial year. net of costs 574.4 – 574.4 Share of profit from associate (2.6) – (2.6) DIVIDEND Cash received on refinancing We paid an interim dividend 3.9p on 10 January 2020. The board of derivatives 7.7 – 7.7 has announced the decision not to pay a final dividend for Adjusting items outflow (88.0) (120.2) 32.2 2019/20 and that it does not anticipate paying a dividend for the 2020/21 financial year. Free cash flow 225.0 580.8 (355.8) Dividends paid (191.1) (303.5) 112.4 PENSION Free cash flow after At 28 March 2020, the IAS 19 net retirement benefit surplus was shareholder returns 33.9 277.3 (243.4) £1,902.6m (£914.3m at 30 March 2019). The increase in the surplus Decrease in lease obligations 201.4 170.1 31.3 is mainly due to a significant increase in longer dated credit New lease commitments (204.1) (150.4) (53.7) spreads driven by market changes linked to Covid-19 resulting Opening net debt (4,075.4) (4,369.4) 294.0 in a reduction in scheme liabilities. Additionally, the return on scheme assets increased due to a fall in gilt yields. It is currently Exchange and other anticipated that the increase in surplus will give rise to an non-cash movements 19.0 (3.0) 22.0 increased pension credit next year. Closing net debt (4,025.2) (4,075.4) 50.2 In April 2019, the Scheme purchased additional pensioner buy-in The business generated free cash flow before shareholder policies with two insurers for approximately £1.4bn. Together with returns of £225.0m, down on last year, driven by lower adjusted the two policies purchased in March 2018, the Scheme has now, operating profit, lower depreciation, working capital increase in total, hedged its longevity exposure for around two thirds of and higher capital expenditure. The working capital outflow the liabilities for pensions in payment. The buy-in policies cover relative to last year was largely a result of the timing of payments specific pensioner liabilities and pass all risks to an insurer in and increased inventory. This follows a planned reduction in exchange for a fixed premium payment, thus reducing the inventories in the prior year, and higher than normal year-end Company’s exposure to changes in longevity, interest rates, inventory levels as a result of additional Food to meet stockpiling inflation and other factors. demand and lower than expected Clothing & Home sales in March. The Strategic Report, including pages 33-43, was approved by a duly authorised Committee of the Board of Directors on 26 May 2020, and signed on its behalf by

Steve Rowe, Chief Executive 26 May 2020

32 Marks and Spencer Group plc

Effective risk management is an essential tool for our business to support the delivery of our transformation and to respond effectively to the challenges facing our company, the retail sector and the communities we serve.

APPROACH TO RISK MANAGEMENT –– Risks being consistently identified, –– Swift action to reassess risk across measured and reported against set the business in response to significant Our approach to risk management is STRATEGIC REPORT criteria which considers both the changes or events, such as the simple and practical. The Audit likelihood of occurrence and potential Covid-19 pandemic. Committee, under delegated authority impact to the Group. from the Board, is accountable for The overall assessment considers overseeing the effectiveness of our –– Each business and functional area the impact of changes in the external risk management process, including maintaining detailed risk registers and environment, our strategy and identification of the principal and mitigation plans which are approved by transformation programme, core emerging risks facing M&S. The Group Risk their respective leadership teams and operations and our engagement with Policy was formally reviewed and revised discussed with the executive directors. external parties. It also includes proactive during the year to ensure it remains fully consideration of emerging risks where the –– Direct reporting of risk and mitigating full extent and implications may not be aligned with business needs and our activities by each of our business and fully understood but need to be tracked. corporate governance responsibilities. An functional leadership teams to the overview of the key features of the Policy Audit Committee on an annual basis. The output from the above process is and the principal risks and uncertainties subject to periodic review and challenge are set out on the following pages. –– A formal half-yearly review of all risk with the executive directors. Subsequently, registers by the Group Risk team. The risk management process mirrors the the principal risks are submitted to the M&S operating model with each business –– Development of an overarching Audit Committee ahead of final review and functional area being responsible for summary of risks, combining both and approval by the Board. the ongoing identification, assessment top-down and bottom-up perspectives, The directors’ assessment of the long- and management of their existing and to provide a consolidated view of term viability of M&S is also reviewed emerging risks. The output of these Group-level risks. annually, mindful of the principal risks assessments are ultimately aggregated –– A full review of the principal risks and faced. The approach for assessing to compile an overall Group-level view uncertainties at least twice a year by long-term viability can be found on of risk. This process includes: the Audit Committee. page 42.

RISK GOVERNANCE AND PROCESS OVERVIEW

Internal reporting External reporting

Consolidated Group-level risks Parties involved: Principal risks –– Consolidation of significant risks from underlying risk registers –– Audit Committee and uncertainties –– Overlay of Group-level risks –– Executive directors –– A summarised version

Top-down of principal risks for –– Review and agreement of the principal risks by –– Group Risk team external reporting the executive directors –– Review and approval –– Review and approval by the Audit Committee by the Board and Audit Committee Business and functional risk registers Parties involved: –– Development and ongoing maintenance of risk registers, –– Operating Committee including consideration of emerging risks, by the business members Parties involved: and functional leadership teams –– Business & functional –– M&S Board –– Review and challenge of risk content and quality of mitigation leadership teams –– Audit Committee plans by Group Risk –– Group Risk team –– Executive directors –– Review and challenge of risks at leadership forums –– Group Risk team Bottom-up Current issues and areas of change Parties involved: –– Monitoring of emerging areas of change or issues that may –– Audit Committee become significant at a Group level –– Operating Committee members –– Business & functional leadership teams –– Group Risk team

Annual Report & Financial Statements 2020 33

During the course of the year, the business –– At a leadership level, streamlined –– Worked quickly with suppliers, initially has continued to develop and adhere structures were implemented to in Clothing & Home from January 2020 to our risk management disciplines accelerate decision-making by a group and subsequently across the whole and managed risks in line with good of the executive and managing directors business as the scale of the virus practice, including adoption of the of our family of businesses. became apparent, to both maintain requirement to formally consider continuity of supply and, where needed, –– The Board and Operating Committee potential emerging risks. to cancel or defer orders. In addition, have met at an increased frequency we implemented extended payment Our established processes had operated throughout the crisis, monitoring and terms for suppliers in Clothing & Home. to allow consideration of the principal risks responding to events on a daily basis. and uncertainties to be completed in –– Took decisive action to reduce our –– Daily meetings of the Crisis accordance with the methodology cost base, capital expenditure and Management team are held outlined on page 33, and in line with our cash commitments: with representatives from across year-end timetable prior to the outbreak the business. ·· Discretionary spend was stopped. of Covid-19 in the UK. The impact of the pandemic on the UK has, however, –– Each business and function has ·· Capital expenditure for the year triggered the need to consider both the developed and maintains full response ending March 2021 was significantly specific consequences of the virus and plans to both highlight and track reduced from a planned £400m its impact on the underlying principal actions for their immediate to a revised target of c.£140m. risks being managed by the business. requirements and to identify what ·· Colleagues were furloughed in The disclosure below has therefore been is required to restore operations. line with the Coronavirus Job structured to provide an overview of the –– We are engaged with all relevant Retention Scheme. actions taken in response to the virus, external stakeholders, including the the most significant risks associated with ·· Updated our dividend guidance. government, retail organisations the pandemic and details of how it has and specialist advisers. ·· Implemented enhanced financial impacted the broader set of principal risks controls over approval of all spend. and uncertainties. –– Operational activities have been amended, and continue to be updated, ·· Immediately reacted to government COVID-19 to comply with guidance provided by initiatives such as the business the government to prioritise the safety rates holiday, tax and VAT payment The impact of Covid-19 on the business is of colleagues, customers and others deferrals. explained in various parts of the Strategic involved in the ‘feed the nation’ strategy. Report. Consequently, the narrative –– Engaged with banks and lenders to This included targeted initiatives to included in the business updates should proactively address the implications on support the most vulnerable members be read in conjunction with the disclosure our facilities and covenant compliance, of our communities. below to provide an understanding of the obtaining formal agreement with the risks and, in some instances, opportunities, –– Successfully implemented home lending syndicate of banks providing facing M&S. working for support centre colleagues the £1.1bn revolving credit facility to on an unprecedented scale, benefitting remove or substantially relax covenant Our response from the recent investment in conditions for the tests arising in From the initial reports of the outbreak technology and digital capabilities. September 2020, March 2021, and in China, the crisis management and September 2021. business continuity protocols for the –– Proactively engaged with the Business business were effectively invoked and Involvement Group to allow decisions –– Obtained confirmation of eligible have, since January, provided a framework impacting our colleagues, and their issuer status under the UK to support our response. The following implications, to be considered in government’s Covid Corporate key actions have been undertaken to advance. Operational protocols, Financing Facility (CCFF). self-isolating, shielding, frontline manage the impact of the pandemic –– Engaged with landlords to manage colleague suggestions or concerns, on our business: rent obligations and property costs. furloughing of staff and the impact –– Reacted immediately to government of changes to reward (such as the 15% guidance by closing clothing outlets, premium for frontline colleagues and Clothing & Home store sections, share award in support centres) have cafés and M&S Bank services. all been considered. –– Introduced distancing and hygiene measures in stores and depots to keep customers and colleagues safe.

34 Marks and Spencer Group plc

The table below summarises the key potential risk implications of the pandemic and how these link to the core principal risks that STRATEGIC REPORT remain in place.

Risk category Risk description Relevant principal risk Protecting –– An inability to maintain and, where needed, adapt operational protocols to Legal & regulatory customers & safeguard customers, colleagues and other partners involved in running our compliance colleagues business during extended lockdown or a period of transitional social distancing would impact the continued operation of stores and breach our responsibilities to all key stakeholders. Clothing & Home –– A failure to effectively manage the implications of the lockdown period on all Trading performance inventory aspects of the Clothing & Home supply chain and inventory management (Clothing & Home) management would adversely impact customer experience, trading performance, liquidity, operational efficiency and third-party relationships for an extended period. Liquidity –– Significantly reduced trading over an extended and currently undetermined Liquidity & funding timeframe, combined with an inability to effectively manage expenditure against revised targets, would impact the business’s ability to operate within committed credit facilities. Store portfolio –– An inability to increase the scale and pace of our plans to create a modern and Business management appropriately shaped store estate during the retail property market downturn transformation would impede our transformation objectives. –– An inability to secure favourable agreements with landlords would impede cost control initiatives. Post-crisis –– An inability to successfully respond to the ending of lockdown (such as Multiple risk recovery management of colleagues returning from furlough and re-establishing implications ‘business as usual’ process and control) would trigger operational challenges and inefficiencies for the business. –– A failure to evaluate, fund and implement initiatives to improve business operations would be a missed opportunity. Strategy –– An inability to define and successfully implement a revised strategy to rapidly Multiple risk re-alignment respond to a post-Covid world and the associated changes in customer behaviours implications and operational requirements would significantly undermine the transformational imperatives of the business. –– This would include, although not be limited to, the operation of our online Clothing & Home business, International operations, management of operating and capital expenditure and the portfolio of business transformation initiatives under way. In addition to the risks noted above, many of the principal risks prior to the pandemic remain the same in substance but have been amplified by the current events – for example, our ability to effectively respond to Brexit, the transformational improvements needed to the supply chain, maintaining controls over food safety, the potential risk of disruption to critical third-party relationships or readiness to execute the launch of M&S products with Ocado Retail. Where this is the case, the effect has been noted in the relevant section below. Emerging risks It is also important to note that, in many respects, the impact of Covid-19 has the characteristics of an emerging risk as well as changing the principal risk profile today, as future events, and their impact on our business and the global community we work within, cannot be determined with any certainty. We will therefore continue to monitor and respond to further changes as needed in the months ahead. As a consequence, the nature and magnitude of the ongoing events will continue to change the risk profile in currently unknown ways.

Annual Report & Financial Statements 2020 35

RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

TRADING PERFORMANCE RECOVERY 1 A failure of our Food and/or Clothing & Home business –– Continued to strengthen capabilities of our senior S to effectively and rapidly respond to the pressures of an leadership teams in both Food and Clothing & Home increasingly competitive and changing retail environment, through targeted recruitment. C including the impact of Covid-19, would adversely impact –– Established operating model consisting of a family of customer experience, operational efficiency and business accountable businesses who share M&S brand values, performance. colleagues and support functions, technology and M&S competes with a diverse range of retailers – in both customer data. Food and Clothing & Home – in an increasingly challenged –– Managing directors for each of these businesses who have sector faced with continued cost and pricing pressures, full accountability for their performance including for shifts in consumer behaviours and broader macroeconomic marketing, supply chain, finance and technology. uncertainties. Delivering the right product ranges that appeal to our customers, clear and simple pricing –– Individual Business Boards to enable executive oversight architecture and availability are critical to the growth and effective governance of each business. of our business. –– Continued delivery against business-specific transformation In addition, Covid-19 has had, and continues to have, plans incorporating discipline around cost, prices, availability, a significant negative impact on our trading performance value, ranges, broadening customer appeal and promotions in line with UK retail more widely. Managing the growth in across both businesses. surplus stock resulting from the lockdown is an area of –– Development, ongoing update and monitoring of business- business focus. specific planning for the business restore as future stages of Delays in implementing the targeted transformational the lockdown are communicated. This includes development improvements, or the business recovery plans in response of a clear strategy to manage the wide-ranging implications to Covid-19, across the business could negatively impact of the lockdown period on all aspects of the Clothing & Home business performance. supply chain and inventory management. –– Planned improvements to online trading by delivering both the Ocado online launch in Food and our online ambitions for Clothing & Home.

BUSINESS TRANSFORMATION 2 A failure to execute our business transformation and –– Adoption of a ‘Never the Same Again’ approach to all aspects S cultural change initiatives with pace, consistency and of business operations and prioritisation of the most critical cross-business buy-in will impede our ability to improve improvement initiatives. C operational efficiency and competitiveness. –– Comprehensive review of all operational and capital The business has continued to deliver the range of projects expenditure to allocate spending to those activities aligned underpinning the transformation, including: to the transformation agenda and stop others in view of –– The reshaping, modernising and effective management Covid-19 priorities and recovery. of a UK store estate that is fit for the future, with the right –– Maintenance of programme governance principles for all stores in the right space, improved integration between ongoing projects. online and store sales and shopping facilities expected –– Periodic independent audit reviews of key programme by our target customer groups. delivery and reporting to the Audit Committee. –– Modernising our supply chain and logistics activities to –– Maintaining momentum to deliver ongoing initiatives to improve speed, operational effectiveness and availability transform our supply chain capabilities in all parts of the and to reduce costs. business. For example, in Food the Vangarde supply chain –– Delivering our Digital First ambitions to improve programme has demonstrated improvements to food waste customer experience, reduce costs and work smarter levels and availability. across the business. –– Continued focus on the store estate transformation with In response to Covid-19, we will need to re-evaluate priorities new initiatives like redevelopment of existing sites to make and their delivery, including acceleration of initiatives to effective use of space, resetting rental rates with landlords respond to permanent changes in customer behaviours or and delivery of new format stores. to change our own working practices, balancing delivery of the transformation with strict cash management disciplines and rapidly reacting to the consequences of the pandemic. A pause or delay to key components of the business improvement programme because of the virus response or other reasons may delay delivery of the transformation objectives.

Risk key S Link to strategy C Heightened risk due to Covid-19

36 Marks and Spencer Group plc

RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

LIQUIDITY AND FUNDING 3 Significantly reduced trading over an extended and –– Continued use of the existing committed facilities available C currently undetermined timeframe, combined with an to the business, including the £1.1bn revolving credit facility. inability to effectively manage expenditure against –– Immediate measures implemented to manage cash and revised targets, could impact the business’s ability liquidity, including: to operate within and secure additional committed credit facilities. ·· Freezing of discretionary spend Availability of, and access to, appropriate sources of funding ·· Significant reduction in capital spending is required for core business operations and the successful ·· Dividend deferral and timely delivery of our transformation plan. In addition, ·· Temporary furlough of colleagues cash management has additional complexity as a STRATEGIC REPORT consequence of the ongoing trading restrictions during ·· Enhanced controls over spending lockdown, the associated reduction in cash generation ·· Confirmation of our eligibility under the UK government’s and planning for the impact of furloughing, deferral of CCFF scheme tax payments and other emergency measures. ·· Use of the business rates holiday, tax payment deferral and Brexit adds a further dimension to this risk because of other government support measures the potential impact on currency movements, corporate –– Formal agreement received from the syndicate of lending bond rates, changes in credit regulations and the extent of banks to relax or waive covenant conditions for our revolving government support of credit markets. credit facility. An inability to maintain appropriate short- and longer-term –– Close monitoring and stress testing of projected cash and funding to meet business needs (both operational and debt capacity, financial covenants and other rating metrics. strategic), make payments on debt and to effectively manage associated risks, such as significant fluctuations –– Regular dialogue with the market and rating agencies. in foreign currency or interest rate changes, may have an –– Review of counterparty credit risk and limits in line with adverse impact on business viability and performance. our risk appetite and treasury policy.

BREXIT 4 An inability to quickly identify and effectively respond to –– A cross-business working party is in place to undertake C the challenges of a post-Brexit environment could have a scenario planning including financial and operational significant impact on performance across our business. impact assessments and to consider and drive readiness The potential implications of the UK’s exit from the European requirements. Union are significant and include: –– Each of our family of businesses has undertaken a risk –– Deterioration in customer sentiment. assessment to prioritise and plan for the operational changes they will need. Teams have continued to progress planning –– Operational complexity and cost due to restrictions during the current pandemic lockdown. on the movement of goods and stricter border controls (including the movement of goods between Great Britain –– Updates are provided to the Board and Audit Committee and Northern Ireland). outlining risks and actions being undertaken. –– Costs passed through from our suppliers. –– We are engaged with the government and industry bodies to represent M&S’s views, including the UK Border –– Continuity of supply and supplier viability. Development Group with access to the Department for –– Import and export duties. Environment, Food & Rural Affairs (Defra), HM Revenue & –– Volatility in currency and corporate bond rates. Customs (HMRC) and the Food Standards Agency (FSA) to support operational planning. –– Tightening of the labour market. –– Additional regulatory responsibilities and costs. –– Increased complexity and cost in our international operations, including our franchise activities. While an orderly exit following the end of the transitional period would allow business planning to more effectively address the consequences of change against a defined timeframe, the level of change required as part of any deal is yet unclear. A no deal outcome would have a more immediate and negative impact. The focus on the response to Covid-19 and the possibility that the government may not seek an extension of the transitional period may mean there is an increased risk of a ‘no deal’ departure and the consequential ability to implement the necessary measures on a timely basis.

Annual Report & Financial Statements 2020 37

RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

FOOD ONLINE 5 A failure to effectively execute the launch of M&S –– M&S nominated directors are part of the Ocado Retail Board S products for Ocado Retail would significantly impact the and participate in leadership forums. achievement of our strategy to take our food online in a C –– The establishment and continued operation of a dedicated profitable, scalable and sustainable way. M&S programme team, supported by senior leadership, to The investment in Ocado Retail is part of our strategy for oversee all aspects of project delivery including commercial improving our online reach and capability. To achieve this, agreements, product range, and establishment of ongoing we are committed to providing M&S product ranges and to operating processes. have established new product development capabilities –– Joint working group in place with Ocado Group Plc and for Ocado Retail by the beginning of September 2020. Ocado Retail to establish the systems, processes and ways Activities include: of working to coordinate sourcing, product development, –– Finalisation of all commercial agreements with suppliers. product ranging, customer data and marketing. –– Delivery of a range of M&S products to allow a seamless –– Regular remote communication continues under lockdown transition for Ocado customers on launch. with the Board, senior management and the delivery teams. –– Establishing data and technology interfaces with Ocado Retail. –– Developing operating procedures and ways of working between the two businesses. An inability to establish effective operating protocols in advance of the launch date, whether related to the impact of Covid-19 or other factors, could delay delivery of the expected benefits from our investment in Ocado Retail.

FOOD SAFETY & INTEGRITY 6 Failure to prevent or effectively respond to a food safety –– Oversight from Customer and Brand Protection Committee. C incident, or to maintain the integrity of our products, –– Food Safety Policy and Standards are in place, with clear could impact business performance, customer confidence accountability set at all levels. and our brand. –– Defined Terms of Trade, manufacturing standards, Food safety and integrity remain vital for our business. specifications for “from farm to fork” and standard operating We need to manage the potential risks to customer health procedures (stores, support centre and supply chain). and consumer confidence that face all food retailers. This includes considering how external pressures on the –– New food initiatives assessed for food safety risks. food industry and wider economic and environmental –– Qualified and capable technical team, with continuing changes could impact the availability and integrity of professional development programme. our food, the ability to operate all routine controls, –– Store, supplier and depot audit programmes, including our reputation and shareholder value. unannounced visits and raw material testing, adapted to Many of these external pressures, including the impact be managed remotely where site visits are not possible. of Covid-19, inflationary costs, labour quality and availability, –– Introduction of modified processes, including enhanced increased regulatory scrutiny, animal disease, and the monitoring of quality and customer complaints, to mitigate unknown impact of Brexit, are, to a large degree, risk during the Covid-19 lockdown and ongoing assessment outside our control but are nevertheless monitored. of the need for further change. –– Quarterly review of our control framework. –– Established processes for the development and legal sign-off for product packaging. –– Documented and tested crisis management plan. –– Membership of the Food Industry Intelligence Network at Board and Operating Committee level. –– Periodic Internal Audit reviews to consider process design and operating effectiveness.

Risk key S Link to strategy C Heightened risk due to Covid-19

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RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

CORPORATE COMPLIANCE & RESPONSIBILITY 7 Failure to deliver against our legal, regulatory, social and –– A Code of Conduct is in place and has recently been reviewed C environmental commitments would undermine our and updated. This is underpinned by policies and procedures, reputation as a responsible retailer, may result in legal including human rights, modern slavery, global sourcing, exposure or regulatory sanctions, and could negatively data protection, anti-bribery and corruption, health & safety, impact our ability to operate and/or remain relevant to food safety, national minimum wage, equal pay, cyber and our customers. data security. An annual self-assessment compliance process The increasingly broad and stringent legal and regulatory is also in place. framework for retailers creates pressure on both business –– Immediate crisis response capability (via the Crisis performance and market sentiment requiring continual Management team) when required on a reactive basis – improvements in how we operate as a business to more recently for Covid-19. STRATEGIC REPORT maintain compliance. –– Mandatory induction briefings and annual training for More recently, the requirements triggered by the relevant colleagues on key regulations. Covid-19 outbreak, including in relation to safety and –– Oversight from committees and steering groups such as social distancing, have in a short time frame necessitated for fire, health and safety or food safety. immediate changes to operating procedures in our distribution network, stores and support centres. –– In-house regulatory legal team, including specialist solicitors, which conducts ‘horizon scanning’ on new and emerging In addition, the expectations of our customers and other regulatory and legislative changes. stakeholders (including regulators) are increasingly demanding. The environmental impact of food, packaging –– Dedicated non-legal regulatory issue leaders and advisers and the sustainability of clothing are all increasingly to drive compliance against key risk areas within the business. relevant. Speed in responding to evolving expectations is This includes, for example, GSCOP (Groceries Supply Code vital to maintaining a positive business perception. of Practice) compliance in Food or ethical sourcing in Clothing & Home. Non-compliance may result in fines, criminal prosecution for M&S or colleagues, litigation, additional investment to rectify –– Proactive engagement with regulators, legislators, trade breaches, disruption or cessation of business activity, as well bodies and policy makers. as have an impact on our reputation and financial results. –– Simplified Plan A operating model with a lean central team responsible for setting the framework and establishing sustainability priorities in each of our family of businesses. –– Published, monitored and reported commitments in relation to environmental and social issues in line with regulatory requirements. –– Established auditing and monitoring systems. –– Customer contact centre insight and analysis of live social media issues.

BUSINESS CONTINUITY & RESILIENCE 8 Failures or resilience issues at key business locations –– A dedicated Business Continuity team. could result in major business interruption. In particular, –– An established Group Crisis Management process – a major incident at our Castle Donington e-commerce which was invoked and has operated throughout the distribution centre may have a significant impact on our Covid-19 outbreak. ability to fulfil online orders. More broadly, an inability to effectively respond to global events, such as pandemic –– Business continuity plans, incorporating remote working or supply chain disruption, would significantly impact requirements, are in place for key activities across our business performance. operations, including offices, depots and IT sites. These were invoked and, where needed, refined during lockdown. As our sole online Clothing & Home fulfilment centre, the effective operation of our Castle Donington depot is vital. –– Group Incident Reporting & Management Procedures in A major incident leading to a sustained period offline would place and used to escalate incidents on site. These also impact sales and potentially hinder the growth of M&S.com. include critical third parties. In addition to Castle Donington, the loss of other locations –– Store and sourcing office business continuity assessments such as the dedicated warehouses that store beers, wines & and visits, where appropriate. spirits or frozen goods in the UK or support facilities, such –– Insurance cover to mitigate the impact of remediation and as for IT, could impact business operations. business interruption. While the response to Covid-19 has highlighted positives –– Mechanisms to validate the existence of key supplier in the business’s ability to continue operating in extreme arrangements. circumstances, it has also underlined the risk associated –– Ongoing contingency planning for Brexit. with our global supply chains. The reliance on China and the interdependency of sourcing locations, in addition to the –– Enhanced capabilities at Castle Donington to manage concentration of supply from individual countries such as technology failure. Bangladesh, highlight the potential impact of globally –– Engagement with external stakeholders including disruptive events. Beyond supply chain, the implications Retail Business Continuity Association and on trading both in the UK and International are also a risk. government-led initiatives. –– Membership of the National Counter Terrorism Information exchange.

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RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

INFORMATION SECURITY 9 Failure to adequately prevent or respond to a data breach –– Dedicated Information Security function, comprising a C or cyber-attack could adversely impact our reputation, multi-disciplinary operation of information security result in significant fines, business disruption, loss of specialists and support services and capabilities, with a stakeholder confidence, and/or loss of information for 24/7 Security Operation Centre. our customers, employees or business. –– Continued focus on improving controls, policies, and The increasing sophistication and frequency of procedures in line with our environment and threat cyber-attacks in the retail industry, coupled with the Data landscape, including heightened areas of risk due to Covid-19. Protection Act (DPA), highlight the escalating information –– Maintained focus on scanning our threat environment. security risk facing all businesses. Our reliance on a number of third parties hosting critical services and holding M&S –– Established third-party assurance programme. and customer data also means the information security –– Focused security assurance, overall operational rigor and risk profile is changeable. security hygiene around significant change activities. This risk also increases as we develop our digital capabilities. –– Network of Data Protection Compliance Managers in priority For example our dependency on the availability of, and business areas to oversee and address compliance. access to, insightful data across our business and/or –– Mandatory information security and data protection with the increasing shift online. training for colleagues, including responsibilities for the In addition, the risk of a data breach or misuse is impacted by use of personal data. Covid-19 as there is the potential for: –– Corporate Security team with a focus on improving the ·· An increase in targeted phishing campaigns. physical security environment. ·· New risks linked to working from home and the usage of personal devices. ·· Increased reliance on third parties supporting critical support services.

TECHNOLOGY CAPABILITY 10 A failure to improve our technology capabilities, reduce –– Delivery against our technology transformation programme S dependency on legacy systems and enhance digital continues and is underpinned with a defined technology capability could limit our ability to keep pace with operating model, project governance principles and customer expectations and competitors, enable business agile methodology. transformation and grow profitably. –– Cross-channel technology investment strategy in place The digital world continues to evolve at an unrelenting pace, and aligned to the family of businesses, reviewed quarterly enabling competitive advantage, influencing consumer to track benefits realisation of core projects. behaviours or expectations and increasing demands on –– Improvements to our IT infrastructure, increased bandwidth IT infrastructure. As demonstrated during the Covid-19 and deployment of a unified communication and lockdown, our business resilience is increasingly dependent collaboration tool, which underpinned the rapid move on the reliability and effectiveness of our technology to remote working during the Covid-19 lockdown. infrastructure and capability. –– Continued investment in in-store technology and We are clear on our aim to be Digital First and continue to digital capabilities to enhance both customer and plan and invest to support this objective. colleague experience. While a focus on improving the existing IT infrastructure –– Prioritisation of technology initiatives which is fully aligned has begun to deliver improvements in capability, flexibility with our operating and capital expenditure targets. and cost efficiency, further work is required to enable the business to move with pace to meet customer and –– Continued collaboration with our principal technology colleague needs. services partner, TCS, and other strategic partnerships, such as Microsoft, to drive our Digital First ambition. We also need to continue to develop the skills and capabilities of our colleagues in order to drive beneficial and –– Expansion of the Decoded programme and investment in effective use of the technological changes that are made. data analytics expertise to improve digital people skills. –– Investment in dedicated resource focused on technology risk and assurance maturity and roll-out of a structured IT control methodology.

Risk key S Link to strategy C Heightened risk due to Covid-19

40 Marks and Spencer Group plc

RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

THIRD-PARTY MANAGEMENT 11 An inability to successfully manage and leverage our –– Inclusion of third-party management risks as part of the S strategic third-party relationships, or a critical failure Crisis Management team oversight of the Covid-19 response. of a key supplier or partner, could impact delivery of –– Clear procurement and supplier management policies C our transformation initiatives, our ability to operate in place, including dedicated relationship partners for effectively and efficiently or, in some circumstances, strategic suppliers. our brand and reputation. –– Defined service level agreements and key performance Our business is dependent on a range of significant indicators for key contracts. third-party relationships that span products and services, franchise operations, joint ventures, investments and our –– Dedicated procurement and commercial teams. banking and services partners. A critical failure of a key –– Key supplier business contingency planning including STRATEGIC REPORT supplier or partner could have a significant impact on targeted reviews by our Business Continuity team. operational activities, our transformation and/or customer –– Structured governance and business monitoring processes experience – any of which could negatively impact for investments, other partnering and franchise agreements. operating profit. –– Integrated business planning processes to support franchise The scale and impact of Covid-19, both in the UK and and joint venture reviews. internationally, has heightened the possibility of disruption or failure in the important group of third-party companies –– Regular review of franchise and joint venture markets and that form part of the extended operations of our business. new opportunities. –– Third-party self-assessment processes to confirm compliance with expected standards and policies.

TALENT, CULTURE & CAPABILITY 12 An inability to maintain efficient processes and complete, –– Investment in external hires to strengthen capability and S accurate people metrics could impact our ability to address identified skills gaps. effectively target our resources and people agenda –– Investment in internal talent through structured to focus on attracting, engaging, developing and identification of critical and senior roles. motivating colleagues and developing skills for the future. This could also impact the pace of operational and cultural –– Leadership development programmes to enhance transformation across the business. leadership capability and colleague engagement. The need to engage, motivate and connect with our –– Improved new starter experience to ensure effective colleagues across a multi-generational, diverse workforce onboarding, engagement and retention of new colleagues. and drive Digital First skills and mindset is key to delivering –– A Business Involvement Group which is actively involved in productivity and supporting the transformation of colleague engagement and representation throughout the our business while driving customer loyalty through business, including at Board meetings. a differentiated service proposition. –– Development of a robust performance management system An inability to maintain the necessary change management that will measure achievement against business objectives capabilities could constrain our transformation objectives. and behaviours, with a clear link to reward. This, combined with the cultural challenge of managing –– A total reward review, with benchmarking of all pay and talent, performance and succession could result in increased benefit components and transparency on fair pay, resource management and development costs. including gender, ethnicity, disability and age. –– Creation of a network of external allies to champion our inclusion and diversity agenda. –– Change management capability considered a specific leadership skill requiring investment through training, toolkits and methodology. –– Planned investment in an HR information system. –– Delivery of a digital-specific apprenticeship programme driving digital literacy and capability building.

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RISK DESCRIPTION & CONTEXT MITIGATING ACTIVITIES

BRAND, LOYALTY & CUSTOMER EXPERIENCE 13 An inability to evolve our brand appeal, customer –– Chief Digital & Data Officer in post to head Insights and S experience and Sparks loyalty programme will impact Loyalty programmes and the recently created Digital & Data our success in retaining and attracting customers team focusing on loyalty, data science, digital product, C and expanding the business. customer growth and innovation. Consumer lifestyles and attitudes continue to evolve –– Brand, marketing and product teams aligned with the at pace in an increasingly diversified and competitive operating model to better address the specific needs of retail environment. A failure to anticipate and keep up our family of businesses. with customer expectations would impact future –– Improved online search functionality, enhanced end-to-end trading performance. journey across M&S.com and stores for Click & Collect, and In addition, the uncertainty of the duration of Covid-19 and greater personalised digital products and marketing. its longer-term impact on consumer behaviour, shopping –– Investment in capability to measure customer experience habits and spending power, is unknown, making our ability through introduction of an end-to-end and multichannel to plan and rapidly react more important than ever. net promoter score programme, supported by third-party Evolving our Sparks programme in a way that resonates expertise. with our customers and helps inform business decisions –– Completion of a review of our Sparks loyalty programme to remains a key objective. Combined with coordinating inform next steps. improvements across customer experience and personalisation through meaningful measures of customer –– Proactive monitoring of social media to observe and respond experience, data-driven marketing strategies and to trends in customer experience. embedding Digital First behaviours, these are key –– Initiatives launched in response to the Covid-19 lockdown to enablers to being a customer-centric business. continue making product available safely to customers, for example the range of M&S food boxes, expansion of Mobile Pay Go payment facility, introduction of M&S E-Gift Cards and shifting focus to contactless home delivery. –– Targeted use of celebrity engagement and high-impact sponsorship of ITV’s ‘Britain’s Got Talent’.

OUR APPROACH TO ASSESSING LONG-TERM VIABILITY

The UK Corporate Governance Code and remunerating at a senior level. Home colleagues to Food to meet the requires us to issue a ‘viability statement’ Our assessment of viability therefore demand and increased safety practices. declaring whether we believe the continues to align with this three-year These measures will help to mitigate the Company can continue to operate and outlook. impact of the volatility, and we believe meet its liabilities, taking into account that trading conditions will recover as Given the global political and economic its current position and principal risks. we move into 2021/22. uncertainty resulting from the Covid-19 The overriding aim is to encourage pandemic, coupled with the already In assessing viability, the directors directors to focus on the longer term fast-paced changes taking place across considered the position presented in and be more actively involved in risk the retail sector, we expect to see the Budget and Three-Year Plan recently management and internal controls. significant volatility and business approved by the Board. In the context In assessing viability, the Board disruption reducing our expected of the current challenging environment considered a number of key factors, performance in 2020/21. We have highlighted above, a “Covid-19 scenario” including our business model (see already felt the impact of the was applied to the plan, as well as the page 09), our strategy (see page 07), risk government’s guidelines on lockdown, modelling of additional severe, yet appetite (see page 33) and our principal with our Food stores open and trading plausible, sensitivities. These were based risks and uncertainties (see pages 34 (albeit with social-distancing measures on the potential financial impact of the to 42). in place), but with Clothing & Home Group’s principal risks and uncertainties The Board is required to assess the unable to trade from stores, and all sales and the specific risks associated with the Company’s viability over a period therefore predominantly coming from Covid-19 pandemic and the uncertain greater than 12 months, and in keeping online sales and Click & Collect in stores. high street trading environment. with the way that the Board views the Measures have already been taken The Covid-19 scenario and how it development of our business over the to protect the health and safety of corresponds to the principal risks, long term, a period of three years is our customers and our colleagues, including the pandemic (pages 34 - 42) considered appropriate for business to manage our supply chain, to cut has been assumed to occur over the planning, measuring performance costs, and to redeploy our Clothing &

Risk key S Link to strategy C Heightened risk due to Covid-19

42 Marks and Spencer Group plc

same three-year period in order to –– Sensitivity 2 – as per sensitivity 1, In addition, in order to maximise liquidity assess the Group’s ability to withstand plus a deeper sales decline over the for the likely duration of the crisis multiple challenges. The potential first six-month period, with Clothing & and the recovery period beyond, impacts of the pandemic have been Home on average c.80% down on the following further steps have also built into the Covid-19 scenario and budget. The incremental impact on been taken: additional sensitivities, but the potential Clothing & Home and Food revenue is –– Formal agreement has been reached impact of a further “black swan” event £424m and £99m respectively, over with the lending syndicate of banks that cannot be reasonably anticipated, and above sensitivity 1 for the providing the £1.1bn revolving credit or is considered remote, is not included. financial year. facility to remove or substantially The Covid-19 scenario assumes that Reverse stress testing has also been relax the covenant conditions for the the current government guidelines applied to the model, which represents tests arising in September 2020,

continue for a period of at least four a further decline in sales compared with March 2021 and September 2021. STRATEGIC REPORT months, resulting in a significant decline sensitivity 2. Such a scenario, and the –– The Group has confirmed its eligibility in sales for the remainder of 2020/21 sequence of events which could lead under the UK government’s CCFF as follows: to it, is considered to be remote. and allocated an issuer limit of –– On average, a 70% decline in The impact of the Covid-19 scenario £300m, providing additional Clothing & Home sales vs budget and sensitivities has been reviewed further liquidity headroom. for the four months to July 2020, against the Group’s projected cash flow The agreement with the banks followed by a slow recovery back to position and financial covenant over the combined with the other measures budget by February 2021, reducing three-year viability period. Should these taken means that, even under expected revenue by £1.5bn for the occur, mitigating actions would be the Covid-19 scenario and the financial year. required to ensure that the Group sensitivities, the business would remains liquid and financially viable. –– A 20% decline in Food sales vs budget continue to have significant liquidity These actions were identified as the for the four months to July, impacting headroom on its existing facilities and Covid-19 pandemic emerged as part annual revenue by £384m. against the revolving credit facility of the contingency planning that the financial covenant. –– International sales following a similar Group has been undertaking, which profile to Clothing & Home, with a considered both feasibility and Neither the Covid-19 scenario, nor the significant decline in April due to timeframe to execute. sensitivities individually threaten closures, and a recovery extended the viability of the Company. In all Mitigating actions taken include, but are to March 2021, impacting annual assessments, there is an option to not limited to, reducing planned capital revenue by £214m. extend the potential mitigations and marketing spend, freezing pay and available, such as further reduction Given the Covid-19 scenario is most recruitment, making technology and in capital expenditure and reduced sensitive to changes in the length of operating expenditure cuts, reducing returns to shareholders. The Audit the Covid-19 impacting period and the the supply pipeline of Clothing & Home Committee reviews the output of the depth of the impact, and without firm stock by c.£560m, and lengthening viability assessment in advance of final guidance from the government on a payment terms, and ceasing to pay evaluation by the Board. The directors possible ‘exit strategy’, a prudent the final dividend payment for 2019/20 have also satisfied themselves that approach has been taken to stress test and for the current financial year, they have the evidence necessary to this Covid-19 case with further downside resulting in a total anticipated cash support the statement in terms of the sensitivities, which extend the length saving of c.£340m. effectiveness of the internal control of the social-distancing measures or The Group also expects to benefit environment in place to mitigate risk. increase the depth of the impact on from c.£172m of business rates relief sales and margin as follows: Having reviewed the current in 2020/21 and the government’s performance, forecasts, debt servicing –– Sensitivity 1 – The Covid-19 scenario Coronavirus Job Retention Scheme requirements, total facilities and risks, above, but with a much slower to help meet the cost of furloughed the Board has a reasonable expectation recovery, thereby impacting Clothing roles in store, distribution and support that the Group has adequate resources & Home and Food sales for longer centres, which should generate cash to continue in operation, meets its and including a recession for the savings of c.£50m up to 30 June 2020. liabilities as they fall due, retain duration of the Three-Year Plan period sufficient available cash across all (modelled as a 5% decline vs plan in three years of the assessment period Clothing & Home and Food sales on and not breach any covenant under an ongoing basis through-out the the revolving credit facility. The Board three years). The incremental impact therefore has a reasonable expectation on Clothing & Home and Food that the Group will remain commercially revenues is £251m and £281m viable over the three-year period of respectively for the financial year. assessment. The Viability Statement can be found on page 96.

Annual Report & Financial Statements 2020 43