Adam Calman (left) of Cushman & Wakefield was joined by Francisco Acoba of awards co-sponsor Deloitte following Calman's presentation.

Marks & Spencer Group Plc (M&S) is one of the U.K.'s largest retail groups specializing in fashion, food, beauty products, home wares and financial services. In 2004 the Group income totaled $15.5-billion with net profits in excess of $1-billion.

As part of its ongoing drive to reduce cost and improve efficiencies within every business function of the Group, M&S embarked on the largest non-food logistics contract re-tender ever undertaken in the U.K., with a contract value in excess of $1.3billion.

Global service provider Cushman & Wakefield came to the M&S management table with an innovative way to maximize the value of the re-tender by leveraging C&W's knowledge of the financial markets with its expertise in supply chain management, as C&W's Partner of Occupier Strategy Adam Calman explained.

“M&S had traditionally operated its non-food logistics function using five different third-party logistics (3PL) providers,” Calman said. “The historic nature of these multiple contracts was administratively challenging and was becoming a restriction to the efficient operation of M&S core retailing activities.”

Calman added that the 3PL charging structure was expensive and not sufficiently transparent to M&S; it was extremely difficult to make clear distinction between the pure logistics element and other add-on costs which M&S wanted to remove.

The portfolio in question was comprised of 10 distribution warehouses totaling 2.4m sq ft with wide U.K. geographic dispersion. Vacant possession value was significantly lower than the potential investment value with an M&S covenant attached, said Calman.

“The Occupier Strategy team within C&W London was instructed before the re-tendering exercise began to advise the internal logistics team at M&S on the property options available to them and to design an effective tender process.,” Calman pointed out. A series of complex financial models and decision making tools was employed to analyze both the financial and operational consequences of a range of options.

“Having identified the relationship between the drivers for the re-tender and the coincidence of ownership across the portfolio, it was decided that the specific key to unlocking this unsatisfactory scenario was to install on the incumbent 3PL providers, a pre-qualification condition for re-tendering,” Calman noted. “All 3PL contractors were obliged to sell, and therefore sold, all 10 of these freeholds to M&S.”

There was an inherent level of uncertainty over whether the individual incumbent 3PL's would be successful in the re-tender, Calman recounted. If re-award was not achieved, their assets would become vacant for a period of time before a new contract could be installed. It was therefore possible to negotiate the purchase of these assets at prices close to vacant possession values.

M&S awarded a new 3PL contract to 2 operators for a 5 year period only. They granted operating agreements to these contractors, allowing them use of the 10 newly acquired distribution facilities. The agreements were co-terminous with the individual supply chain contracts.

Calman observed that M&S now has several options remaining open:

• Continue to finance the ownership of the assets using internal capital resources, thereby retaining complete flexibility of ownership and operation
• Raise real estate specific debt under an OpCo/PropCo structure, giving an enhanced capital raising opportunity, while retaining property ownership upside
• Pursue a sale and leaseback program, raising the maximum capital sum and allowing off balance sheet treatment of both the asset and the debt, under current IAS rules

“We created with them and delivered for them an innovative and strategically important solution which resulted in a more closely aligned supply chain platform to the operational needs of the business,” Calman said.

By disaggregating the ownership of the real estate from the services provided within, M&S realized transparency on the true costs of operating the non-food logistics contract and reduced operating and financing costs by some margin.

“The total flexibility to release significant value from the assets through sale and leasebacks at a future date, on occupier friendly terms, could generate asset values in excess of their cost of acquisition,” Calman told the awards panel judging the cases.