Marks and Spencer drops out of FTSE 100: what does it mean for investors and shoppers?

Marks & Spencer (M&S) crashed out of the FTSE 100 last week for the first time since the index was formed in 1984.

The demotion is a big blow to the retailer's status. Experts have deemed it a sign of the struggling UK retail sector, with more big household names at risk of falling out of the prestigious list.

We take a look at what the change means and what plans Marks & Spencer has to turn its fortunes around.

Why is M&S out of the FTSE 100?

The FTSE 100 is a collection of the 100 biggest companies in the UK based on market value.

FTSE Russell, the index provider, reviews the list four times a year to ensure it is reflective of the market.

In its third reshuffle of 2019, FTSE Russell announced Hikma Pharmaceuticals, Meggitt, and Polymetal International would enter the FTSE 100.

But big names Marks & Spencer Group and Direct Line Insurance Group, as well as Micro Focus International, will leave the FTSE 100 index by 23 September.

• Find out more:how does M&S fare in our table of the best and worst high street shops?

What went wrong for M&S?

In 1998 M&S became the first British retailer to make a pre-tax profit of more than £1bn.

But shares in the company have dropped 40% over the past year, following three previous years of profit falls and multiple failed reinventions.

At the time the retailer was cut from the FTSE 100 it had a market value of £3.7bn, compared to Next - its closest fashion rival - which had £7.9bn.

Experts say Marks & Spencer was slow to invest in online sales and remains heavily reliant on its physical stores.

The business has also seen a decline in sales of clothing, which makes up a large part of its profits. Critics say it has failed to revamp its lines, especially in womenswear.

In the past, the retailer's foods division helped offset losses in other parts of the business. However, this has slowed and competition from other supermarkets has intensified.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, told Which?: 'When online shopping first came knocking, M&S was slower off the mark than some rivals, which hindered progress, particularly in the crucial clothing and home business.

'That also meant it was left with the hefty costs associated with running physical stores, at a time when more people were shopping online, which was an unhelpful combination.'

• Find out more:did M&S do well when we reviewed online shops?

What the relegation means for investors

Falling out of the FTSE 100 means M&S has joined the FTSE250, a list of the next-largest companies in the UK.

Symbolically this is a big blow to the business as it's been a stalwart of the prestigious FTSE 100 index from the beginning.

However, some commentators have said it could give M&S the space it needs to focus on developing without such intense focus from the City.

Helal Miah, investment research analyst at The Share Centre, says for institutional investors the change doesn't really matter, but funds tracking or benchmarked to the FTSE 100 will no longer need to hold shares in M&S - which means they will have to dump the stock.

Many funds are linked to the FTSE 100. These are passive, low-cost investments known as tracker or index funds.

Archie Norman, chairman of M&S, has claimed to be unperturbed about the shift, stating: 'When I went to ITV we dropped out of the FTSE 100, the sky didn't fall in.'

• Find out more:investing directly in shares

Could M&S re-enter the FTSE 100?

Companies enter and leave the FTSE 100 regularly.

Hika Pharmaceuticals, for example, re-entered the FTSE 100 last week for the seventh time in the past five years.

The table below shows the companies that have entered and left the FTSE 100 over the last year.

The potential for M&S to re-enter to the FTSE 100 rests on the success of the current strategic turnaround.

Miah commented: 'You need a period of confidence and recovery in the whole UK retail market, while M&S itself needs to address self-inflicted issues, such as creating more appealing clothes and a greater push towards online sales.'

Miah predicts the next reshuffle could see a number of other high-profile names, including Sainsbury's and Morrisons, leaving the list due to challenges in the wider sector - not least the rise of discount supermarkets and continuing Brexit uncertainty.

Miah told Which?: 'The only other general merchandise retailers left in the index will be Next, which has done well to transition to online sales, and JD Sports with its premium-end sports fashion and global expansion growing the business.'

What can Marks and Spencer shoppers expect next?

Shoppers won't be directly affected by M&S changing index, but you can expect to see changes under the company's turnaround plan.

Steve Rowe, chief executive of M&S, launched a strategy to make M&S 'special again' in 2017. We spoke to M&S about what this means for shoppers.

Store closures (and targeted openings)

M&S has said it plans to reduceits huge estate of physical stores to match consumer habits.

There are plans to close 100 underperforming stores by 2020 - but it could be much more if the review reveals other sites that are dragging profits down.

However, M&S told Which? this doesn't mean new stores won't open. The retailer says it wants to open more stores in areas it feels it could have an impact in, and has plans for another 75 food stores.

M&S food online

M&S plans to boost its food business and make its entire range available online.

In February this year, M&S bought 50% of online-only supermarket Ocado for £750m.

M&S told Which? it plans to offer its full range of food (that's around 7,000 products) online through Ocado by September 2020.

• Find out more:M&S reviewed by food shoppers

Price cuts that don't sacrifice on quality

Marks and Spencer is also trying to compete more on price, in a bid to become the destination for your weekly grocery shops.

It's already lowered prices on 400 lines. M&S says it's done this without reducing quality and instead found 'efficiencies' in its current processes - for example, by using just one supplier for chicken in its sandwiches and its ready-meals, rather than buying from multiple sources.

Staple products like milk and bread have also come down in price to help it compete with supermarkets.

• Find out more:supermarkets compared

Bolder fashions

Critics have often laid into the M&S clothing range for being old-fashioned.

M&S acknowledges that in the past it has tried to cater for everyone through multiple fashion lines instead of offering one or two ranges with a broad appeal.

It wants to refocus 'from buying wide to buying deep' - for example, rather than having several different designs of jeans, with some selling well and others failing to hit the mark, M&S will focus on a smaller range of designs.

• Find out more: your rights when shopping