Marks & Spencer is to be demoted from the FTSE 100 for the first time in the latest sign of the declining fortunes of the retailer, which was a founding member of the leading City share index.

Relegation to the FTSE 250 comes as the company is closing 120 stores as part of an overhaul designed to shore up profits.

M&S’s demotion reflects a share price at nearly a 20-year low as a long-running sales slump at the retailer’s clothing arm is compounded by the high street crisis affecting rivals including Debenhams and House of Fraser.

The FTSE 100, which was established in 1984, contains the UK’s biggest listed companies by market value, with membership considered a mark of business prestige. The index is reshuffled four times a year according to share price movements, allowing a handful of companies to move up and down.

Tony Shiret, an analyst at the stockbroker Whitman Howard, said: “It is significant [for M&S] in the sense that it is a fairly objective measure of the diminished scale of the company.”

M&S shares closed down 1.5% at 187p, valuing the company at £3.6bn.

A decade ago, M&S was making a £1bn annual profit but the latest figure was below £100m on the back of more than £400m of restructuring costs relating to the revamp being led by the company’s chair, Archie Norman, who is highly regarded for turnarounds during his career including at Asda and ITV.

Losing its FTSE 100 status means M&S shares will no longer be held by the investment funds that only track the index of Britain’s highest-value companies, forcing them to dump the stock. Norman has previously been sanguine on the matter, saying: “When I went to ITV we dropped out of the FTSE 100, the sky didn’t fall in.”

Last year, he told shareholders M&S had bigger problems because it was facing an existential threat as retail shopping moved online. “This business is on a burning platform. We don’t have a God-given right to exist and unless we change and develop this company the way we want to, in decades to come there will be no M&S,” Norman warned.

Q&A What is the FTSE 100 and why does it matter? Show Hide What is the FTSE 100?

The FTSE 100 is an index of the 100 largest companies listed on the London Stock Exchange measured by their market value, or capitalisation. The total value of the companies that comprise the FTSE 100, often referred to as “blue chip” businesses, currently stands at about two trillion pounds; about 80% of the value of all publicly listed companies in the UK. The FTSE 100 was founded in 1984 as a joint venture between the Financial Times and LSE. What are the benefits of being in the FTSE 100?

London is one of the world’s major financial centres and there are significant benefits attached to the status of being included on the capital’s main market. Benefits for blue chip companies include increased profile, particularly internationally. It is still regarded by many as a proxy for the health of business in Britain although, in fact, the FTSE 250 index is more representative of domestic-focused companies, as a about 75% of FTSE 100 company earnings come from overseas. Gaining a place in the FTSE 100 can improve demand for a company’s shares as some investors are more comfortable investing in companies in the blue chip index. It can also help with raising capital. Many funds are linked to the FTSE 100. These passive, low-cost investments, known as tracker or index funds, do not use highly-paid fund managers to pick stocks but invest instead in the constituents of the main stock market index, thus tracking its performance. Why would a company be ejected from the FTSE 100?

A falling share price is the main reason for a company being demoted from the index, as this will reduce its value. Companies are also removed from the index when they have been taken over and no longer have a separate stock market listing. I don’t own any shares – why does the FTSE 100 matter to me?

The FTSE 100 affects most people even if they don’t directly invest themselves, as pension funds are often linked to the main market and its performance directly affects returns. What are the rules under which companies get promoted and demoted in each quarterly review? There are a number of rules in place to ensure that there isn’t a constant turnover of businesses exiting and entering the main index on a quarterly basis. Any company outside the FTSE 100 which has a market capitalisation equal to 90th position or better in the main market is guaranteed promotion. Conversely, any company which ranks it 111th position or lower is automatically demoted. Depending on how many companies automatically fit these criteria at the time of each quarterly review, the main market is “rebalanced” to reflect the top 100 listed companies total.



Nick Bubb, a retail analyst, said M&S had been in the relegation zone for some time. “M&S has been declining remorselessly for many years, as a result of weak and arrogant management, and stronger, more focused competition [such as Primark]. The problems have mainly been on the clothing side, where M&S tries and fails to be all things to all people in the mid-market,” he said.

M&S – which was founded on a Leeds market stall in 1884 – was late to adapt to the rise in online shopping, hampered by its legacy of 300 clothing stores. Many of the chain’s shops predate the second world war and are no longer in the right place or are the wrong size for their local market.

Norman is putting the company through its biggest shake-up in a generation. He has paid £750m for a 50% share in Ocado’s retail arm and, from autumn next year, M&S products will replace Waitrose-branded goods in shoppers’ deliveries. But investors are split on the merits of the deal, with some arguing the company has taken an expensive route into the fast-growing online grocery market.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

But Norman, who is working closely with the company’s chief executive, Steve Rowe, has had his work cut out reviving the M&S clothing business, which remains the country’s biggest in sales terms despite seven years of decline.

In July, M&S sacked its clothing head Jill McDonald after she failed to get a grip on the biggest job in high street fashion. At the time, Rowe – who is now running the business – revealed buying errors meant key products such as jeans had sold out, resulting in the poorest stock levels “I have ever seen in my life”.

With FTSE 100 membership purely a function of market cap size, Bubb said: “Other companies have grown bigger and M&S has got smaller. Life will go on after the exit from the FTSE 100 and in some ways, a lower profile might help M&S.”