Why the John Lewis Partnership is not in crisis

Inevitably, with today’s profits warning from the John Lewis Partnership, there will be speculation that the owner of the eponymous department stores and the Waitrose grocery chain is being blasted by the hurricanes that have afflicted so many of its competitors.

During recent years, BHS and Allders have vanished from the high street, House of Fraser is shutting more than half its stores and Debenhams now has a stock market valuation equal to less than five weeks of its sales.
Surely the John Lewis department store chain, arguably Britain’s best-loved retailer, must also be struggling?
Not necessarily, argues Sir Charlie Mayfield, chairman of the Partnership.
What today’s announcement is all about is adapting to changing times and future-proofing the business. That means investing heavily in IT – a significant factor behind the escalation in costs that will contribute to half-year profits being wiped out – and also in changes to the store estate.
This latter factor does not mean a wave of store closures, as some have suggested in the wake of today’s news that four Waitrose convenience stores and one small supermarket are to close, but means doing other things with the stores.

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Video: Drive for ‘better value’ at John Lewis

Sir Charlie points out that, with the Partnership owning a lot of its sites, it is well-placed to build some sites higher, potentially enabling it to let out space for other uses, or even develop flats and apartments that can be sold.
Future-proofing the Partnership also means sacrificing profits in the short term in order to invest in the long-term.
Sir Charlie wants the Partnership to invest between £400m-£500m a year which, he says, will means the Partnership’s level of capital investment, as a proportion of sales, will be more than 10% ahead of its competitors.
This, he argues, is a strength of the partnership model. John Lewis Partnership is owned by its 85,500 employees and, as such, is under less pressure than stock market-listed competitors to generate short-term returns.
Take any high-profile retailer that has experienced difficulties in recent years and, somewhere along the way, a lack of investment will have contributed – whether that is the failure of the likes of BHS, Allders and House of Fraser to stay relevant to customers or a refusal on the part of Asda to sacrifice profit margins in the short term to defend its market share in the face of competition from the hard discounters Aldi and Lidl.
The other real significance in today’s announcement is that the Partnership clearly plans very little addition to floor space.

The 50 John Lewis department stores it has is clearly deemed sufficient for its needs and, while Sir Charlie was at pains to stress that the gleaming new John Lewis store at the Westfield shopping centre in west London will not be the last store opening, it is likely to be one of the last.
Similarly, Waitrose will not be adding dramatically to its core estate of 353 shops, a dramatic change from the ambitions expressed by its former managing director, Mark Price, who only four years ago was talking in terms of doubling the size of its store estate from 300 to 600.

Image: Sir Charlie Mayfield is investing now for the long term
Instead, Sir Charlie argues that both Waitrose and the John Lewis department stores will have to focus on “differentiation not scale”, fighting for customers not by being the biggest players in their field but by offering a real point of difference.
The department stores will, in time, raise the proportion of its sales coming from own-brand or exclusive products from 30% to 50% while Waitrose will also be looking to raise the proportion of products that are own-brand from the current 50% or so.
A stroll around John Lewis in Westfield gives a good indication of what the Partnership hopes to achieve. While everything that one would expect to see in a John Lewis store is there, there is also a lot of space devoted to services, providing advice and making shopping a more personal experience. In the jargon, John Lewis wants to deepen the relationship it has with its customers.
Some of these changes are going to be painful for partners. One of the ways in which the Partnership aims to strengthen its balance sheet will be a review of its legendarily generous pension scheme.
Profits may also be eroded at the department stores, famous for their ‘Never Knowingly Undersold’ prices pledge, as the likes of House of Fraser close underperforming stores and announce stock liquidation sales.
But there are already signs that the extra investment is paying off.
While profits are going to be down this year as a whole at the department stores, Sir Charlie expects them to be up at Waitrose, marking a turnaround from the tough trading the up-market grocer suffered in 2017.