Analysis: John Lewis in crisis

Let’s face it, John Lewis Partnership's full-year financial results were never going to make easy reading. Waitrose aside (which today revealed a 0.9% fall in revenue, but sales growth of 13%) it is the department store’s fortunes that now look serious.

Since last September’s first ever half-year pre-tax losses, the store has seen sales slump (by 2.3% in the seven weeks to 4 January), the exit of boss Paula Nickolds and the appointment of new chairman, Sharon White. In January it even ended its 100-year tradition of publishing weekly sales figures.

For some, that last change really was a sign that the writing was on the wall. And so the scale of today’s profit slump – while massive – is barely unsurprising: a 23% drop in profits to just £123 million for the full-year ending 25 January 2020 – its third consecutive drop in annual profits across the Partnership as a whole. Meanwhile, operating profit in freefall plunging 65% to £40 million. A raft of store closures (in addition to the three Helensburgh, Four Oaks and Waterlooville stores announced today), now look unavoidable. Is this really a position it can bounce back from?

In a letter to partners White said: “This is weaker performance than we hoped for, driven significantly by reduced profitability at John Lewis”.

The future of department stores

But according to Guy Elliot, senior industry lead of retail at Publicis Sapient, things could get much worse: “The results were no real surprise because the public just isn’t clear why these big department stores exist,” said Elliot. “If you don’t have a clear proposition, you only have price, range and availability, and marketplaces like Amazon will win every time.”

He added: “Interesting in her statement was White saying the Partnership is a purpose-led brand – it might well be for partners, but it’s not for customers. It needs a clear proposition to resonate with customers again.”

White said this will be via relentless return to service, but with staff bonuses cut to a paltry 2% (or £360 for the average worker; it’s worst since 1953 when there was none), some argue she’s creating a paradox. “How can you say service is key and then cause demotivation and retention problems by cutting their bonuses?” asked Nelson Blackley, retail research associate, Nottingham Business School.

But his view is also that there are much more structural issues at play: “With around 50 stores creating £40 million in operating profit, it’s clear that some stores are hardly driving any operating profit at all. With some 20 of these in shopping centres, which ones survive will depend on who can negotiate their rent the best.”

Retail analyst, Chris Fields, added: “Fundamentally, I don’t think the partnership model itself works in retail now. Partners won’t go along with the radical change that’s needed to turn the business around.”

Action plan

John Lewis’s operating profit is now just a meager 0.8% (compared to 2.3% last year), and if service is something it wants to improve, Catherine Shuttleworth, CEO of Savvy, argued it will be tough going. “While it makes sense for John Lewis to reduce store space and even dispose of weaker shops, customer service doesn’t come cheap.”

She said: "The problem is shoppers in the UK demand a level of service from John Lewis that I’d argue is unsustainable. Both in-store and online expectations of service are almost impossible to fulfill.”

According to Andrew Busby, founder of Retail Reflections, its ‘never knowingly undersold’ mantra is also “a millstone round its neck it needs to get rid of.” Nothing was mentioned of this today, instead, a commitment to undergo a strategic review – another distraction noted Busby.

“The problem for John Lewis is very clear,” he said. “It’s probably got about 30 stores too many and it has dumbed down to be put in the same category as Debenhams and House of Fraser – just as customer expectation has risen. What it really needs is to create an ‘experience’, and you don’t need a McKinsey to tell you that.” He added: “Time is simply not on White’s side. In two years, the department store has gone from an operating profit of £250 million to an operating loss of £37 million. Saying she’ll announce the results of a review in the autumn, and that change might take 3-5 years is mad. It’s is too far off. The world will have changed again by then.”

Busby is not the only commentator to hint that the senior board seriously lacks retail experience. White is herself ex-consultancy (which is why Busby suggests she leans towards a review), and one of her first hires was Nina Bhatia, former MD of smart meter firm Hive as director of strategy.

Year-round customer experience

Ivan Mazour, CEO and founder of AI customer marketing platform, Ometria, believes John Lewis has focused on too much on creating an annual Christmas advertising spectacle, rather than truly understanding and valuing its consumers all year round. “Today’s dismal results show a need for creating experiences that customers love, tailored to individual tastes and preferences," he said. "It must also invest in convenient digital experiences that its audience are accustomed to receiving via competitors such as Amazon.”

The only crumb of comfort, argue Busby and Elliot, is that a plan by previous chairman, Charlie Mayfield – to bring the John Lewis and Waitrose brands closer together appears to be dead in the water. “Waitrose is its own successful and distinct brand, that needs its own space,” said Elliot.

But as Busby concluded: “Legacy retailers like John Lewis really do need to grasp the new reality. There needs to be much more pace and urgency in making change, not wading through treacle for another for six months doing a review.”