John Lewis revealed that its profits plummeted last year with pre-tax profits in freefall and the lowest partnership bonus given since 1954.
The retailer, which has historically led its market, is grappling with the structural challenges and cost pressures afoot in retail, as well as damaged consumer confidence as a result of the Brexit vote.
Retail Week looks at how it will weather the coming storm.
It’s not as bad as it looks
Pre-tax group profits plummeting 77% looks like a car crash, no doubt about it. But take a step back and things aren’t as bad as they first appear.
The drop includes exceptionals of £282.5m, which is mainly comprised of restructuring costs.
Without a partnership bonus of £74m and exceptionals, operating profits dropped 24.6%. All of that drop was due to Waitrose, which struggled to mitigate increased costs as a result of the fall in sterling.
“We pushed through a greater level of change in one year than I have ever seen in my time at the partnership”
The partnership admitted today that Waitrose would continue to suffer margin pressure. “We don’t think it will bounce back quickly,” finance boss Patrick Lewis said.
By contrast, John Lewis’ operating profits before bonus and exceptionals rose 4.5%.
By restructuring its business now, the partnership is setting itself up for the future.
“We pushed through a greater level of change in one year than I have ever seen in my time at the partnership,” chairman Sir Charlie Mayfield said today.
Sales were also stable across both parts of the business – like-for-likes edged up 0.9% at Waitrose and 0.4% at John Lewis, while total sales were up 1.8% at Waitrose and 2.2% at John Lewis.
Partnership and productivity
The partnership began restructuring and introduced its ‘fewer, better jobs’ rhetoric two years ago.
Today the extent of that change was exposed.
Last year, there were around 1,400 redundancies across the business.
While John Lewis would not make any predictions for the coming year, Mayfield admitted that there would be fewer partners still.
“What we are looking at is a level of disruption and displacement that is far greater than we have seen in recent years and so the partnership is preparing,” he said.
“There are 5% fewer partners today compared to this time last year, and we are expecting that the number of partners will continue to decline.”
“We are investing very hard with our partners to make sure that, as our jobs change, everybody’s skills are being developed to be really successful in the future”
Mayfield said he believed “the extent to which tech is going to affect the workplace is currently not being factored in by most businesses”.
He cited a study in the US that estimated 51% of US jobs were highly susceptible to automation and declared “that figure will be very similar in the UK”.
Mayfield added that John Lewis was doing a lot of “really fascinating and promising” work around AI, and was developing its jobs training programmes in order to prepare itself for the ongoing digital and jobs revolution.
“We are investing very hard with our partners to make sure that, as our jobs change, everybody’s skills are being developed to be really successful in the future,” added Mayfield.
“We have launched nine apprenticeship schemes and that will be increasingly important to the future.”
Mayfield also emphasised that the business had no qualms about cutting its bonus.
“If the right answer was to have zero bonus, we would have zero bonus, I’ll be absolutely clear about that,” he said.
“It is not what we aim to achieve, of course, but it reflects that fact that the most important thing for our business is always the long-term health of the partnership.”
The partnership last forwent its bonus in 1952 and 1953, while during the Second World War partners were encouraged to pay in and give money back to the partnership.
No “defensive crouch”
Both Mayfield and John Lewis managing director Paula Nickolds spelt out the importance of continued innovation in a tough market.
“We expect trading to continue to be volatile and we are not expecting any let-up in the competitive intensity that we are seeing in the market,” Mayfield said of the coming year.
“As a result, we are anticipating continuing pressure on profits this year.
“But I want to be really clear – this is absolutely no time for a defensive crouch. On the contrary, our whole game plan for our business is to step up to these challenges and we will be upping the pace on innovation in the year ahead.
“It is the only way to win in these markets.”
“To progress our ambition in differentiating product we will make unprecedented investment this year in our own-brand development capabilities, recruiting 80 new roles across home and fashion in design, tech and buying teams”
Those innovations include accelerating John Lewis’ ambition to reach 50% own-brand product. At the moment, own-brand accounts for 35% of product.
“To progress our ambition in differentiating product, we will make unprecedented investment this year in our own-brand development capabilities, recruiting 80 new roles across home and fashion in design, tech and buying teams,” said Nickolds.
“Later this year, we will have new product range launches.”
Nickolds said the department store was also rolling out a social media initiative, which will allow partners to share specially created John Lewis content on their personal feeds as well as creating their own posts.
The #WeArePartners initiative has already been trialled and will now be rolled out across the business.
“Partners have, to some degree, always been our best brand ambassadors and this is just a way of bringing that to life a bit more,” Nickolds said.
Beauty was a standout performer for the department store, with sales rising 8%.
John Lewis is planning to capitalise on this with a customer relationship management programme that will capture customers’ histories, beauty regimes and goals, and allow the retailer to personalise its digital communications with them.
Nickolds said that John Lewis would continue to move into service areas, adding other sectors to its Solutions banner, which currently revolves around handy-work and odd jobs.