John Lewis Partnership’s half-year results made for a sobering read, as the high street stalwart unveiled the first half-year loss in its history.

The retail group fell into the red in the half-year to July 27, recording a loss before tax, exceptional items and IFRS 16 of £25.9m, compared with a profit of £800,000 the previous year, as operating losses at John Lewis spiralled by £42.5m to £61.8m.

The retailer attributed its overall losses to planned investments in partner pay and IT, as well as subdued consumer confidence stymieing demand for big-ticket items.

John Lewis Partnership chair Sir Charlie Mayfield stresses that the retailer, which reduced its net debts by 16.4% to £2.4bn year on year, had anticipated this consumer spend slowdown.

“We anticipated we would be facing profit pressures pretty much as early as 2014, and we’ve taken a series of strategic and financial steps since then to strengthen our financial position,” he says.

Cost savings

Mayfield points to measures throughout the last several years which have “saved hundreds of millions of pounds”, including the reduction of the retailer’s partnership bonus and axing of its final-salary-based pension scheme, as ways the business had strengthened its cash flow to better withstand the shockwaves of consumer uncertainty.

Despite this foresight, Mayfield stresses that “it will not be possible to mitigate [the] impact” of a no-deal Brexit, and crashing out of the EU without a deal on October 31 “could affect sales, the smoothness of our operations and ultimately that could have a knock-on effect on profit”.

“We are pursuing bold and ambitious plans that allow us to unleash the power of the partnership to break out of the pressure affecting all retailers” 

Sir Charlie Mayfield, JLP

“We are ready for all those eventualities. They could be significant but obviously that depends enormously on what actually happens and how severe any disruption is,” he says.

Despite this uncertainty, Mayfield insists that JLP plans to grow sales during the vital Christmas trading period but admits that this “could be a real stretch” in the current climate.

The question is, against a backdrop of growing consumer uncertainty with Brexit looming, are things going to get worse for this high street stalwart before they get better?

Brexit disruption

There are two key areas where Mayfield anticipates Brexit – and particularly a no-deal scenario – will impact John Lewis: the movement and subsequent availability of fresh food products, and consumer confidence.

On the former point, Mayfield is clear that, despite the splash that the Government’s no-deal planning document Yellowhammer has made this week, its predictions came as little surprise to Waitrose.

“We’ve been consistent that a no-deal Brexit would have an impact on our business,” he says. “The publication of the Yellowhammer documents gives a bit more insight, but frankly, I don’t think it tells us anything particularly new that we didn’t already know.”

Waitrose has taken precautionary measures such as stockpiling ambient goods, such as wine and olive oil, and frozen items, as much as its warehouses will allow and has increased its range of British-sourced products.

“All our beef is from the UK, all of our chicken, all our lamb when in season,” says Waitrose managing director Rob Collins. “We have a history of building strong UK supply.

“One of the challenges around the potential timing at the end of October is that we are well out of the UK growing season so that brings an added challenge in terms of fresh produce.”

Subdued consumer confidence is already hitting John Lewis sales. Any post-Brexit disruption could hinder this further and hit Christmas trading, Mayfield warns.

“In the event that there is disruption and people are seeing that happening across the country, how inclined are they going to be to make discretionary purchases? Obviously that is particularly relevant at a key time of year when we are expecting to see sales increasing significantly,” he says.

Big-ticket blues

John Lewis & Partners_HOUSE AW19

Homeware and electrical sales have fallen

The lack of appetite for big-ticket purchases was evident in John Lewis’ first-half sales, where performance was divided into two distinct camps: fashion and beauty, where sales grew ahead of the overall market; and homewares and electricals, where sales fell.

As John Lewis managing director Paula Nickolds explains: “There have been fewer housing transactions in the first half of 2019 than at any time in the last decade and that tends to be the trigger [for discretionary home and electrical spend], particularly for the more involved purchases in the home like curtains and carpets.

“That, coupled with a generally subdued consumer confidence level, is going to have a particular impact in those categories.”

Although home and electricals have been hardest hit, this low level of consumer confidence has resulted in price reductions from John Lewis’ rivals across all product categories. The number of price changes made by the retailer as part of its Never Knowingly Undersold pledge rose 73% year on year during the half.

When asked whether she anticipated the rate of price cutting to maintain momentum, Nickolds was forthright: “It’s a direct consequence of low consumer confidence and retailers needing to be more promotional to attract consumer spend in that environment, so sadly I expect it to continue.”

Yesterday’s development partner

Within Waitrose’s half-year results was the bombshell that the grocer had terminated its short-lived partnership with little-known technology firm Today Development Partners (TDP). 

TDP had been unveiled as the successor to Ocado in May – shortly after Ocado’s tie-up with Marks & Spencer was revealed – which would help Waitrose triple the turnover of its online grocery arm to £1bn over the next three years.

Is Waitrose squaring up to ecommerce titan Ocado and Marks & Spencer without a technology partner by its side the equivalent to David taking on Goliath without his slingshot?

Collins is adamant that Waitrose has the resource internally to deliver its £1bn ecommerce ambitions. “Categorically do not take this in any way as a shift in our ambition in this space. We are absolutely committed to tripling the size of our online business in the next three years and we are making really good progress,” he says.

Collins highlights that Waitrose’s online sales rose 11% in the first half and says it plans to open its second customer fulfilment centre in Enfield next spring. It is also opening up more capacity across its stores to fulfil online orders and is investing in its website.

Waitrose will continue to automate its fulfilment centres to drive efficiencies in its grocery arm, although Collins admits this will take longer to develop than the retailer’s initial three-year timeframe.

“John Lewis has enormous expertise in this space in terms of what we’ve done at Magna Park which we are really tapping into and there are other third parties who we have worked with in this space who bring a lot of expertise.

“I am very confident about the progress we are making and the plans we are developing to create some significant value for the partnership.”

Own-brand promise

Despite an undeniably sober set of results and a healthy dollop of realism about the consumer outlook, JLP’s focus on innovation in products and services gave it some cause for optimism.

Nickolds flagged that the product categories where John Lewis had recorded the most significant growth were those where it had invested most significantly, such as in womenswear, where a combination of revitalising its own label and investing in personal styling had resulted in a 4% uplift in total sales and a 6% rise in own-brand.

Buoyed by this result, the retailer will relaunch its own-brand menswear collection this autumn and will debut a no-booking-required personal styling service for the category.

The retailer is taking a similar approach in other categories.

John Lewis plans to launch 3,000 new products across homewares and electricals this season and will unveil a new concept called World of Design in its Peterborough branch, which will allow shoppers to meet with home design stylists for advice on new trends and items for their home.

The retailer has also been encouraged by a 17% uplift in sales across its affordable homeware range House during the first half.

Investment in own-brand has also aided sales at Waitrose, where the grocer’s new Scrumptious Summer range generated £25m worth of revenue.

The grocer plans to roll out its plastic-free Waitrose Unpacked concept to three more stores following positive customer response.

“We are pursuing bold and ambitious plans that allow us to unleash the power of the partnership to break out of the pressure affecting all retailers,” says Mayfield.

Investing in product and store is no doubt a wise move when the chips are down, but will it be enough to help JLP weather the Brexit storm?