Andy Street has been a brilliant and energetic leader of the John Lewis Partnership, but how strong will his legacy be?
On the same day that John Lewis opened an impressive new store in Chelmsford, full of new merchandising ideas and brands, it was announced that managing director Andy Street will be stepping down at the end of October to concentrate on his challenge to be to the Mayor of the West Midlands in next year’s election, after being chosen as the official Conservative Party candidate.
He won’t find it easy to fight off the Labour Party candidate, Sion Simon, and it remains to be seen what he will do if he doesn’t win the contest. But that is a story for another day and, after wishing him the best of British luck, the focus now is on what his legacy will be at John Lewis after nine years in the job.
Given the strength of the business on show in Chelmsford (with the long-awaited Leeds store opening on October 20), John Lewis looks in great shape. In the announcement John Lewis Partnership (JLP) chairman, Sir Charlie Mayfield, said: “Andy has led John Lewis brilliantly and leaves the brand with great momentum for the future”.
A most respected retailer
Street’s biography on the JLP website also says that “he has led the business through times of significant change in both the economy and the retail industry at large. During this time, John Lewis’s gross sales have increased in excess of 50% to over £4bn. It has opened 18 new shops, and the johnlewis.com business has seen annual sales of more than £1bn making the department store one of the UK’s most respected and successful retailers”.
The incredible success of John Lewis’s online business must be Andy Street’s greatest legacy, as the 35%-plus penetration of total sales is well ahead of its peers and has driven the improved market share.
Even in the first half John Lewis online sales grew by as much as 18%, at a time when overall industry non-food online sales growth was slowing.
And the way in which the John Lewis brand has been broadened and strengthened has also been impressive. The traditional strength of the business in home and electricals has been retained, but the fashion department is now much improved.
The ’Never knowingly undersold’ mantra has been underpinned by more aggressive price matching of competitor promotions to provide reassurance to customers. And the famously heart-warming Christmas TV advert has become a much-awaited event for the whole nation.
As the favourite store of the middle classes, there is much to envy about John Lewis and yet sales are one thing and profits quite another.
The bottom line
JLP has always been a top-line focused organisation and if it’s not trumpeting about sales growth it’s talking about bumper levels of capital expenditure, but you don’t hear much focus on bottom-line profitability or return on capital even though that is ultimately what pays the Partnership bonus.
The fact is that when Andy Street took over as managing director back in 2007, John Lewis was making operating profits of just over £200m and achieving an operating margin of 9%.
This year, given the way things are going. John Lewis will do well to make much more than £200m in operating profits and the operating margin will probably be under 5.5%.
The business has been hit by extra distribution and other costs, but there is always something exceptional like that in a department store business.
It was impacted hard by the financial crisis of 2008, not long after Andy Street had taken over, and it wasn’t easy to recover from that.
The downside of the 18% online sales growth in the first half is that store like-for-likes were more than 2.5% down. In a business with heavy fixed costs the persistent like-for-like store sales drag is not good news for the John Lewis P&L account.
At least John Lewis has been able to outperform its peers and deliver decent overall like-for-like sales growth thanks to its superior online sales growth, but translating this into improved profits has been problematical.
Some pundits will say that Andy Street is off to pursue a new career in politics and leaving his successor with the challenge of making better profits.
But the fundamental challenge the business faces has been clear for some time and it is hard to claim that he is getting out at the top, given the fall in profits likely to be suffered this year.
So the next managing director of John Lewis will inherit a business with great strengths but also some weaknesses. What is clear that high up on his or her agenda will be a review of the operating cost base and the productivity of all the selling space in the business.
Ironically, just a week after the next John Lewis managing director takes over on October 31, Steve Rowe at Marks & Spencer will be announcing the outcome of his review of his UK store portfolio, on the back of the M&S interims on Nov 8.
John Lewis will be watching closely what M&S says about store and space closures.
- Nick Bubb has been a leading retailing analyst for more than 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think Tank