John Lewis must take remedial action before autumn in order to thwart its “fall from grace”, industry sources have told Drapers.
Profit before tax at the business, which comprises John Lewis and Waitrose, fell by 23% to £123m for the year to 25 January. Gross sales were down 1.5% for the year to £11.5bn.
New chairman Sharon White said the fall in profits was largely due to “significantly reduced” profitability at John Lewis. The department store chain reported an operating loss before partnership bonus of £37m, down from a £92.6m profit last year. Operating profit before partnership bonus, exceptional items and IFRS 16 fell by 65.5% to £39m.
White said the numbers were “not what [they] hoped for”: “They are at the bottom end of our range of expectations, and they’re the third year of decline in profit. We had a solid performance in Waitrose last year, but a poor performance in John Lewis.”
As a result, the partnership is launching a strategic review with the aim of reversing the profit decline. White stressed that staff and customers will come first in all the business’s decisions.
“We have to revert our profit decline, so we can invest more in our customers, more in the business, more in partners. This year we’re going to be investing significantly in Waitrose.com, we’re also going to be investing significantly in John Lewis online and our home offering, which we’ll be refreshing and making more contemporary.
“Given the structural change in retail, more change is needed in what we deliver to our customers. And that is why we’re launching a strategic review, which will be substantially complete by the autumn. And we will update on this at the half-year results in September. The review will consider what more we need to do to strengthen our core retail business, and what services we might need to deliver outside retail.”
White said it is “too early” to pinpoint stores for closure, but the company will be looking at the store estate in its entirety: “Part of what we’ll look at is whether we’ve got stores in the right location.”
Industry experts told Drapers that a strategic review of the business needs to happen sooner.
“They’re investing in Waitrose online, online generally and in John Lewis’ home offering – but there is no mention of John Lewis retail. I think its absence is conspicuous,” said retail analyst Richard Hyman. “The key problems are in the John Lewis department stores themselves. The review is going to last until autumn – what that suggests is that there aren’t going to be any major changes announced until then. So, this time next year, they’ll just be starting to take some remedial action. I’m not sure they’ve got that long.”
A former John Lewis head office employee said the business has been “complacent”: “For many years, not only the management, but also the partners in head office, have been complacent about John Lewis – not Waitrose.
“It’s always been difficult to get decisions made, as there are so many layers of management who [often] have no experience outside the partnership. They have a very collaborative approach which works for some things but there has never been the drive and retail experience at the top to look forward and identify what the strategy needs to be to be profitable whilst ensuring customer service is at the forefront.”
John Lewis Partnership employees will receive a bonus of just 2% – their lowest payout since 1953. White said it is “prudent, affordable and recognises the hard work of the partners.”
Several industry sources said despite the downfall, John Lewis still has a future on the UK high street.
“The news of a major profit, store closures and a reduced dividend is clearly not positive”, retail analyst Mark Pilkington said. “However, I think that Sharon White is looking at a number of initiatives that seem to be in the right direction.”
“She is looking at reducing the store footprint – this is the right thing to do. The large current spaces are too expensive in terms of rents, rates, fitout and utilities. She is looking to improve the experience and service. This is essential. Customers will visit department stores that offer special experiences, educational opportunities, high service levels and a sense of ‘buzzy community’. These kind of initiatives are already being successfully pursued by Nordstrom Local [in the US] and Selfridges.”
The former John Lewis head office employee agreed: “It still has huge customer support, but this needs to be repaid by cutting head office costs, combining back office functions, creating a group culture, closing some stores, and investing in their store staff.
“While [own-brand] clothing brings good intake margins, the [external] brands bring the footfall, which is imperative in such big retail spaces. A balanced approach, particularly in clothing, is needed.”
Drapers has contacted John Lewis for comment.