James McCallion

James McCallion

To what extent has The John Lewis Partnership's business

strategy proven to have enabled the business to survive

and prosper throughout the recent recessive economic

trading environment more effectively than their

competitors ?

Weekites

JSH

4200 words

James McCallion

Introduction - John Lewis History

John Lewis started trading in 1900 alongside M&S and Sainsbury's. What makes it unique in

the retail market place is that from 1920 it has operated as an employee owned partnership

with an employee profit-sharing scheme along with a representative staff council who are

involved in running the business. The business is focussed on delivering good customer

service through its involved and rewarded staff or partners.

The John Lewis Partnership now consists of over 70,000 employees who are all partners in

the business of 231 Waitrose stores, 28 department stores and online services. It is this

unique partnership that lies at the heart of their commercial success over the last 5 years.

With every one of the 70,000 employees receiving the same percentage annual bonus,

there is a strong motivation to work as a team and deliver what is necessary to survive the

economic climate.

From 1995 – 2006 where the UK economy grew significantly John Lewis became

synonymous with providing good customer service and its policy of "never knowingly

undersold" provided consumer confidence that whilst not the cheapest retailer, customers

would still feel comfortable that they were not being significantly over charged.

In the latter half of this decade, the American Banking system suffered from a liquidity

shortfall which had negative ramifications worldwide. The world economy and stock

markets fell along with many housing markets. These issues lead to a recession in the UK

that resulted in 6 successive quarters of contracted growth. The recession resulted in the

Government borrowing a staggering £178 billion (12.6% of GDP) to invest in the economy

with a number of banks having to be bailed out by the government. These unstable financial

circumstances have also caused dramatic changes and problems to businesses worldwide.

With high levels of unemployment and concerns about financial security, customers are less

inclined to purchase high end goods such as those sold at John Lewis. John Lewis is one of

thousands of businesses that have been hit by the recession and have been forced to

change marketing strategies and prices. This essay will argue that The John Lewis

partnership with its unique operating ethos has demonstrated a successful way to survive

the recession and at the same time has prospered, in many cases more than businesses with

different structures and strategies.

Experts opinions

There is a debate between retail analysts and business writers as to whether John Lewis has

outperformed its competitors and successfully prospered. Although some writers such as

James McCallion

Julia Finch claim that "John Lewis is not the most profitable business1" and that "Its not the

best-run business in Britain. Its a crude comparison, but fashion group Next makes much

higher profits from half John Lewis's sales.2" Others, however, side with this essay in that

John Lewis have done well. Firstly, Nigel Cope a city editor in his article explains how "City

experts say the "settlements in trust"... Are bulletproof" emphasising the long term stability

in John Lewis's strategy. According to Sir Terry Leahy the CEO of Tesco, "Waitrose is the only

major chain not losing market share to Tesco3" which again demonstrates the foothold that

the Partnership continues to hold in the market even against giants like Tesco. Karen

Atwood, an analyst from Seymour Pierce also quoted that "They (John Lewis) have been

getting a series of factors right: the right products in the right locations with the right degree

of service. If you can do all these things then you are on to a winner, and John Lewis has

consistently been able to do that.4"

Impact of the recession on the retail market

The recession that has caused consumer spending to decrease and businesses to suffer falling demand has of course affected John Lewis. Falling house prices along with a lack of job security has meant that there is a lack of confidence to spend money. The higher cost of credit and subsequent lack of available credit has not helped the situation either. For John Lewis, the recession has posed a problem because of the demand for competitively priced products. Due to the fact that John Lewis focuses on high quality, it is often hard to compete for price which can sometimes make cheaper brands appear more attractive.

Yet, the recession has similarly impacted the Partnership in a good way. The recession has lead to a higher demand for "value for money" and for John Lewis, this comes with their expertise and excellent service rather than extremely cheap prices. John Lewis is also a very reputable business which means that their brand loyalty will attract customers because they are trusted.

Despite some of these negative impacts, the following figures and explanations will demonstrate how John Lewis has managed to turn around the problems that it was suffering from and use the beneficial elements of the recession to their advantage.

1 Julia Finch- http://www.guardian.co.uk/commentisfree/2010/mar/11/john-lewis-profit-happiness-employees#history-link-box 2 Julia Finch- http://www.guardian.co.uk/commentisfree/2010/mar/11/john-lewis-profit-happiness-employees#history-link-box 3 CEO of Tesco’s quoted in Karen Atwood- John Lewis and the taste of success article 4 Karen Atwood quoting an analyst in her article as mentioned above

James McCallion

Financial successes

In terms of financial performance it is easy to provide evidence that John Lewis' strategy has

been successful. According to their annual budget sheet, their annual turnover has

increased by £1bn in the last 4 years to £7.4bn5. Despite the recession the partnership is still

retaining profit of £198.7million, £146million and £155.3million successively over the last 3

years.

John Lewis sales 2005-10

From John Lewis annual reports 2010

The partnership has also demonstrated that their tactics are proving incredibly beneficial

through their record Christmas sales. The department stores alone hit their best ever

£500.8m turnover in 5 weeks6. Similarly in Waitrose there was a 20.8% increase in the

Christmas week's sales in comparison to the same week of the previous year, "while in the

13-week period to 26 December total sales at the supermarket chain were up 16.1%"7.

Another important and unique factor about the partnership that has shown upward trend is

the annual bonus. This is a good indicator of how well the company is doing generally and

with the announcement of a 15% bonus (which equates to over 2 months pay) this trading

year, they have proved that their strategies must be working even in tough times. Andy

Street the Managing director of John Lewis claimed that "the remarkable thing is that our

successes have been very broadly based"8 and with bonuses of 20%, 13% and 15% over the

last 3 years this has been proven true.

5 John Lewis annual report sheet- issued march 2010 6 http://news.bbc.co.uk/1/hi/8440511.stm 7 http://news.bbc.co.uk/1/hi/8440511.stm 8 Interview on the today show

Financial year

Turnover

£billion

Profit before tax

£million

Net profit

£million

Partner bonuses

£million

Profit retained

£million

2009–2010 £7.4 £389 £306.6 £151.3 (15%) £155.3

2008–2009 £7 £279.6 £580 £125.5 (13%) £146.0 [6]

2007–2008 £6.8 £379.8 £320.4 £181.1 (20%) £198.7

2006–2007 £6.4 £319.2 £263.2 £155 (18%) £164

2005–2006 £5.7 £251.8 £215.1 £120.3 (15%) £94.8

James McCallion

Comparison to other Retail companies

However, the most important way of analysing John Lewis figures is by comparing them to

other companies financial performance.

2005/6 2006/7 2007/8 2008/9 2009/10

John Lewis

Sales

£5.7B £6.4B £6.8B £7.0B £7.4B

% Year on Year Growth

12% 6% 3% 6%

Profit

£252m £319m £380m £280m £389m

Profit % growth

26% 19% -26% 39%

%of profit on sales

4.40% 4.90% 5.60% 4% 5.30% M&S

Sales

£7.3B £8.0B £9.0B £9.0B £9.5B

% Year on Year Growth

14% 13% 0% 6%

Profit

£850m £1.0B £1.2B £870m £852m

Profit % growth

18% 20% -28% -2% % of profit on sales

11.60% 13% 13% 10% 9%

Sainsburys

Sales

£17.3B £18.5B £19.3B £20.4B £21.4B

%Year on Year Growth

7% 4.30% 6% 5%

Profit

£352m £429m £535m £616m £671m

Profit % Growth

22% 25% 15% 9% % of profit on sales

2% 2.70% 2.80% 3% 3.10%9

Although the profit and sales figures give us an indication of how well the companies are

doing, due to the different sizes and markets a more accurate way to compare is by

comparing three important percentages: 1) percentage sales increase year on year, 2) profit

growth year on year and 3) profit as a percentage of sales.

1) Sales increase year on year

By looking at these figures it is clear that in a number of respects John Lewis have prospered

and have been more financially successful than some of their major competitors. Firstly in

terms of sales growth % John Lewis has beaten Sainsbury in 3 out of the last 4 years. John

9 All figures taken from the published accounts.

James McCallion

Lewis performed less well in 2006 and 2007 but with 3% and 6% successive growth in 2008

and 2009 John Lewis has outperformed M&S with their 0% and 6% in those years.

2) Profit growth year on year

In terms of percentage increase of profit growth from year to year, John Lewis have also

demonstrated success against their competitors. The figures show that over the last 4 years

John Lewis have as with the percentage sales growth, beaten M&S in 3 of these years. In

2008/9 both of the companies saw huge falls in profit in comparison to the previous years,

but in 2009/10 John Lewis managed to create a 39% increase in profit compared to that

poor year, whereas M&S suffered further losses of 2%. The same can be said in comparison

with Sainsbury's. Although Sainsbury's is a larger company with profits almost doubling and

sales tripling that of John Lewis, the latter is still holding its own in terms of % growth from

year to year.

Thirdly, the most important aspect of these figures is the profit as a percentage of sales

comparison:

3) Profit as a % of sales

2005/6 2006/7 2007/8 2008/9 2009/ 10

J. Lewis 4.4% 4.9% 5.6% 4.0% 5.3%

M&S 11.6% 13% 13% 10% 9 %

Sainsbury's 2% 2.3% 2.8% 3% 3.1%

This table shows that every year in the recession period, John Lewis has achieved higher

profit percentages then Sainsbury's. John Lewis is also demonstrating a far more upward

trend in these figures than M&S.

John Lewis have also prospered well in comparison to Debenhams who have achieved only

£95million profit after tax from £1.9 billion total revenue creating 5 % profit this year10

whereas John Lewis have achieved £252million profit from £5.7billion total sales.

Other retailers in financial difficulty

Another factor that emphasises how well John Lewis have done is by analysing the amount

of companies selling largely similar products to John Lewis that have gone into

administration in the last 3 years. Since the economic downturn in 2007 several retailers

have gone into administration as a result of poor demand for their products. These include

10 http://www.investis.com/debenhams/pdfs/ar2009_new.pdf

James McCallion

Woolworths, Zavvi, the tea and coffee specialist Whittards and menswear chain; The Offices

Club. The book shop chain Borders, Fopp the former largest independant UK music retailer.

Others include, Faith shoes, Adams (the children's clothing chain.) and Drinks retailer Thirst

Quench who own Threshers and Wine rack, have suffered the same fate. Others include

Birthdays the high street greetings card retailer, Allied Carpets- , Coffee republic, Blooming

Marvellous, Empire Direct, Land of Leather and MFI who all stopped trading in 2007-2009. 11

What has made John Lewis successful ?

The financial figures and achievements demonstrate that John Lewis ranking within the top

5 of the recession survivability index12 is a fair one. It does not however, explain how exactly

their strategies have worked to their advantage and how the partnership has come to

achieve these figures. In terms of strategy, even the most basic such as marketing their

corporate slogan has put them in a favourable position. The Slogan of "Never knowingly

undersold" is a clever one due to the fact that it promises a low price but at the same time

does not take responsibility if a lower one is found.

The partnership idea

Firstly, the main strategy and idea that has resulted in their successes is their focus on

partnership and "democratically giving every partner a voice in the business they co-own13".

Unlike many of its competitors such as Tesco's competing with Waitrose, department stores

such as House of Fraser competing for furniture and homeware and Debenhams competing

for clothing, John Lewis is a Private company. For this reason the culture of the business

focuses on working together to achieve their goals. The biggest impact of this is the

increased motivation that comes with everyone in the business being able to make a

difference and this is why they have continued to grow even in the recession.

Combined with the general culture of working together as a partnership is the subsequent

increased quality in training, employees and in services. John Lewis focuses on the high end

of the market targeting mainly middle class customers, so their branding and service quality

is essential. With much larger companies such as Tesco dominating the price war, John

Lewis' strategy of quality and working together has let them dominate in their segment of

the market and has allowed them to attract their own customers.

Even experts outside of the Partnership have commented on the benefits of the model.

Joseph Lampel, in one of his articles commented that "In the current economic conditions,

business leaders and policy makers should be looking again at the resilience of the

11 Whosegonebust_latest.php- all companies listed taken from this website 12 Recession survivability index- based on branding, cost management and internet potential- Graham Ruddick telegraph article- 13 http://www.johnlewispartnership.co.uk-

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Employee Ownership Model14. Data carried out by the Cass Business School with surveys

and analysis of 250 companies concluded that;" The model offers particular advantages to

small and medium sized businesses... create new jobs more quickly,... add more value to

output and human capital than conventionally structures businesses15" Not only does this

explain why John Lewis is financially very stable, but it also emphasises the focus on

motivation. This has also been demonstrated with the fact that John Lewis offers its

partners use of a vast leisure programme including hotels, yacht clubs, tennis, golf and

leisure parks which portrays the culture of the business.

The structure also has other advantages. Given the fact that John Lewis is not a listed

company, the partnership can wait far longer for returns on their investment than many of

their competitor listed companies. Because these companies have to answer to the

demands of their city shareholders they are being constantly pushed for returns, whereas

John Lewis are not obliged to give short term returns. The advantages of this is that John

Lewis, as well as being flexible with their finances can put more of their money to different

areas at different times, and make long term more profitable investments whereas their

competitors in the city would prefer less risky, short term ( and perhaps less profitable)

investments. John Lewis could for example reduce bonuses one year to fund projects that

would provide profit for a far greater bonus the next year.

John Lewis' partnership approach to employee relations means that the partners and the

management of John Lewis work together for the benefit of the business. Other companies

who do not have employees interest aligned in the same way such as British Airways have

suffered significant industrial strike action from its employees which has damaged the

company's reputation, earnings and profitability.

To further explain how and why John Lewis has been successful, the tactics and strategies

used by the two biggest revenue earners; The Department stores, and Waitrose needs to be

analysed.

John Lewis Department Stores

By firstly looking at the John Lewis department stores we can easily see how their strategies

have proven beneficial. The stores have a strategy that focuses on high quality. This is

shown in the fact that all of their products have guarantees and there is a refund policy on

all of their products to eliminate dissatisfaction. Not only this, but John Lewis also offers

expert advice on products such as laptops and T.V's which encourages customers to spend a

little extra for a service they know they can trust. John Lewis can often not compete for

price, but it is loyalty towards quality and satisfaction that has seen them through the

recession.

14 Joseph Lampel commenting in the article: “ “employee ownership model shows greater resilience” based on research from Cass Business School. 15 Cass Business School in the same article.

James McCallion

John Lewis' recent construction of a store in Cardiff also demonstrates how they are

profiting enough to expand. The largest department store in Wales is expected to encourage

shoppers and regenerate a popular shopping area. This epitomises their focus on reaching

new customers which has also been demonstrated with the opening of a new "John Lewis at

home" in Poole. This strategy has proved to be very successful. With a staggering 9% sales

rise in fashion, the company realised the need to boost its other major department; the

Electrical and home technology (EHT) sector of their market and this is exactly what they

have done with the new stores. This has demonstrated huge success with gross sales

increases of 3.5% in EHT and 2.5% in home16.

John Lewis have demonstrated through their £6 million 6 week T.V advertising campaign

that they can still perform well even in a recession. The gross sales increase of 2.8% during

the advertising period emphasises how their strategies are helping them survive and even

expand during the recession. This is a completely new move for the company and

"emphasises its commitment to quality, price and service"17 Eva Wisemans, a writer for the

Guardian described how "The John Lewis, spend it before you die ad increased sales by

39.7%18" on John Lewis.com

But perhaps the biggest way that The John Lewis department stores have demonstrated

that their strategies have been beneficial is through their movement into the online services

sector and the successes surrounding the move. At the "Which?" Awards 2010, John Lewis

was voted the best online retailer after having been previously voted Britain's favourite

retailer in a poll of 6,000 shoppers in London19. The John Lewis Direct has had incredible

success with sales up by 18.2% at £60.5m to £393.5m. According to their annual report, the

"multi channel strategy continued to be a major advantage" and the fashion category of the

website as with the department stores showed huge growth of 9% this year.

An important strategy in their online area has been the creation of Greenbee. Although the

company does not bring in as much revenue as Waitrose it offers services such as home,

travel and car insurance, organising travel, tickets and telecoms. This strategy of

diversification has proven to be clever with John Lewis transferring their high quality

reputation into other areas to compete with giants such as Tesco with their expansions.

GreenBee and John Lewis also share the Partnership Card which has aimed at customer

rewards to increase loyalty with special offers of 0% on purchases and balance transfers for

the first 6 months.

16 John Lewis Partnership plc – annual report and accounts – business review ( review of performance) ( all figures in this paragraph) 17 Louise Cooper 18 http://www.guardian.co.uk/business/2010/may/02/john-lewis-ad-sales-boost 19 Poll conducted by retail analysts “ Verdict Research” in January 2010

James McCallion

Waitrose

The largest role, however, in terms of successful strategies has been by Waitrose, an

upmarket supermarket that belongs to The John Lewis Partnership. The main focus for

Waitrose has been on the expansion of its market to attract new customers for both reasons

of convenience with their new stores and for value with their new "Essential" ranges. If we

look firstly at their pricing strategy, the benefits can clearly be seen with the Essential range

on track to "generate sales of £0.75bn in the coming year20". With the "Essential" and value

ranges out there to compete with Tesco and Asda, Waitrose have also benefitted from

competing at the other end of the market. The introduction of the "Indulgent desserts

range" and "The restaurant quality ready meals" have offered them a unique selling point

which may help to explain the Like-for-like sales growth of 3.6% this trading year.

As well as pricing strategies, Waitrose have also benefitted from the opening of their new

convenience stores to help them survive the recession. John Lewis believes that they have a

potential 6.5 million more customers to reach that simply do not shop there because it is

inconvenient. The new stores will be smaller, but Anthony Wysome, the head of

convenience at Waitrose confirmed that "we've made the brand more accessible to more

people in more places".

Waitrose, like the department stores has achieved their success partly because of the only

services that they offer. The Waitrose Delivery service currently operates in 129 branches21

and this along with the Ocado service have run together to have significantly contributed

towards the 26.8% increase in operating profit in the past 2 years.

But what has really given Waitrose the edge over their market in the recession is the extra

effort they are putting into both their image and the community. Waitrose "have been

recognised for its industry- leading measures to convert leftover food into renewable

energy22" and have also committed to a contract with Heston Blumenthal and Delia Smith to

help with the promotion and branding of their new recipes, which is incredibly popular with

the public.

It is these tactics that have contributed towards The financial successes of the supermarket

and the partnership. Because of these strategies operating profit is up to £268M from

£215m last year which is even larger than it was in 2006 pre recession with £169m.

Counter argument

Despite the evidence that John Lewis has financially and tactically been successful and innovative, some do criticise the partnership. Julia Finch, a journalist for the Guardian claimed that "John Lewis is not the best-run business in Britain. Its a crude comparison, but

20 John Lewis 2010 annual report- Business review: Waitrose 21 Data from annual reports and accounts 22 John Lewis press release article – “waitrose awarded for pioneering food to fuel technology”

James McCallion

fashion group Next makes much higher profits from half John Lewis's sales. The much-derided Marks & Spencer made double John Lewis's profit last year, from sales 20% higher23. It is clear from the previous figures that John Lewis is meagre in sales comparison to even Sainsbury's, who have been trading for similar lengths of time. But it is unfair to compare John Lewis figures in this way and the numerous awards and financial successes in terms of percentage sales rather than sheer size illustrate John Lewis strength.

Many also point out that M&S have achieved more than double the percentage profit in terms of sales than John Lewis over the last 5 years and with total revenue totalling no more than 20% more for M&S than John Lewis this is seen as a significant weakness

Weaknesses in John Lewis Strategies

Although John Lewis has been successful during the recessionary period from 2007 it can be

argued that there are a number of weaknesses in parts of the strategies that John Lewis

undertakes. Firstly, there is now increased competition from online retailers that are

offering the same products at cheaper prices. John Lewis pricing policy of "never knowingly

undersold" does not apply to internet competition. The expert advice that John Lewis offer

is very expensive to provide and can be a disadvantage because customers will visit the John

Lewis retail outlets which are expensive to operate to take advantage of the expert advice

and obtain information about the product. They will then go elsewhere to other online

competitors to buy the actual product.

One other key weakness is that the "partnership "structure makes it harder for John Lewis

to raise funds to develop or expand the business. Other listed businesses such as Tesco have

raised money from the stock market and expanded their business considerably over the last

20 years. This is why John Lewis only has 28 department stores compared to M&S having

300 stores in the UK.

The "partnership "model although successful has not been copied by other companies

because it reduces their capacity to raise funds for expansion.

Conclusion and the future

If John Lewis wants to continue providing customers with a premium service including

specialist advice, 5 year product guarantees, free home delivery and no quibble refund

policy then they need to start charging for their additional services to improve their overall

profitability. They must however, ensure that at the same time they remain competitive.

Competition from online specialist retailers selling high profile branded goods make it

difficult for John Lewis to trade profitably on these products.

23 Julia Finch- Guardian article 11/3/10

James McCallion

But in conclusion the fact remains that John Lewis have done well. Their financial

comparisons to M&S and Sainsbury's adequately illustrates that in the harsh recessionary

climate John Lewis have not only managed to survive more effectively than many

competitors but have also delivered huge profit margins. The successful strategies focusing

on different pricing and markets in Waitrose products and new John Lewis stores is proving

useful for their differentiation ideas. The partnership idea is undoubtedly central to their

success and although some argue otherwise, John Lewis has created an extensive brand

name with a foreseeable and profitable future. John Lewis' brand values have transferred

well in the online market and John Lewis online is expected to deliver significant revenue

and profit in the coming years.

There is also even more hope for John Lewis in the future. There is an opportunity for John

Lewis to benefit from its strong brand and corporate reputation to sell higher margin John

Lewis own branded goods. Although this is traditionally in furniture, carpet, curtains and

unbranded homeware, John Lewis brand is strong enough for it to provide its own label

products across a growing number of sectors in electrical, clothing, and white goods which

will allow John Lewis to improve its margins on these products. John Lewis currently only

operates 28 department stores, mainly in the south of England and it has plenty of

opportunity to develop with the opening and development of new stores and the online

business will allow more customers to access their products across the UK.

James McCallion