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Josh Holmes, senior consultant at Retail Economics, discusses how John Lewis has fallen behind its rivals and what the end of its partnership model could mean for the high street behemoth.
It’s been a tumultuous couple of weeks for the John Lewis Partnership. The appointment of its first-ever CEO, Nish Kankiwala, was quickly followed by heavy losses in its annual results – of £234m for the year to 28 January 2023 – and the announcement that there would be no partner bonus for only the second time in 70 years.
Speculation then surfaced that the business is exploring a change to its employee-owned structure by selling a minority stake, signalling that a significant strategic shift is needed to secure the long-term future of the business.
This is a bold and risky move for a retailer that has championed the value of its partnership model, which is firmly embedded into its brand’s DNA.
John Lewis boss, Sharon White, has tried to alleviate concerns by reaffirming her commitment to the partnership model and everything it stands for.
However, against a backdrop of evaporating profits, and without a concrete plan for how potential outside investment would be used, retail analysts like me are left unconvinced by the leadership team’s ability to turn things around.
Partnership structure has its flaws
To be fair, John Lewis has faced successive waves of disruptions that have already pushed other industry behemoths such as Debenhams, House of Fraser and Arcadia to breaking point.
Spiralling costs, cut-throat competition, cautious consumers, and the need for huge sums of capital to provide truly compelling digital and in-store experiences has created incredibly choppy waters.
What sets John Lewis apart is its unique partnership structure. While a 100% employee-owned business has worked to its advantage in the past, and has a certain idealistic charm, it also comes with notable drawbacks such as limited financial flexibility.
With debt markets tight, the company is constrained in its ability to raise funding due to its current employee-owned structure. This has hindered the company’s ability to keep pace in an exceptionally fast-moving industry. Put simply, John Lewis has been left behind.
Given these constraints, there is a case for John Lewis to explore ways of exchanging a minority stake in return for investment, without causing irreparable damage to customers’ trust in the partnership.
The funds raised through such a sale could be transformational – providing capital is deployed in the right areas, the strategy is executed efficiently and there’s solidarity in the leadership team and its owners in fighting a common cause.
The issue is not so much with the plan to seek investment by altering the ownership structure, but rather in the lack of confidence that the funds raised will be allocated wisely and effectively to change the company’s fortunes.
The diversification distraction
The company’s recent ventures into building rental homes and expanding its financial services feel like unnecessary distractions, rather than game-changing diversification.
While they may generate some ancillary income over the long term, it’s difficult to break into these markets and very few retailers have made it work in the past. In fact, many retailers have spent the last decade simplifying business models and doubling down on their core competencies, seemingly the opposite of what John Lewis is doing right now.
It would be better off improving its core retail proposition and investing in rebuilding its position as a leader in customer experience. The company must invest intelligently in its digital infrastructure to provide a truly omnichannel experience that is supercharged with a single customer and inventory view, powered by sophisticated use of data that unlocks value in their store estate.
The recent opening of a multi-sensory John Lewis concept store in Horsham is a step in the right direction.
Cost-cutting risks diluting customer experience
The company has put cost-cutting at the forefront of its strategy, with a further £600m of cost savings planned by 2026. This almost certainly means fewer staff, more store closures and a further erosion of the customer experience.
While protecting profitability is important, rigorous cost-cutting risks undermining what made John Lewis special in the first place – an aspirational brand renowned for quality and excellent customer service.
Missed opportunities as rivals step up
As the last major UK department store still standing, John Lewis should be capitalising on the clear opportunities presented by the demise of Debenhams and House of Fraser.
However, other retailers are stepping up to fill the gap instead, with both Marks & Spencer and Next investing heavily in third-party brands and new flagship stores, even taking on former Debenhams locations.
The recent success of Marks & Spencer’s turnaround shows that strong leadership and a clear, well-executed strategy can make all the difference.
Inspiration should also be taken from Selfridges, as it continues to set the bar for department stores with experiential, trendsetting offerings that captivate younger shoppers.
The retail landscape is more challenging than ever, but for John Lewis employees and customers alike, let’s hope the business gets its strategy right and rebuilds the brand we all know and admire.
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