Save John Lewis from the break-up merchants

One of my closest friends once confided in me that when her husband retired from the civil service, she dreamed of him getting a job at John Lewis, preferably in the kitchenware or electrical department. 

The staff at John Lewis, she whispered, are so knowledgeable, so calm and happy, wouldn’t it be a great place for him to work so he doesn’t get bored at home? And, she added, think of the discounts. 

I remember roaring with laughter at the idea of her high-flying civil servant husband – let’s call him Freddie – advising people on which oven or kettle to buy, yet I knew exactly what she meant: anyone can sell ovens but at John Lewis, the staff always did so with grace and a smile. And you didn’t feel you were being ripped off. 

What my friend was alluding to was the same spirit Sir John Betjeman captured when he jokingly remarked that if the end of the world were nigh, he wanted to be in the haberdashery department at Peter Jones, the Chelsea branch, “because nothing unpleasant could ever happen there.”

It’s an ethos which has worked spectacularly well. From the 1980s onwards, millions of British shoppers flocked to the John Lewis and Waitrose stores so that by the early 2000s, it had become one of the country’s most successful and admired retail success stories. Slightly tongue in cheek, we retail followers dubbed the stores the new temples of middle-England – never knowingly undersold – sanctuaries on the hurly burly high street away from retail sharks such as Sir Philip Green and Frasers’ Mike Ashley. It was the place for wedding lists, for sheets and duvets, for quiet coffees with friends and stocked the best range of stockings and tights in town. 

The saintly John Lewis also became a barometer for City analysts to follow. Its up-to-date weekly sales figures – published without fail since 1929 because the founder, John Spedan Lewis, wanted his staff to know how trading was going – were a must-see indicator of what was happening on the ground on the high street.  

Yet few shoppers – or indeed commentators – really understood what made the stores something more special than, well, just shops. They sort of knew that the staff were called partners, that they shared in an annual bonus. I remember one senior Labour politician, who shall remain nameless, scoffing during a Westminster debate I chaired on fairness in business, that John Lewis was just another of the nasty guys paying out big bonuses. To her, bonus was a dirty word. She couldn’t have been more wrong. 

To understand why its spirit is so special, step back to 1929 when John Spedan Lewis decided to give the family company to the staff through a trust arrangement. It was a time of great international upheaval: the Bolsheviks had their grip on Russia while raw capitalism in the US was going through its own explosions, leading to the terrible stock market crash. In an attempt to come up with something different between these two extremes, Spedan Lewis, who had already introduced what was then the novel idea of staff committees, offered his own radical concept: all staff were to become partners, and to share in the profits. 

Here’s what he had to say in a BBC radio broadcast in 1957 explaining his decision: “The present state of affairs is really a perversion of the proper working of capitalism. It is all wrong to have millionaires before you have ceased to have slums.”

He added that this perversion had given us an unstable society, and that while there must be differences of reward to induce people to do their best, the present inequalities were far too great. So he wanted to experiment with a more thoughtful business structure, one that avoided both rampant managerial capitalism and Bolshevism. 

More astutely, he observed that the function of providing capital had become more and more separate from the function of managing capital, no matter who owns it. Yet he understood that capitalism delivered the best outcome: ”Capitalism has done enormous good, and suits human nature far too well to be given up as long as human nature remains the same.” For him, the trick was about sharing the fruits of labour. His solution was equity and trust. 

As Andy Street, former managing director of John Lewis for nine years and now Mayor of the West Midlands, put it to me in an interview more than a decade ago: “There’s magic to this organisation; Spedan Lewis always said it’s not enough to run a successful business, but that workers should share in the success. That’s why there’s a cohesion here I don’t see in other businesses.”

That spirit runs deep in the partnership, and explains why the 74,000 partners – from the shop floor assistants to the senior managers –  still have that sense of higher purpose. Run by a staff council, with a formal constitution, there are all sorts of quirks and brakes built into the structure to ensure that fairness continues. 

For example, the top staff can’t earn more than 75 times the lowest. Everyone gets the same percentage of their annual salary paid as a bonus while the profit to be shared between partners is agreed after around a third goes into new investment and another third into the generous pension scheme.

What all this saintliness does not mean, however, and this is important, is that John Lewis and Waitrose view profit as a dirty word. Indeed, they welcome profit, as I discovered during my interview over lunch with Street in the Oxford Street flagship’s Brasserie when he teased the waitress over the size of sea bass we were being served. Too big, he laughed, such big portions will eat into our margins. 

What’s more, contrary to what many observers might have assumed, Street suggested the unusual ownership structure meant the executives drove the top line even harder than other retailers, forcing the group to constantly innovate, never to stand still. Both John Lewis and Waitrose, for example, led the way in developing online omni-channel shopping services.

The John Lewis model also served as the Holy Grail for other companies looking to do something different: there are now 1,300 employee-owned firms in the UK representing more than 4% of GDP, including well-known ones including Richer Sounds, Mott MacDonald and Arup. On just about every measure, the UK’s top employee-owned businesses have productivity levels two to three times higher than the average business and much higher employee retention. 

Which is why many of us read the newspapers last Sunday choking with rage. The Sunday Times reported that the chairman, Dame Sharon White, is looking at diluting the partnership structure to allow outside investors in for the first time in its history, thus ending the 100% ownership structure. 

And the reason? According to sources close to Dame Sharon, life is now so tough on the high street that the group needs up to £2 billion of new capital to invest in better technology and data analysis. They say she cannot raise such a large amount of money internally because JLP is a mutual and the group is stuck with £1.7 billion of debt, so she has no recourse other than to go outside for new funds. 

Well, that’s what’s being put around. This of course is baloney, as we will see. It is true that trading has been horrendous: the partnership announced a pre-tax loss of £78 million – which turned into a £234 million loss when including exceptional write-downs – for 2022-23 on sales of £12.3 billion, down 2 per cent on the previous year. 

The chairman has described the current situation as a “hurricane” of inflation. It’s certainly dire, and only the second time since 1953 that staff received no bonus. Yet if you follow Spedan Lewis’s own logic, that is the risk they take as partners. 

However, if you strip out the effects of inflation on costs, the trading picture is not that bleak: there were more customers than ever, with footfall to the shops rising to 20 million, some 800,000 more than the previous year, but they bought less. Sales at John Lewis were up although those at Waitrose fell by 3% and market share slipped below 5%. 

And the balance sheet looks relatively strong: it has £1bn of cash and access to a £420m credit facility if needed.

So you can imagine how partners, past and present, reacted when they read the stories and are now up in arms over Dame Sharon’s potential betrayal of the entire John Lewis philosophy. They are joined by many high-profile City figures and aficionados such as Dame Helena Morrissey – who has already called publicly for a rethink – as well as hundreds of customer fans who can see that John Lewis needs to be saved from what looks like a catastrophic error of judgement. 

It’s obvious the newspaper leaks are a way of softening up the partners with a sob story about hard times – that there is no alternative – as well as a way to entice potential outside investors to come in from the cold. The other idea being suggested is that opening up to new investors is nothing new, as the recent deals with Ocado and now with Abrdn over building flats for rents, is at best disingenuous. Both those deals were supply type arrangements. 

Partners also don’t like the blame-game that is being played out publicly. For Dame Sharon, a former Ofcom boss who has zero experience of retailing and has been in the job for two years, has let it be known that the problems go back to the over-expansion of John Lewis stores by Street and Mark Price, the former boss of Waitrose, and former deputy chairman to Sir Charlie Mayfield. 

Under their leadership, the number of stores went from 151 to 379 between 2000 and 2015. Just about everyone on the high street was expanding retail space at that time, some mistakenly and some with the right strategy. But there’s been plenty of time since Street and Price left in 2016 to redirect the business. So this too is errant nonsense.   

Even some of the most hardened City scribblers say they can’t be blamed for expanding the stores’ footfall when the economy was growing and both groups were still doing well, although it’s fair to say that Waitrose has had some supply and pricing problems.  

What they suggest is that the new management is using this as an excuse for its mistakes, particularly the failure to appoint credible senior retail talent after a series of revolving door departures. 

Instead of blaming past bosses, they should be looking at their own retail performance. As one retail analyst says: “It’s all about trading, providing customers with the best products and experience. Look at the Oxford Street store where they are selling spare space for rental flats while Selfridges down the road is building out and making its retail space even more interesting. Have they forgotten what retail is about? It’s about creating excitement and a place to go and explore as well as shop.”

What happens next? Will Dame Sharon go ahead opening up the partnership, a poison pill apparently devised by her finance director?

If she does decide to go ahead looking for outside investors, there’s no doubt Dame Sharon will face a mighty rebellion. Selling even a minority stake means a change to the constitution which forbids partners from taking steps that “risk loss of financial independence”. It also has to be voted on by two-thirds of the 60-strong partnership council. 

And this is not the greatest time to sell a share of the business anyway. Taking the most conservative estimates, analysts reckon the enterprise value minus its debt, would give JLP a valuation of around £2.5 billion. That would mean a £1 billion investment by an outside party would translate into about 28.5% of the enlarged business, hardly a minority.

From what I hear, partners are so livid about the latest plans that any vote would be lucky to get 10% at most. They heard it before in 1999 when there was talk of a stock market float, with one council member describing the move as “gullible, greedy and selfish”. 

They also know it’s too simplistic to say the only way out is to go outside: there are always other options, as Spedan Lewis showed. Selling more property rather than off-loading for rental, focusing on value and making further cutbacks should be explored more fully.

Getting more expert retailers running the show might help too. Whether the latest recruit – former Hovis boss Nish Kankiwala – who has just been appointed as its first ever chief executive – will be any good is yet to be seen. Kankiwala’s background is in turnarounds, someone who Dame Sharon says, has “significant transformation experience to drive performance and profitability day to day.”

What does “transformation experience” mean anyway? Yet another example of corporate gibberish, and a sign the board doesn’t know what it is doing. What John Lewis and Waitrose do need is someone who understands the customer, the shopping experience and what makes the partnership so special. It’s inconceivable that out of 80,000 staff there aren’t a couple of high-fliers from inside who know how to run the two groups. This whole mess smells to me like highly-paid consultants and head-hunters have got their claws into the business. 

Of course John Lewis and Waitrose face big challenges. All big retailers do with customers trading down during the cost-of-living crisis and the fall in online shopping being seen after the highs of the pandemic. The two groups have faced huge competition from rivals on a crowded high street and particularly fierce competition on the grocery front, from Marks & Spencer at the luxury end and from Lidl and Aldi at the bottom. 

But the really good retailers – Next, Primark, Dunelm and now Marks & Spencer along with the sharper Zara and Mango chains – are showing that having a great physical space can work wonders. Dame Sharon, and now Kankiwala and the board, should be concentrating on making their retail space work better – making sure the brand is still magical – before dashing off and investing more in technology and data analysis. The best data comes from the shop floor, and the partners themselves.

They should forget this nonsense about outside investors because once the partnership is broken, the magic will be smashed forever. Fortunately, partners know there is no such thing as “partly” demutualising the partnership: you are either pregnant or you are not pregnant. They are right to feel betrayed, that heresy is about to be committed. It is Dame Sharon and the board who have let down the partnership and if they can’t come up with better ideas to get through the tough times, it is they who should be voted out. 

Write to us with your comments to be considered for publication at letters@reaction.life