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John Lewis sees profits more than halve in challenging trading conditions, but continues tech investment

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John Lewis & Partners has become the latest retailer to log substantially lower operating profits in 2018, seeing them fall by a staggering 56% year-on-year to £114.7m – and the blame is rested squarely on weaker sales, higher property costs and increased spend on IT.

Gross sales are up 1% to £11, 724m, but heavy discounting forced on the retailer by the tough High Street conditions – a particular issue for John Lewis with its ’Never knowingly under-sold ethos – and Brexit uncertainty have failed to see this convert into profit.

Waitrose & Partners provides a more cheering picture, with its operating profits up 18% to £203.2m.

The news comes as yet another blow to the High Street, following Debenhams declaring a first half profit warning earlier this week. The department store said it could no longer stand by its previous statement that it was “on track to deliver current year profits in line with market expectations.” This, it said, was no longer valid and it now plans to provide a further update when it issues its half-year results.

John Lewis and Partners: part of the plan

John Lewis & Partners, a Leading retailer in IRUK Top500 research, is more sanguine about its seemingly disastrous fall in profits, with Sir Charlie Mayfield, Partner and Chairman of the John Lewis Partnership, claiming in a statement that the fall is “In line with expectations set out in June”.

Mayfield adds: “Near-term uncertainty, politically and in the economy, is having a major impact on consumer confidence, but we do not believe the market conditions are cyclical. The disruption we have seen on the High Street, including business failures and renewed interest in mergers and acquisitions, are instead signs of an inevitable market adjustment which will require greater clarity on whether brands are competing on scale or difference.”

The retailer claims that it will continue to invest in differentiating itself from the market, and has already invested heavily in IT – one of the costs that have dragged down profits – and in staff. Part of this involves acquisitions to help arm staff with technology and the creation of in-store experiences for shoppers.  

To do this the company has been on a multi-year, £400m to £500m investment mission. Despite the tough trading conditions, Mayfield says the retailer is committed to continuing this investment.

“To deliver the level of distinctive difference and innovation we need for the future requires annual investment of £400m-£500m,” he says. “We anticipated five years ago that market conditions would worsen and took a series of connected steps to strengthen our financial reserves to enable continued investment at this level despite lower profits. These included changes to our pension benefit in 2014, deprioritising investment in new physical space from 2015 and halving the rate of bonus distribution in 2016.”

He continues: “We have made a number of divestments of shops and assets in the year and yesterday we also informed Partners that five further Waitrose & Partners shops will be sold to other retailers. We have also made significant organisational changes including moving to single Partnership support functions in many areas. Partner numbers have reduced from 93,800 in January 2015 to 83,900 in January 2019. We will take a series of further steps this year in the move to an even more productive ‘one Partnership’ approach.”

Michael O’Grady, Principal Forecast Analyst at Forrester adds: “The retail environment is changing, posing new challenges to John Lewis. Its operating margins declined by 90% in the first half of 2018 as its “knowingly undersold” price promise forced it to lower prices to compete in a heavily discounted retail environment. This, coupled with the fact that over the next five years over half of retail sales at John Lewis will be online, suggests that John Lewis needs to adjust its strategy to focus on increasing sales to grow market share or grow its margins to attract investors. In order for retailers to prosper in today’s complex retail environment, retailers need to focus on managing store overheads, differentiating products and services, sell more full priced items, diversify sales from products to services and retain and attract shoppers.”

Waitrose woes

Waitrose and Partners, a Top50 retailer in IRUK Top500 research, offers a glimmer of good news in the baron retail environment. It saw a 18% rebound in profits. This was driven by like-for-like sales growth of 1.3% and improved gross margin, which benefited from 24 range reviews, as well as stronger operational performance and well controlled costs, especially in the second half year.

“Significant investment in, new customer smartphone apps and customer delivery services has led to a strong increase in online grocery sales of 14%, well ahead of the market, and increased online customer satisfaction,” says Mayfield.

However, uncertainty hangs over Waitrose too. On 27 February 2019, it confirmed that the commercial arrangement with Ocado will come to an end in September 2020.

“We have strengthened our own online business significantly in recent years, and said last summer that we will double within five years,” says Mayfield. “This change will be a major part of achieving this, and in future, and our shops will be the exclusive places in the UK to buy Waitrose & Partners products. We plan to open a second fulfilment centre to support growing volumes in the London area.”

The road ahead

The retailer is bullish that it is in a strong position to face further challenges and uncertainty in the coming months and weeks, not least around Brexit and the continuing pummelling of the High Street. Technology investment continues apace, as does the board’s commitment to reshaping its retail stores to meet the challenges on the modern shopper.

“Despite these profit pressures, John Lewis’ strategy to continue to invest in digital – particularly mobile and ecommerce – is both appropriate and positive,” says Lizzie Willett, Senior Retail Consultant at BJSS. “These investments should not be considered in isolation, especially with the news that Waitrose is set to lose over 700,000 Ocado customers.”  “

Willett continues: “It is clear that change is constant in the industry, with department stores faring particularly poorly. John Lewis needs to adapt its existing business model in light of this. Future performance will be determined by the extent to which John Lewis can maximise the role of physical stores, seamlessly blended with a continuously improved mobile and ecommerce experience.”

In addition, John Lewis and Partners has also built up massive cash reserves and is in as strong a position to weather the next few months of uncertainty as anyone.

“We have been preparing for the operational implications of Brexit for well over a year and are in a good position for a managed transition,” says Mayfield. “This covers currency, tariffs, customs and labour. The main risk in an unmanaged transition is a strong fall in consumer confidence and the impact that has on trade. Given the current level of uncertainty, we expect 2019 trading conditions to remain challenging. We have built up a strong liquidity position at nearly £1.5bn so that we have the financial headroom to mitigate the risks and make sure we can continue investing for the future.”

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