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John Lewis sets out a strategy of differentiation – at a hit to profits – as the shopping revolution bites

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The John Lewis Partnership this morning said it would invest upwards of £400m to £500m a year to focus the business on competing through differentiation and innovation rather than scale – but warned that the step would reduce profits to zero in the first half of its current financial year.

The group, which owns the John Lewis department store business, a Leading retailer in IRUK Top500 research and the Waitrose supermarket chain, ranked Top50, said it was changing its name to reflect the fact that staff are at the heart of a change that will see it “sharpen” its points of difference. 

Charlie Mayfield, chairman of the John Lewis Partnership, said: “The John Lewis Partnership is a unique business with different ownership, a different purpose and a different outlook to any of our competitors. As retail changes we need to tread a path that enables us to thrive as a business while building on the qualities that make us different. For us the relentless pursuit of greater scale is not the right course. Our plans put differentiation, innovation and partner-led service at the heart of our offer. the measures we have outlined today are an important next step in our strategy that will ensure we emerge stronger from this period of profound change.”

Fast-growing online sales at Waitrose

Waitrose, where more than half of products are now own-brand, will focus on its core customers, on health and wellbeing products, delivered with “an extraordinary level of service” – an approach that extends to The partnership said that as a result, its online sales were currently growing by 21% a year, well ahead of figures published by other grocers.

Focus on service – and services – at John Lewis

John Lewis, meanwhile, will focus on unique products– with a “curated and targeted assortment which is increasingly unique to John Lewis” – on personal service and on expanding into new services, as recently seen through its acquisition of home project organisation business Opun. Currently 30% of its products are own-brand and exclusive, and it plans to lift this to half. The partnership said that customer reviews of its brands scored an average 4.5 out of five this year, beating third-party brands. The in-store experience, again, will be “exceptional,” using technology and personalised advice and other services in both the home and fashion categories.  

How staff fit into the strategy

John Lewis is changing its name to John Lewis & Partners, while Waitrose will be Waitrose & Partners. The partnership said that its staff were the partnership’s “point of difference and its competitive advantage”, and that it would continue to invest in them. This year, it said, the average hourly pay rise for partners who have been in the business for at least a year was of 4.5%. “We will continue to invest in pay and have set an ambition to make the partnership one of the healthiest places to work by 2025,” it said.

The role of stores

John Lewis Partnership says that “unlike many of its competitors” it has around the right number of stores, in the right places. They include 353 Waitrose shops and 50 John Lewis. “As we develop our plans to prioritise differentiation we will continue to make adjustments to our overall estate, including exit or closures, but at a rate that’s in line with what we have seen over the last few years.” Today Waitrose said it would dispose of four convenience stores and one small supermarket.

The cost of investment

These plans for investment will hit profits, at least in the short term. The John Lewis Partnership expects first-half profits to be close to zero, and that it was working on the assumption that full-year pre-tax profits would be “substantially lower” than last year, with profit growth at Waitrose, a fall at Waitrose and “significant extra costs at the partnership level as a result of greater IT investment, which will be a big driver behind the overall profit change.”

The partnership is strengthening its balance sheet by £500m over three years to spend on investment in products and services. It’s looking to build on Waitrose’s profits, “create more value” from its property and to review the partnership’s pension scheme. Ahead of this, John Lewis says it has reduced its debt level, strengthened its balance sheet by £750m over the last three years, says this should give it the money it needs to invest between £400m and £500m a year. “We expect our level of capital investment as a percentage of sales will be more than 10% ahead of typical competitors,” it said.

Setting the context

The news comes a day after Carpetright set out how it plans to deal with the “Amazon factor” that is seeing shoppers move online fast, and across categories – and days after House of Fraser would approval from landlords for a CVA (creditor voluntary arrangement) would close 31 of its 59 stores in order to survive, via a CVA route. 

John Lewis said every retailer’s response to “a period of generational change” would be different. Its own focus is on investment, services and differentiation.

Commenting on the plan, Richard Lim, chief executive, Retail Economics, said: “Even the mighty John Lewis has not been able to escape intensifying pressures building on UK high streets. The impact of rising sourcing costs, higher operating costs and the turbulent consumer environment has flatlined profits. 

“There’s a growing sense of panic for the retail sector as the intergenerational shift in behavioural trends is fragmenting the market. The emergence of the sharing economy, mass personalisation at scale and the ’me’ economy has put the emphasis on retailers to differentiate themselves from their competitors. But the pace of change is accelerating and the race is on to pivot business models in a move to become fit-for-purpose in today’s digital age.”

Image courtesy of John Lewis

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