John Lewis: can kinder capitalism compete in ruthless retail? | FT Film

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John Lewis and Waitrose, they're more than a business. They're a British national institution. People really care about it.

The question is whether this John Lewis Partnership, which cares about its employees, which cares about society, can really thrive in an age of ruthless retail epitomised by Amazon.

It's one of the country's largest retailers.

It is the biggest employee-owned business in the UK.

It's made up of John Lewis department stores and Waitrose, the supermarket business. And it's got to balance what's really an alternative form of capitalism - putting its employees first while competing in retail efficiently. And retail is a vicious, unforgiving, fast-moving market.

For rich British people, John Lewis is kind of the nanny store, right? It kind of appeals for the upper middle class British psyche. It's something that a lot of people grew up with as the place they went to get their shoes as a kid, their clothes, their homewares, sofas, LED TVs. And you trust it.

Everyone from newlyweds to the very wealthy shop in its stores and supermarkets. It's such a totemic institution, if you like, that when the former prime minister's then fiancée Carrie Symonds said she wanted to get rid of what she called the John Lewis furniture nightmare left by the former prime minister, there was a big national outcry because people felt personally attacked, that they were trying to get rid of a brand that they loved.

Sharon White, the chair, says that John Lewis faces the greatest scale of change in its entire history.

The road isn't easy. Everybody knows that.

Profits are down. It hasn't been able to pay bonuses to its partners, i.e. its staff who own the business.

It's increasingly difficult for them to maintain their profit margins when you've got Amazon and a host of other online retailers competing with them.

It's had to close some stores, which it paid millions of pounds to open. And it follows that up early in 2021 by announcing its first ever financial loss.

Around it, you have some very high-profile collapses - other department stores, Topshop, Debenhams, House of Fraser.

After Covid and after these huge write-downs in how much the stores are worth, you then have inflation which really hits the business and hits its costs.

There was immense dissatisfaction with Sharon White's attempt or suggestion that they should consider selling a minority stake in the group to an outside investor. That created a lot of tension.

She also wanted to diversify away from retail in much more profitable areas - property, where John Lewis is hoping to become a landlord, and financial services. And this is seen as a risk. And all along there's been this competition between John Lewis and Marks & Spencer. There's been a battle for who is the upper middle class, the quality, premium supermarket of choice. And in 2023 you have this key moment, Marks & Spencer is making a profit and John Lewis isn't.

Waitrose and John Lewis are probably at the most precarious time in their history. They're trying to turn themselves around. There is still a long way to go. But they have shown some green shoots of recovery with a return to profit.

And they have a new chairman, Jason Tarry, who joins from Tesco. His experience could prove instrumental in reviving John Lewis. But premium John Lewis is very different from mass-market Tesco.

Ultimately, I think that the John Lewis story is one of a company that set out to do something different, did it very successfully for a long period of time. But I think ran into very severe difficulties because of the inherent limitations that model brought.

John Lewis was an orphan from Somerset. And in 1864 he set up a draper's shop in London's Oxford Street, and from there became a retail empire. John Lewis was a incredibly hard-driving, almost miserly man, very successful at retail. And so the real change in what John Lewis means really comes with his son, John Spedan Lewis. And he's worked out that in a year, a department store makes more money for the owners than it does for all the rest of the staff put together. And he thinks this can't be right.

The John Lewis Partnership has been an experiment with an idea for a better way of managing business. So that instead of the many being exploited by the few, there would be genuine partnership for all.

And so his way is the staff should effectively own the business. They should share the profits from the business. It's not designed to maximise profit. It's designed to create sufficient profit and also to invest in the happiness of its workers. And that's a real break from the times and a real break with what most businesses aim to do today.

Pros of this model are that our workers are also our owners. And, therefore, they are more invested in the business. They care more. They are more likely to go the extra mile.

Staff culture and this sense of partnership that gives back to its workers is an incredibly important part of John Lewis through the decades. More than that, it had a pension which you received without making any contribution.

So the idea of big, appealing, practical department stores is in the DNA of John Lewis and always has been.

I'm Beth Bloomfield. I'm a senior retail analyst. I worked at John Lewis from the start of my career when I graduated. I was in the central merchandising function, in charge of the jewellery and watches and the haberdashery departments. And haberdashery is obviously John Lewis's heartland.

I think it's an interesting question about why do people care? And I do think it goes back to that fondness of a brand from memories that are either from 10 years ago or more recently that you went to buy your wedding ring there and you got great customer service.

The Waitrose supermarkets came quite a long time later. You might only buy a refrigerator or a sofa or a bed once every 10 years, but you have to shop for food every week. John Lewis saw that as another route to the middle class shoppers' wallet. And also, they had this thing called Never Knowingly Undersold, which was an implicit guarantee to middle class shoppers, in particular, that you weren't being overcharged. You might be paying a little bit more, but it was for a better quality product.

But it brings downsides as well. Clearly, a business which is responding to its thousands of employees may be a little bit slower in adapting to changing times. And it may find it harder to raise capital. And so you have this tension that runs through the partnership model as it moves into a very different retail environment with the rise of internet shopping.

So in 2007, 2008, 2009, we had the global financial crisis, which came at a really interesting juncture for John Lewis, because they'd just committed to basically quite an aggressive expansion of their store estate, which when you look back now, was clearly a strategic mistake. But I think at the time it was an entirely rational decision.

You'd had this great, long economic boom. Customers were feeling very wealthy. Things were being sold online, but at a much lower proportion of overall sales than is the case today.

We worked very, very hard to make people who work in the organisation feel valued. Hopefully, they'll work better and harder and they do give better customer service. And then we're a more profitable business as a result.

Charlie Mayfield was an interesting figure. It was he who presided over this rapid expansion.

It goes from having about 160 stores in the year 2000 to having 400 stores just before Covid.

The majority of customers who are keeping their jobs, except it's terrible for those who do not, their disposable income is still reasonably strong.

So I'm Andy Street, mayor of the West Midlands now. But before that I was a John Lewis lifer, worked for them for 31 years. And from '07 till October '16, I was the MD.

We decided at the time of the financial crisis to move decisively for what was originally called a multichannel and then an omnichannel strategy. We were the first to do Click & Collect. We were the first to really sort out all of our national distribution stuff.

We did build more department stores. Absolutely. I even got perhaps a little bit carried away. And we talked about, a city used to be defined by having a cathedral, then it was defined by having a John Lewis. But people aspired to that. It was the anchor brand everyone wanted. But the critical thing we understood was that our brand was created in our shops and then often actually transacted online.

3, 2, 1!

We were doing really well.

The most straightforward benefit was that you would get a staff bonus, awarding this once a year with great fanfare usually at its Oxford Street store.

There's a lot of energy that the employees get from that. I was there when there was a 20 per cent bonus, which is a massive bonus and a big whoop and cheer happened that day.

And so it seems to be going brilliantly. It's Christmas ads become viral.

Good times for...

Trying to market a retailer, and particularly a retailer at Christmas, in the aftermath of a global financial crisis had some challenges. But what was interesting, particularly in the case of John Lewis, is that a lot of their customers appeared to almost double down on the notion of they were determined to buy well, not just buy cheaply.

The first of the powerful Christmas campaign was probably The Long Wait. That idea of a boy who you thought couldn't wait to get all of his goodies at Christmas, but actually he was impatient to give a gift. It's selling the destination rather than the individual product. In a sense, Christmas advertising became a cultural moment. At some point, it became a thing.

There's probably no better sign of John Lewis's ambitions in that moment than the opening of a flagship department store at Birmingham Grand Central next to the train station, costing an amazing £35mn pounds.

Birmingham was one of the gaps in the map. And if you work on this bricks and clicks together, as we called it, then clearly there was a big catchment online, which we believed we could stimulate with our physical shop as well.

But I think by 2015, Mayfield had realised the company could not really open more stores and do so profitably.

So he slammed on the brakes almost. New store expansion was brought to a halt. The first iPhones appeared in 2007-2008. You had a very rapid rise from that point onwards in ecommerce, which started to pressure how much revenue each square foot of selling space of shops makes for you.

You also had this new wave of discounters - Primark, Aldi, and Lidl. They started selling lobsters for Christmas and very nice champagne. And it was little things like that, that people were very curious about and ended up going to their stores. So around that time customer loyalty started to erode, too.

And, of course, again, to return to this idea that of it being an employee-owned organisation, if profits fall, if sales fall, then Charlie Mayfield can't raise funds from shareholders like a listed company can. And I think realised that they needed to get costs and borrowings under control because if they did not they had nowhere else to go. So, for instance, they decided to close down the pension arrangements, which were absurdly generous.

We are anticipating that there are big changes afoot in retail and essentially we're going to retain a bit more profit this year in order to make sure we've got the firepower to ensure the partnership is successful in the long run.

Charlie Mayfield, when he decided to step down, he then, in 2019, chose a complete outsider in Sharon White to succeed him.

I sometimes think of ourselves almost as much a national institution as the BBC or the National Health Service.

That was a surprise. Whilst she is a very impressive leader, she was a civil servant in the Treasury previously and ran Ofcom, that is the media regulator, but had no retail experience.

Sharon White would say that her role is partly to preside over the management of it. So she's not actually doing the hands on retail. And given the complexity of John Lewis's ownership structure and the employee involvement in decisions, that actually requires someone with more political skills than retailing skills.

Profits are going down. And Sharon White announces a strategic review, announces that things have got to change. And then you have Covid.

And straight away, she had to deal with store closures, social distancing, masks, hand sanitizer, all of those things. Despite that, she went much further than Charlie Mayfield had in the sense that she closed department stores for the first time, really, on a large scale in John Lewis's history.

I think the stores probably could have been closed sooner than they were. I think it was quite a cruel decision, in many respects, to leave it to Sharon White on entering to make that decision and to pull that trigger.

I think it's remarkable and quite underappreciated how popular she managed to remain with shop floor staff, despite pushing through these very considerable changes.

About one in three of its department stores are closed in this time. And that includes the flagship store at Birmingham Grand Central Station.

It was very clear at the time, I was really, really disappointed about the closure of the Birmingham shop. I suppose I was cross is the truthful answer. Most importantly, because it was people who live and work here who had lost their jobs.

They said, of course, it was all to do with the performance of the shop. But I knew very well from other shops we'd opened, it takes time to get to maturity. But the real key point that the shops drove online. I still believe that is right.

At the end of 2020 it announces that it won't be paying its partners a bonus for the first time since 1953. That's a huge shock.

It sent, I think, a very difficult message internally, affecting staff morale, dampened the mood.

And it follows that up early in 2021 by announcing its first ever financial loss. And this is attributable largely to a huge write-down in the value of its stores.

And that was based on a totally revised expectation of how much value each store brought in terms of online sales.

And so you have real divergence over what John Lewis's strategy should be. And this is about realising, in Sharon White's view, that retail itself cannot provide enough money for it to keep going with the social mission it has. So she wants John Lewis to make quite a lot of its money in much more profitable areas.

One aspect of it was financial services. We have a respected brand and we apply that brand to financial services. Lots of retailers have done that. The other thing that she talked about was going into this whole building homes to rent out to people. And I think that raised much more eyebrows because that was a complete departure.

There was a group of people that saw it as a very rational response. And there was another camp that said, well, this is just a reflection that you don't believe in yourselves as retailers. You don't back yourself as a retailer. And, therefore, you see the need to go into all these unrelated areas just to survive.

The other thing that is tricky for John Lewis is that it's become harder to communicate the difference between price and value.

There's obviously been a huge amount of pressure from online retailers, prices changing in real time. And John Lewis had to dispense with their Never Knowingly Undersold promise because it was a commitment that couldn't be kept.

The dropping of Never Knowingly Undersold shows a real crisis of what it means to be John Lewis and what it means to shop there.

The issue is now John Lewis has to lead on price. But actually, people want to come for quality. But they don't want to feel they're paying an absolute premium because John Lewis, at the end of the day, is a middle class department store.

I think that John Lewis's customer service is still better than almost all of its major rivals. But I think it's not as good as it used to be. And it's very hard to point to empirical evidence for that. But I think there's lots of anecdotal evidence.

What has happened is whether it's people quitting or people being made redundant who have worked there for 20, 30 years, it's the institutional knowledge leaving the building.

My dad always tells the story that when he went to John Lewis at Kingston to buy a stereo they actually told him which one out of a whole host. And it was the middle price range, because that partner knew that was the best one based on what my father said that he wanted. So I think people still have those memories of great customer service when there were lots of staff in store. And I think as it's tried to cut costs it's potentially cut employee numbers a bit harder in store. And potentially, people have long queue times and they're waiting for service.

After Covid and after these huge write-downs in how much the stores are worth, you then have inflation which really hits the business. It hits its costs. It makes the turnaround plan that Sharon White is trying to drive even harder.

When inflation started surging and the price of food started going up, Waitrose lost quite a lot of momentum to the discounters and traditional supermarkets.

For many years Ocado delivered Waitrose's food. That ended. And Ocado now works with Marks & Spencer. And that's been a bit of a knock to Waitrose's online business.

It had to make enormous investment, getting itself to a point where it could supply groceries ordered online direct to consumers itself.

As shoppers start feeling a bit more confident, those numbers have started to tick back up. But both John Lewis and Waitrose have quite outdated operating systems, IT systems. So they have to invest money to modernise in line with their competitors, whilst also trying to cut costs.

John Lewis is riding two horses at the same time. It's trying to keep the high street stores going. And it's also trying to invest in online. And it's unclear that it has the resources to do both of those things well enough.

They've embarked on a significant cost-cutting programme, which is ahead of target. They've reduced the debt level. And that's what they need. However, the sales were still lacklustre.

And the real difficulty is that the profits from the new areas, financial services, property, seem to be quite slow in materialising. So there's no quick source of cash for them to make those investments.

Sharon White has had to think of solutions to try and put the business on a firmer financial footing. One of them has been trying to gauge how people internally would respond to selling a minority stake to an outside investor, which is unheard of. And that leaked to the media. And it turned into a month-long debate.

It's my old life. It's many years since I left. And I don't tend to comment on it publicly. But I will give you my reaction, which is it would be a tragedy.

I always believed that John Lewis and Waitrose were successful because of their ownership structure. And we always talked about the service that we offered in our shops, the commitment of our partners throughout everything we did. And there was a huge risk that we were throwing away the family silver, throwing away the very essence of it.

They know that when they go in, those people are part of a co-owned business. So the outcry summed up the general feeling towards the business of, no, no, you can't touch this most beloved business. But I think they have a really difficult decision going forward.

So there was never any question that we were going to change the partnership model. The question for us now, as a 12 and half billion pound business, is how do we fund the growth that we know is there? But doing that in a creative way that keeps the partnership a partnership.

People were unhappy internally and externally about this idea that you might sell a stake in the business. And this manifested itself in an annual meeting with partners. And whilst Dame Sharon White won a vote of confidence in her vision for the future of the business, she lost the vote over the performance of the company in the past year. And, yes, it was a reflection of the fact that people were unhappy, but willing to arguably give her another chance.

What they almost certainly will do is they will bring outside investors in to help finance things like the rental homes initiative or the financial services expansion. But I was very surprised to hear that they were considering that. And I don't think it went down well internally. And I suspect, although I don't know, that it may have played a part in Sharon White's decision to not seek another term as chair.

In 2023 you have this key moment Marks & Spencer is making a profit. And John Lewis isn't. There's this real change in fortunes.

So one of the things that preoccupies Middle England is the comparison of John Lewis with Marks & Spencer, basically a 19th century business that that is comparable in many ways. There are differences, though. So Marks & Spencer is listed on the stock market, so it has access to outside capital. But it's important to stress that turnaround, which you're really starting to see blossom now, has basically been 20 years in the making.

Revenues were not in the right place. They didn't sell the right stuff, especially in clothing and home. And they just didn't seem to get it right until recently, where their sales are going back up.

And also, Marks & Spencer has been heavily investing in refurbishing its stores.

They've got their food offering spot on.

It's got some really glossy, new look food formats, which will give Waitrose a real run for its money.

Suddenly, everyone's falling in love with the clothes for the first time in a long time from really young shoppers, the Gen Zs, all the way through to older customers.

Where M&S have really stolen the march on John Lewis is perhaps their digital and their loyalty element. You get lots of offers that entice you back into that store.

They've done a big move out of tired, old high streets and into out-of-town premises. They had to fix their cost base.

This feels like Marks & Spencer has got sharper. It's chaired by a very experienced retailer, Archie Norman.

And one of the things that Archie Norman was really, really big on was that they had to fix the bureaucracy. And the whole pace of organisational change really had to step up. And Archie was very fond of telling people that M&S did not have a divine right to survive.

And I think exactly the same thing applies to John Lewis. And I think they know that. You are literally only as good as your last set of results and your last partnership bonus.

And for 2023, John Lewis and Waitrose, in fact, posted a small profit for the first time in three years. Sooner than some industry analysts expected, which is encouraging. But there was no bonus for staff again.

Management also said they wanted to invest a big chunk of money in the business over the next three years. They want to open more stores. They want to refurbish existing ones.

And they want to improve customer service. All very welcome steps. But while Waitrose is on an upwards trajectory and doing well, John Lewis is still struggling with a decline in sales.

The home and electricals market is really struggling. That's going to hit them quite hard because those are high price points. But actually, there are reasons to be optimistic.

They've grown their customer base. Their fashion sales are performing well. Customer confidence is going to come back at some point. But they need to be ready with a proposition for those customers who want to spend.

What we're striking from the results was the move away from Sharon White's initial vision to make almost half of its profits from outside of retail by 2030. Those targets were scrapped. It's arguably an admission they shouldn't have done it in the first place.

So John Lewis now says their focus is unashamedly on retail. And I think to deliver that they need to have the right people in place.

Possibly where Sharon White's fallen down is having the right team around her. By that, I mean having a team that really understands retail.

But Sharon White did eventually take steps in the right direction. She created the first chief executive role in the partnership's history and appointed Nish Kankiwala, who had consumer goods experience. Not only that, we've seen Peter Ruis join to run the department stores - the former John Lewis insider who has worked for some of its biggest rivals.

Peter Ruis, who for a long period was my merchandise director. I have got huge confidence that he will get John Lewis focused back on what they should be doing, delighting customers.

And finally, Sharon White found her replacement, Jason Tarry, who couldn't be more different to her. He was UK chief executive of supermarket giant Tesco and was crucial to its turnaround. His experience could prove instrumental in reviving John Lewis and helping it navigate his limited financing options. But he'll have to have more tricks up his sleeve. Premium John Lewis is very different from mass-market Tesco.

Department stores have to reinvent themselves, don't they, because of the ease of transacting online.

And that changes what's expected from retail environments. There will be a higher expectation of theatre and experience, rather than just piling masses of products up for customers to come in and grab.

And you only have to look at a city like this to see that the high street is still very, very vibrant.

I think Sharon White tried to be radical to the extent that the structure of the employee-owned business allowed her to. But she really should have focused on retail sooner.

I think that in years to come people will look at her tenure and think that she probably did a good job under exceptionally trying circumstances to fulfil what is the duty of the chair at John Lewis, which is to ensure the survival of the partnership.

I think what's now interesting is while her successor, Jason Tarry, has backed the ideals of the partnership, he will really have to focus on making sure that the business stands out in the ruthless world of retail.

I think already the brand has taken a huge knock and it won't be the same for the next generation. And that moment when everyone gathered around and watched the Christmas ad and then talked about the Christmas ad online, that seems to have passed. We've passed the peak of Monty the Penguin, et cetera.

I don't think John Lewis means much to young people. The TikTok generation, Gen Zs, would not associate John Lewis with that warm feeling of familiarity and love that everyone used to back in the day. So it's on them to try and redefine themselves in a way for the next generation, if they want to continue existing.

Maybe if their future is focusing on the upper middle class and remaining very much focused on service, on provenance, on sustainability, on quality, then maybe the trade-off is that they have to accept that they will appeal to a smaller audience than they once imagined that they might do.

I'm a huge believer that John Lewis brand has some magic. I think it had a period where it captured it, it's lost it, and now there's an opportunity for it to refind it.

So what would John Lewis, the founder, make of today's John Lewis? Well, he might scold his son and say, look where this experiment in employee democracy has got you. You should have stayed loyal to capitalism, red in the tooth and claw. If you asked John Spedan Lewis what he would make of today's partnership, he would probably say I'm very proud that it's survived a hundred years or more.

They would probably have a good, old argument with a condescending father saying, the model wasn't working in its current form, and the son saying, poor sales and losses were cyclical, but that the employee-owned structure had stood the test of time.

Spedan Lewis has talked about, to properly be a partnership, you have to be properly efficient. And I think we got a little bit less hungry. I think we maybe just lost sight of the fact that we were an experiment that still needed to be worked at.

I think the model of employee ownership is intrinsically attractive. I think it has much to commend it. And I'm pretty sure that they will find a way to preserve it.