Data: John Lewis results and what they mean for strategy

Sliding profitability at department stores

Traditionally the more profitable part of the group, margins at John Lewis department stores have taken a slide over the past couple of years.

Operating profit before bonus and exceptional items fell 65.6% to £39.5m, down from an already reduced £114.7m a year ago. Last year there were charges of £123m against the division, reflecting shops “playing less of a role in driving online purchases”. Gross sales fell 2.1% and like-for-like sales by 1.8%.

At grocer Waitrose, results were more encouraging. Operating profit (before bonus) reached £211.9m, up 6.4%. Like-for-like sales edged down 0.2%.

Following a handful of store closures, the food business appears to be performing well in a tough trading environment. Profitability at Waitrose has overtaken that of the rest of the business.

However, challenges still lie ahead as Waitrose loses its supply agreement with Ocado this year and ramps up its own online delivery operations. Following an in-store picking model will also add overheads in future.

Shops ‘playing less of a role in driving online’

The statement in the results that shops are playing less of a role in driving online sales is telling. Shopping habits are changing and, in that respect, John Lewis is becoming partly the victim of its own success.

More than half of sales are now generated online and, with so many different and convenient fulfilment methods on offer, does the retailer still need as many stores?

If shoppers are ordering online and collecting from Waitrose, for instance, that lessens their need to visit a department store. At the same time, the cost of fulfilling more online purchases is increasingly weighing on the bottom line.

New chair Dame Sharon White confirmed that a strategic review of the business has been launched in a bid to reverse profit decline and return to growth.

She warned that it could take “three to five years to show results” and that it would involve ”right-sizing” the store estate across both brands and require a transformation in the way the Partnership operates.

The past few years have been difficult for John Lewis, but even more so for some of its competitors such as Debenhams and House of Fraser.

Selfridges excels by offering superior products and experiences in fewer flagship stores. Could this indicate a direction for John Lewis?

Investing in flagships and experiences 

In order to recover sales and profits, it is likely that John Lewis will need to grow through differentiation rather than scale.

This means it may need to close some department stores. However, with more sales coming through online, it might be able to afford to close some formats, such as the ‘At Home’ stores for instance, freeing the retailer to focus on delighting customers with experience-driven retail in its flagships.

More “shared locations” was hinted at by White, which could lead to John Lewis and Waitrose being more often co-located in the future. 

Will the structure of the Partnership change radically?

When it comes to the Partnership strategy, it appears that some aspects of the radical restructure proposed by former chair Sir Charlie Mayfield may also be up for negotiation.

However, White says that priorities for the business include continuing to be an employee-owned partnership, retaining its two brands and putting exceptional customer service at the heart of what it does.

For now, it appears that the two halves of its business are on different trajectories. White said today that the business was still very much “two distinctive brands”, but pointed to the customer service and cost-saving advantages of bringing them together.

John Lewis has been on a journey that is primarily inwardly focused of late as it restructured, following an expensive rebranding to include “& Partners” at its Waitrose and John Lewis stores. Now is the time for it to refocus on what is most important – providing great quality and service and delighting its customers.