Knowingly Undersold

John Lewis (Partnership?)

Fat cats to get the cream?

Normal service on the Moving Tribes podcast is slightly interrupted this week by the news broken exclusively by Sam Chambers and Oliver Shah in the Times this weekend that the leadership of the John Lewis Partnership are considering ‘de-mutualising’ in order to be able to bring in a minority shareholder (and their money) to boost the investment capital they have available.

That’s a pretty bold move for a business which has made huge store for decades about its partnership model and all that means for its brand, investment horizons and operating model.

Initial reactions online have been fairly predictably negative. The argument goes that by moving away from its “owned by our employees” model the business risks squandering all that makes it special and unusual as a retailer. Furthermore, goes the prosecution case, the undoubted weaknesses in the performance of the two flagship JLP brands - Waitrose, the supermarket, which has been losing share rapidly and John Lewis the department store which seems to have failed to cash in on the exit from the High Street of other department store brands - is not particularly caused by any characteristics of the ownership model but instead by some leadership missteps caused by the same team that are now considering such a shocking selling of the family silver.

Let’s, then, consider each of those charges. Firstly, why is the business arguably under-performing the wider market within which it operates, and secondly is the proposed plan to bring in a minority shareholder part of the solution to that, or just another symptom of the problem?

It’s the customer, stupid

Evidence that all is not well for JLP is fairly easy to find. As outlined above Waitrose, in particular, has been losing sharing in recent quarters as evidenced by the Kantar supermarket share analysis.

The business has clearly had availability challenges in recent months but is certainly not alone in that. The analysis that seems to hit a bit closer to home, though, is that the business has lost its edge in its product offering.

That certainly seems true when you make the comparison with M&S, who have followed a very clear and well-executed strategy in their food division for some years now. Any comparison of the range on offer in an M&S food hall with the equivalent in Waitrose will bear that out. I hold Waitrose in huge affection and am a regular weekly customer, but if you’d told me 5 years ago that I might occasionally pine for a visit to M&S as an alternative I’d have laughed at you. Somehow, though, we’ve arrived at a point where M&S seems to have at least as strong a product offering, and better value for money.

The change in John Lewis is harder to see, in my view, but much of the expert analysis of their offering points the finger similarly to the product offering and customer experience having weakened in recent years. I remained firmly agnostic when the lower priced Anyday range was launched a few years ago and I suspect it is still hard to read whether that was a good move or not. On the upside, it looks like a brilliantly prescient reading of the coming cost-of-living crisis. On the other hand, though, it also looks like a devaluation of what was once the middle-classes’ favourite retail destination.

The biggest challenge for John Lewis in my view, though, is the one I spoke about a few weeks ago in this podcast hosted by Hyperfinity when discussing the question fo whether department stores have any place in modern retailing.

Fundamentally, I think they do - there is a real value to a carefully curated set of products brought together and brought to life for a specific target audience, and there is no reason a department store can’t do that.

The core question for any department store business, though, is why I as a consumer should accept the inevitably narrower ranges on offer across multiple categories as opposed to going to visit a specialist retail who (presumably) has sector expertise and broader range authority in the products I want to buy.

There are several possible answers to that - that power of curation, the trust given to a beloved brand, and a strongly customer focussed set of colleagues in store are all answers John Lewis once offered with great success. But just as Waitrose’s market share loss is really driven by a competitor upping their game, so John Lewis faces a different competitive landscape than it once did.

Want clothes? The High Street is full of excellent clothing retailers, many at the top of their game. Want white goods? Online specialists like AO offering a terrific customer experience (sadly significantly better than John Lewis). Want homewares? Retailers like Dunelm are doing it better, with broader ranges and at lower prices.

And the result has been stagnation. A read of JLP’s accounts would act as a reminder that the business is still generating positive operating profits, but as the recipient of the market-share gift that the demise of Debenhams should have provided, the John Lewis department store performance can only feel like a missed opportunity.

So what can John Lewis do to hold onto its position as arguably the last scale department store business in the UK? As I outlined in that podcast, for me the answer must involve making the store experience richer - running events, hosting pop-ups, bringing regular customers in for sneak previews, providing entertainment in store. In other words, finding a way to replicate across the country some version of what Selfridges do so well in London.

Sadly, the conclusion from both the Waitrose and John Lewis parts of the JLP story is that cost-cutting, taking staff hours out of stores and trying to compete at lower and lower price points is unlikely to be the answer. Neither is diversifying away from retailing altogether, as much as that may generate some helpful ancillary income.

The answer is about product, people and customer experience. As it nearly always is in retailing.

Investing for growth

So that analysis of where the Partnership is now brings us back to the original question - what are the rights and wrongs of considering additional investment from another shareholder?

The case for doing so is easily apparent from the analysis above. The business needs to spend to grow, putting customer-facing, colleague-led experiences and high quality product innovations at the heart of both brands.

In its current form its hands are tied financially, though. In the latest annual results it still holds cash reserves of some £1.0bn, but it also had nearly £700m of bank and bond debt to pay off, so its financial headroom is not as great as you might think on first glance. That’s even more true, of course, for a business owned by its employees in trust - since it has no way to raise equity it needs to have a very conservatively managed balance sheet. The business isn't in financial trouble by any means (it has plenty of unused borrowing facilities) but it doesn't have endless room for further investment.

Viewed through that lens, an equity sale to raise money from a third party might make sense. Assuming the partner is a minority then the role of the Partner community in running the business needn’t be massively changed, and the funds raised could be transformational.

And remember too that debt figure. I sense some of the more hand-wringing posts opposing de-mutualisation somehow imagine that JLP is some fluffy collective of employee councils with no hard-nosed third party investors involved at all. But the bank lenders and bondholders who currently fund much of the balance sheet would disagree. Arguably, seeking a third party equity investor is just another way of bringing outside money into the business, different from bank debt only in that it earns a share of future profit but less risky than bank debt in that it doesn’t charge interest.

This, I suspect, is where the leadership team of JLP are coming from - not a wholesale attack on the employee ownership model but rather a technical change to how the business can raise money to invest for the future.

Conclusions and caveats

You might therefore think that I come down in favour of the rumoured plan. And certainly, I’m more agnostic than most on business ownership structures. There is a kind of dewy-eyed mystic aura some people apply to the employee ownership model, but it certainly has weaknesses as well as strengths. Ask anyone who has worked around the JLP business and they will describe a slow-to-act, deeply political management structure that has often stifled innovation and held the business back.

In a future post, I’ll lay out some of the pros and cons of the various ownership models a retailer might have. All can work, but none are perfect, least of all employee ownership.

But.

I do have a reservation about this plan. It’s not that I’m intrinsically opposed to exploring different corporate structures for JLP. It’s that I’m worried about what they are going to do with the money, and therefore whether the investment will save the group or just drive it further into the mire.

The analysis above was clear - invest in retail experiences, in colleagues and in product. The current leadership team of the business has, however, shown little interest in doing any of those things. That’s the key question for anyone with a stake in this discussion, in my view. What are they going to do with the money, and will the plan work.

If I object to the potential proposal, then, it isn’t because raising money is a bad idea, but because I don’t think the business currently has the right plan for spending it.

For the sake of the 74k colleagues across the business, whatever the business decides about fund-raising, I hope they get the strategy right and build again the JLP we all want to love.

As ever, I’d love to hear from the Moving Tribes gang on this - please do share this post to others, and let me know what you think by commenting below.