The UK is pinching itself after the John Lewis Partnership, UK’s High Street darling, said its half-year profits crashed nearly 99 per cent to just £1.2million.
Clearly the group behind the eponymous department store and upmarket supermarket Waitrose, highly regarded as it it, is not immune to the turmoil sweeping through the sector, and gripping its rivals House of Fraser and Debenhams.
Its troubles, according to Julie Palmer at law firm Begbies Traynor, throw up parallels with ‘the fall of the Roman empire’, as they lay bare the extent of the High Street’s woes.
John Lewis is re-branding to John Lewis & Partners as part of its efforts to differentiate
‘This brand was hailed as the model to which all should follow, and as a commercial and customer success – make no mistake, for the high street this is as significant as the fall of the Roman Empire,’ she thunders.
But what’s eating away at the group’s profits?
‘Never Knowingly Undersold’
John Lewis, which recently re-branded to John Lewis & Partners, is shackled to its ‘Never Knowingly Undersold’ promise – its commitment to price-match the competition, even during Sale events and promotions.
Unfortunately for the department store chain, rivals Debenhams and House of Fraser have amped up the promotional activity of late in a bid to urgently win back customers.
In fact, JLP chairman Sir Charlie Mayfield said it is the most ‘promotional market for nearly a decade’, with the number of discounting extravaganzas double that of the same period last year.
Matching the prices of its heavily discounting rivals hurt its fashion and beauty departments in particular.
Mayfield said on Thursday that it cost the business around £40million in profits in the first half of the year, contributing to a staggering £19.3million loss at the department store chain, compared with profits of £54.4million in the first half of last year.
Despite this blow to the bottom line, the chairman vowed to stick by the firm’s price promise – even during difficult times.
‘No one has anything quite like it. It is extremely valuable and, in fact, it is times like these test the integrity of that promise. You have to be up to it in tougher times too,’ he claimed.
However, some retail analysts suggest it is a promise that John Lewis & Partners can no longer afford to keep – especially as its retail rivals show no sign of backing away from the promotions and special offers.
And the pledge holds less value than it once did, others claim, as it does not apply to the low prices offered by online retailers like Amazon.
Brexit and the weaker pound
Sparking some backlash from Brexit secretary Dominic Raab, Mayfield said Brexit has played a part in the group’s diminishing profits.
The retailer argued that cost price inflation, as a result of the significantly weaker pound since the Brexit vote, was eating into its margins and therefore denting the bottom line.
Mayfield said: ‘[Without Brexit] would sterling have fallen to the extent that it has? Probably no.’
John Lewis Partnership chairman Sir Charlie Mayfield received some backlash for linking the profit drop to Brexit from Brexit secretary Dominic Raab
In the immediate aftermath of the vote, retailers were largely hedged against such currency fluctuations, meaning the cost of buying goods from overseas did not change.
But once those hedging agreements expired, sourcing became more expensive – impacting firms to varying degrees depending on their exposure and reliance on overseas sourcing.
With the value of the pound still down against the dollar and the euro, some retailers – supermarkets in particular – have started to pass on some of these cost increases to shoppers. But given the high level of competition already in the market, and Waitrose’s already punchy price point, JLP has been reticent to do so.
It has eaten into its margins to cover the higher costs instead.
‘It’s clear that sterling weakness can hit supermarket groups hard as it has a significant impact on real incomes and import costs. For those like Waitrose at the top end there is less scope to claw this loss back with price increases.
‘If a Brexit deal is reached we are likely to see the pound on the up and up again. But, whether this means that the likes of John Lewis find themselves back in the sun remains to be seen,’ says Paul Mumford at Cavendish Asset Management.
JLP is far from alone in this issue: The diminished value of the pound was the nail in the coffin for single-price retailer Poundworld.
Brexit-related consumer uncertainty
Brexit has taken its toll on shoppers too, with consumer confidence tumbling in the aftermath of the vote and remaining volatile as negotiations rumble on.
Bosses at the partnership argue that this has contributed to the fall in profits, and expects it to mire its full-year earnings too.
‘With the level of uncertainty facing consumers and the economy, in part due to ongoing Brexit negotiations, forecasting is particularly difficult but we continue to expect full year profits to be substantially lower than last year for the partnership as a whole,’ Mayfield said.
Nerves around spending have manifested most prominently in the ‘big ticket’ sector, which includes expensive items like sofas, flooring and white goods.
Carpetright cited weak consumer confidence for plummeting sales and is urgently closing stores to stem the decay. Likewise, furniture firm Multiyork hit the buffers at the end of last year.
It follows then that John Lewis’ home category was the weakest performer during the period, with sales down 4.2 per cent, compared with a 1.2 per cent rise in fashion and 7.8 per cent uplift in tech.
John Lewis’ half-year home sales fell 4.2%
Mayfield claims that the declines in this category are triggered by fewer shoppers being willing to splash out on expensive furniture while they remain unsure about Brexit and the impact it could have on their disposable income.
He said: ‘Home is the weakest of the three areas – it is substantially to do with consumer confidence. Purchases in the home are more deferrable than in other areas.’
To mitigate this, the business is driving its product innovation in home and furniture and expanding its personal styling service.
‘You have to create your own luck,’ Mayfield said.
On that note, it is reassuring to know that some of the partnership’s wounds are self-inflicted as JLP raids its earnings to shore up its balance sheet, pay down some of its debt and futureproof itself.
‘We spend a lot of money on both our brands every year to stay current and be progressive, Mayfield said.
The group has committed to maintaining its investment levels of £400million to £500million per year, ‘whatever the economic environment’.
In June, it warned that profits would be close to zero this year as it ploughs funds into its IT systems, and develops more ‘unique’ products and services.
For example, it has launched a new womenswear brand as it strives to reach 50 per cent own-brand or exclusive brand products.
As the group shifts its focus to ‘differentiation, rather than scale,’ it has also pushed the button on a major re-brand – adding & Partners to its John Lewis and Waitrose fascias, so as to put its 83,000 employees ‘at the heart’ of the business.
The new-look logo for John Lewis Partnership-owned supermarket Waitrose
The retailer has paid down some of its debt during the period too, which Mayfield said puts it in a stronger position to face the current challenging environment.
Debt is a huge burden for High Street retailers and played a huge part in the recent demise of House of Fraser, for example, which sank into administration after languishing in debts exceeding £1billion.
In defence of the cost of John Lewis’ lavish adverts, Mayfield said ‘you never win by going into retreat’ and claimed that this investment garners ‘the biggest returns’.
The profit slump, as eye watering as it may be, shows that even John Lewis is having to take drastic action to ensure it can weather the storm and steel itself for potentially tougher times ahead.