After years of underperformance, Marks & Spencer has found a recipe that’s winning against John Lewis.
(Bloomberg) — For decades John Lewis Partnership Plc has been considered the pinnacle of British retailing, overshadowing archrival Marks & Spencer Group Plc.
While the owner of the John Lewis department store and upmarket grocer Waitrose was lauded for its employee-ownership, service levels and quality, M&S struggled with never-ending turnaround plans, a revolving door of CEOs and plunging profits.
But the tables have turned.
The partnership reported a £234 million ($283 million) loss on Thursday, canceled the employee bonus for the second time in three years, and warned of fresh job cuts for its 80,000 partners who co-own the business.
John Lewis has also appointed the first CEO in its 160-year history as it seeks to get a grip on a business which is losing market share in grocery and last month parted ways with the head of the department store arm.
In contrast, M&S recently reported its best ever market share in food over Christmas while its home and clothing division reached its highest share in seven years. Last year the retailer posted a pre-tax profit of £392 million after improving its fashion credentials and making its food more affordable.
“John Lewis, the darling of the high street, seems to have lost its momentum whereas M&S seems to have turned a corner and is powering ahead with its transformation,” said Richard Lim, chief executive officer at research consultancy Retail Economics.
Intense Competition
Both department store chains, which date from the 19th century, generate more than £10 billion of sales each a year, and are battling for customers at a time when the cost-of-living crisis is squeezing household budgets. The problem for the partnership is that this fight is taking place during a turnaround program led by a revamped top management team that has lost some retail experience along the way.
Chairman Sharon White, a former telecommunications regulator, took the helm in early 2020 and was immediately faced with a global pandemic and lockdowns that decimated brick-and-mortar sales. She quickly cut thousands of jobs, closed 16 John Lewis stores, with some never reopening from Covid lockdowns, and set a target of hitting £400 million profit by 2025.
White, who previously had never held a commercial executive position, said a key part of rebuilding profit would be investing in areas outside of retail, such as real estate and financial services. This push into new revenue streams has, however, coincided with one of the most challenging periods in retail with rampant inflation hitting consumer budgets and increasing already intense competition between retailers.
“Instead of focusing on getting better at the thing they already do, retailing, they’re trying to establish a business in an area where they haven’t really had any meaningful presence before,” said Richard Hyman, a partner at advisory firm Thought Provoking Consulting. “It would be much less risky for John Lewis to invest in becoming a better retailer.”
Waitrose Problems
Waitrose has been particularly badly hit with sales at the grocer, once revered for such luxuries as Gruyere and Rosemary Puffs, falling 3% last year. The grocer has been very slow to cap rising prices and shoppers have decamped to cheaper rivals, including discounters Aldi and Lidl. It has also been beset with availability issues after a problematic roll out of a new tech system and a fire at a depot in Milton Keynes led to gaps on shelves.
The situation is not much better at John Lewis where sales were flat last year. Pippa Wicks, the restructuring expert brought in to revive the chain, left abruptly last month after less than three years in the role. Wicks introduced the more affordable Anyday range which has been criticized by some for diluting the John Lewis brand. She also got rid of the chain’s “Never Knowingly Undersold” price match pledge. Since then the department store has focused on a “good, better, best” pricing strategy which they say is clearer for shoppers to understand.
“You do have to wonder when they think introducing ‘good, better, best’ is some sort of revolutionary strategy,” said Tony Shiret, retail analyst at Panmure Gordon. “They are long on talk but short on walk. The Waitrose supply chain is clearly not sorted out and the new CEO is a mystery man so far as retail is concerned.”
Management Challenge
Nish Kankiwala who is stepping into the first chief executive position ever at the partnership, has turnaround experience at breadmaker Hovis and Burger King Corp. He has already been on the retail group’s board for two years as a non-executive director and was appointed after an internal search. In a statement, White hailed Kankiwala for having a wealth of experience in consumer goods and retail, although his expertise is mostly in consumer goods.
Kankiwala and White are up against increasingly tough competition from M&S which is further along in its turnaround under the stewardship of chairman Archie Norman who has guided the retailer since 2017. The day-to-day operations are led by Chief Executive Officer Stuart Machin, who has more than 30 years experience in the food, fashion and home retail sectors.
Since joining M&S, Machin has expanded the food range, lowered prices, opened new format food stores and brought in more clothing brands. The retailer is also working hard to lower the cost of the hundreds of stores in its portfolio and has improved its website, which was dogged with operational problems for many years.
While M&S profit is nowhere near the level it was before the turn of the millennium, the chain is in the black and and making significantly more than the partnership.
“M&S is a very large mid-market competitor who isn’t doing things anywhere near as badly as it used to, and that’s a problem for John Lewis,” said Patrick O’Brien, UK retail research director at consulting firm GlobalData Plc.
The partnership said its plans to return to profit are still on track. It has already cut £300 million of costs from the business and aims to slash a further £600 million by 2026, most recently putting the Winter Hill Golf Club in Berkshire, which it has owned for more that 80 years as a staff perk, up for sale.
“Inflation has hit like a hurricane and it has hit the partnership in particular ways,” said White on a media call, but added:“I couldn’t be more confident in the strategy.”
–With assistance from Eamon Akil Farhat.
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