The Daily Telegraph
John Lewis seasonal perk at risk as middle classes feel the squeeze
The retail chain is placing its faith in a marketing blitz as it prays for a strong festive season,
JOHN LEWIS has slumped to a £99m half-year loss and warned that its staff bonus is at risk as the cost of living crisis squeezes middle-class consumers.
Dame Sharon White, the chairman of the group that also owns Waitrose, said a successful Christmas is now essential for the fortunes of the company as it battles the biggest wave of price rises in half a century.
She warned that John Lewis will need “a substantial strengthening of performance” in the second half of the year if it is to generate sufficient profit to pay out a bonus for staff, who jointly own the mutual. Employees did not receive a bonus last year for the first time since 1953.
Dame Sharon said: “We haven’t seen inflation of this sort since the shock of the 1970s.”
John Lewis said that it chose not to hit customers with its own rising costs, such as higher wages and electricity bills. However, it did agree to pass on increases sought by suppliers, meaning some prices have gone up.
Dame Sharon blamed the loss on soaring inflation, which breached 10pc earlier this year, as well as shoppers spending less with the retailer in the six months to July 30.
She said: “We are making a conscious choice to forego profit to provide support for partners and customers.” The business lost £99m during the period, compared to a loss of £29m last year.
Total net debt was flat year-on-year at £1.6bn. Sales at Waitrose stores open more than a year dropped 5pc to £3.6bn, while the department store posted a 3pc increase in sales to £2.1bn.
Fewer people bought big-ticket items such as sofas and dining tables, which are typically more profitable.
To offset this, the company said it was ploughing £500m into promotions at John Lewis this year, and is expanding the range of customers to whom it offers interest-free credit.
Meanwhile, the amount of goods bought in a typical Waitrose shop shrank by nearly a fifth, despite an increase in customer numbers, as shoppers rein in spending. The cost of living crisis fuelled a 28pc increase in sales of John Lewis’s value brand, Anyday. Energy saving items also attracted high demand, with sales of air fryers up 56pc and smart thermostats up 8pc.
Dame Sharon, who is seeking to overhaul the retailer so it is fit for the internet age, said: “Two years into our five-year plan, the direction continues and we’ve got great confidence [in the turnaround].”
The company has been pushing into property and financial services to diversify away from retail.
Nick Bubb, an independent retail analyst, said the retailer “will need a Christmas miracle” to pay a bonus given weak performance so far.
John Lewis said it would give fulltime workers a one-off £500 payment to help with the cost of living crisis.
Dame Sharon added that the Government’s recent energy package, which will cap average bills at £2,500 for two years, is “a potential game-changer” for consumers. The group managed to secure competitive electricity and gas contracts last year.
Bérangère Michel, finance chief at John Lewis, said “We’ve been somewhat protected so far, but we’ll see how that evolves.”
Executives also dismissed suggestions that the John Lewis Christmas advert could be axed this year.
Pippa Wicks, who runs the department store chain, said: “We’ve been very thoughtful and made sure it’s aligned to our purpose and we’re excited about the customer reaction.”
As the cost of living crisis sends the high street plunging towards a harrowing winter, spending millions of pounds on a Christmas advert might seem like an extravagance.
But for John Lewis, this year’s annual TV spot is more than just a way of showing off its status.
After plunging to a near-£100m loss, the company needs a festive miracle to stave off disaster – so much so that one executive warned cutting the ad budget would be a “terrible idea”.
“No one could have predicted the scale of the cost of living crisis that has materialised, with energy prices and inflation rising ahead of anyone’s expectations,” the mutual’s chairman Dame Sharon White said yesterday.
“As a business, we have faced unprecedented cost inflation across grocery and general merchandise.
“A successful Christmas is key for the business, given the first half.”
It is not unusual for John Lewis to lose money in the first six months of the year, said Dame Sharon, adding that a successful winter could salvage its position – and prized staff bonus – despite the highest inflation since the 1980s.
However, the company’s own numbers highlight the scale of the challenge. Despite a rise in customer numbers of 4pc at John Lewis and 6pc at Waitrose, the partnership’s supermarket arm, the average spend per shopper is down.
Overall sales dropped 5pc at Waitrose as the post-pandemic boom in demand unwound. At John Lewis, despite an overall increase, sales of homeware and technology goods both fell – with a keenly felt drop in bigticket items, such as sofas, where the retailer’s margins are largest.
There is likely even more pain to come as household energy bills go up next month and the company confronts the prospect of higher costs of its own.
“We’ve been somewhat protected so far because of the [energy] hedging we did last year,” said Bérangère Michel, John Lewis’s finance chief.
The mutual warned that under a “severe downside scenario”, where a deep recession takes hold, it may be forced to seek permission from lenders to break rules governing some of its debt, which is currently undrawn.
“We’re not concerned at all,” insisted Michel, who said the business still had “significant headroom” in the terms around its £420m credit facility.
White is already grappling with a £1.6bn net debt pile as interest rates go up, with £350m of borrowings due to be repaid in the next three years.
Under existing plans for an overhaul, the partnership is already expected to deliver cost cuts of £300m this year as it becomes “leaner” and more efficient.
But it has also agreed to pay more to suppliers, and the decision not to pass all of the extra burden to customers means further savings must be found elsewhere to balance the books.
All this means that getting shoppers through the door this Christmas has become more important than ever, with both chains focusing relentlessly on value.
National advertising campaigns for Waitrose’s Essentials range boast of “quality you’d expect, at prices you wouldn’t”, while John Lewis’s Anyday homeware and clothing products aim to attract younger customers who may otherwise find its merchandise too dear. Anyday products include bath towels for £15, a desk and office chair set for £95 and a 12-piece porcelain dinnerware collection for just £20.
In a bid to assuage concerns about affordability, John Lewis is investing £500m into prices and is making more credit lines available to buyers, lowering the threshold for interestfree loans from £1,000 to £500.
“We’re also looking at more promotions on big-ticket items,” said Pippa Wicks, who runs the department stores.
The Christmas advert, meanwhile, is seen as more crucial than ever.
Last year’s effort, titled “Unexpected Guest”, followed a young boy as he introduced a visiting alien to traditions such as mince pies, tree decorating and – to some confusion – novelty jumpers.
James Bailey, who runs Waitrose, said it would be a “terrible idea” to cut the ad budget as the business will simply become “less visible” to shoppers. John Lewis is also aiming to ensure shelves are fully stocked after two years of supply chain disruption left empty spaces in some stores. Most of its Black Friday and Christmas stock is already in the country.
Bosses are scrambling to improve customer service as well, with the slew of job cuts in the past two years prompting concerns that the company’s famously high standards are fraying. Yet there are fears that the squeeze on customer budgets has come at the wrong time not just for the retail sector at large, but for the John Lewis Partnership in particular, with Dame Sharon’s overhaul leading the company into new areas in which it is not established.
Since taking over as chairman in 2020 – weeks before the coronavirus pandemic upended the British economy – she has vowed to push into gardening, financial services and even housing, with empty stores converted into affordable apartment blocks.
Those moves now look questionable when she has placed so much importance on the company’s performance this Christmas, says independent retail analyst Richard Hyman. “By focusing on those other areas, they have by definition got less of a focus on retail,” he adds.
“Retail is not a business for the faint-hearted. In order to do well you have got to take business from the people next door and in order to do that you have to be better than them. It is hard not to interpret the current John Lewis strategy as a diminution in their commitment to retail.”
Despite Prime Minister Liz Truss’s blockbuster intervention to support households with their energy bills, it is still unclear how much customers will rein in spending this festive season.
Economists remain split over when a recession will come and how deep it will be, but the National Institute of Economic and Social Research this week warned inflation “continues to burn a hole through consumer pockets, drag on economic growth and intensify economic uncertainty”.
In her remarks yesterday, Dame Sharon acknowledged that the partnership’s fortunes are partly tied to a still-uncertain economic picture.
But in a rallying cry, she also reminded partners: “Time and again we have been tested as a group. We have always come through – and stronger. We will do so again.”
‘Time and again we have been tested as a group. We have always come through and – stronger. We will do so again’