John Lewis must accelerate move towards own-brand to protect profits, says GlobalData

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Following today’s release of John Lewis & Partners FY figures for 2018/19, Zoe Mills, retail analyst at GlobalData, a leading data and analytics company, comments: ‘‘For the sixth year in a row, the John Lewis Partnership has cut staff bonuses (from 5% in FY2017/18 to 3%) after the retailer reported a 55.5% fall in profit before tax and exceptionals. This comes as the partnership faces continued cost pressures despite Waitrose’s operating profit rising 18%, as its department store business bore the brunt of heavy discounting during Black Friday and poor performance in its home division.

“Its ‘never knowingly undersold’ price match promise, despite being commendable and a key point of differentiation, will continue to plague profits unless, as it has within clothing, it rapidly moves towards more brand exclusives and own-brand products, getting closer to its target of 50% of products. With House of Fraser and Debenhams both struggling and John Lewis reporting muted results with revenue growing just 0.7% to £3,887.2m, it is clear that the overall department store model needs to be revamped to ensure future longevity.

“Across John Lewis & Partners’ core categories, performance was mixed. Fashion achieved strong growth, boosted by the retailer’s expansion of own-brand collections including its John Lewis & Partners womenswear range as well as AND/OR and Modern Rarity, driving own-brand womenswear sales to increase 12.9%. These ranges will have gone some way to protect profit margins, while also highlighting that among department stores, investment in own-brand collections can be worthwhile when they resonate with core customers.

“Its home division pulled down the department store retailer’s overall results with John Lewis & Partners stating that subdued consumer confidence reduced demand for big ticket items and bespoke pieces. However, while consumers have been wary of spending on larger furniture items value-focused retailers, such as IKEA and design-led players like Made.com, are stealing share as they offer innovative and aspirational pieces.

“Recent trading has been difficult with growth in the past week driven by significantly better weather in 2019 compared to last year. However, while its competitors are plagued with vast store estates John Lewis & Partners has kept tight control on its physical store portfolio, announcing the intended closure of its Knight & Lee & Partners branch in Southsea in July 2019. This will help to safeguard its profit margin and highlights the importance of its strong online proposition that through an efficient delivery offer and its network of Waitrose & Partners stores can cater to a wide population including those with no access to its network of 51 shops.”

Commenting on Waitrose’s performance, Thomas Brereton, retail analyst at GlobalData, a leading data and analytics company, comments: “Despite the enduring turmoil in the premium food space, Waitrose & Partners has successfully rebounded from its -32.7% profit fall in 2017 to deliver growth this year, converting a £74.8m rise in revenue (to £6.4bn) into a double-digit rise in operating profit (before exceptional items) to £203.2m. Crucially for the JL Partnership’s chairman Charlie Mayfield (who is due to depart the business in 2020), the improvement of gross margins at Waitrose has done enough to offset tumbling profit at its non-food sibling John Lewis, and allowed the Board to issue a 3% partner bonus, rebuffing speculation that the bonus would be dropped this year.

“Waitrose has endured the troubles in upmarket retail through inventive product innovation, accelerated in 2018 to include rapid expansion of its free-from ranges, increasing the number of vegan SKUs 60% throughout the year with the likes of own-label fishless fingers. Furthermore other innovation has been impressively “outside the box”, looking at steps such as robotic farming, agricultural AI and aeroponic in-store displays. This ongoing strategy is more akin to online rival Ocado than its Big Four competitors, and will stand it in good stead for the long-term.

“With respect to overall strategy in 2019, Waitrose & Partners will likely epitomize the change in retail from physical to online, having already identified five stores that it would like to dispose of this year and full-year commentary strongly focused on further investment in Waitrose.com and smartphone apps. And this is the right move for Waitrose; although online sales are growing at 14%, penetration is only at 7.1% – notably below the 9.4% online penetration for the overall grocery market. With its partnership with Ocado set to end in 2020 (replaced by close rival M&S Food), Waitrose are now looking to stand on its own two feet in online food retail, a logical strategy given the overall online grocery market’s 9.3% growth in 2018.”