John Lewis profits slump as shoppers demand price cuts

Stores group is likely to face renewed calls to demutualise as the fall-off in earnings hits staff bonuses

John Lewis Partnership, the department store company which owns the Waitrose supermarket chain, is celebrating its golden jubilee year. But there were no champagne corks popping yesterday as the distinctly middle-class retailer unveiled a 43 per cent slump in first-half profits, despite a 10 per cent boost in sales. This continues a two-and-a-half year decline in earnings.

John Lewis Partnership, the department store company which owns the Waitrose supermarket chain, is celebrating its golden jubilee year. But there were no champagne corks popping yesterday as the distinctly middle-class retailer unveiled a 43 per cent slump in first-half profits, despite a 10 per cent boost in sales. This continues a two-and-a-half year decline in earnings.

Sir Stuart Hampson, John Lewis's chairman, who swapped his high-powered civil service job for the frumpy world of home furnishings 18 years ago, blames the poor performance on a mixture of one-off charges and deflationary pressures. He is confident that the good times will return. But, as controversy continues to surround the group's antiquated ownership structure and outmoded management practices, other industry observers are not so sure.

There are several serious issues which could hamper John Lewis's much-needed turnaround. The first is a sea change in consumer behaviour which has seen department store customers switch their attention away from traditionally high-margin clothing items towards lower-margin products such as electrical goods.

In the half-year period, John Lewis's sales of audio and television appliances leapt as much as 28.7 per cent compared with the previous year, while demand for electronic goods and cameras soared 36.9 per cent. Conversely, sales of dresses, bridalwear and outerwear fell by 23.8 per cent, while other womenswear items dropped by 20.7 per cent. Overall, department store sales rose by 8 per cent to £878.3m, while turnover at Waitrose was up 11 per cent at £999.6m.

Like most high street retailers, John Lewis has been bruised by static or falling prices. Sir Stuart says: "The sales graph doesn't tell the whole story. We're still selling many lines at prices well below those of last year, yet the cost of making those sales doesn't stand still."

Honouring its longstanding motto "Never knowingly undersold", John Lewis has been forced to cut the price of an average TV set from £349 last year to £299 this year as it fights to compete with the aggressive discounting of Wal-Mart, the retail giant. At the same time, the group has refused to cut corners on service, and continues to offer customers the option of free home delivery for larger items.

The outcome was yesterday's figures for the six months to 29 July which showed a slump in pre-tax profits from £67.7m in 1999 to £38.5m. Adjusted for one-off items, the underlying decline was 18 per cent.

Contradicting the upbeat comments of Next, the clothing stores group, which earlier this week claimed that price deflation was a thing of the past, Sir Stuart said: "We are not assuming that [the pricing environment] will get any better.... The market will remain competitive."

But while the John Lewis boss continues to grapple with external pressures, industry observers say his greatest troubles lie within the business, in particular its distinctive partnership structure.

It is a year since Sir Stuart fought off an emotional campaign for the group to demutualise, a move which could have triggered £100,000 windfalls for many of John Lewis's 50,000 employees. He insists that the issue is now dead and buried: "It has not been spoken about internally for a year."

Legally, he insists, a dissolution of the partnership would not be possible since it is technically owned by a trust which was set up by Spedan Lewis, son of the original John Lewis, to make all staff beneficiaries in the group's profits.

But the spectre of Paul Fineman, the rebel partner who led the call for demutualisation and who was dubbed "the Che Guevara of the Peter Jones bedding department" still remains. As Sir Stuart himself warns, the collapse in group profits is expected to continue into the second half and will almost certainly lead to a cut in the annual bonuses enjoyed by John Lewis partners. With disgruntled staff already reeling from a 3 percentage point cut in handouts last year, when they fell from 22 per cent to 19 per cent of base salaries, the carpetbaggers could be set to make a determined come back.

Richard Perks, a senior analyst at Retail Intelligence, the specialist research firm, says: "Of course there are always people around who are looking for a swift buck. But I would be upset to see that sort of reaction to one set of poor results."

Even if Sir Stuart does manage to contain any second staff rebellion, he still faces the continued challenge of reconciling his role as a benevolent capitalist, entrusted by the company's constitution to ensure the happiness of its employees, with the necessity of maintaining his status as a serious player in the cut-throat retail market.

His lot was not helped by yesterday's revelation that the Central Council, the elected group of representatives who represent John Lewis's partners, had forced the company to provide for a cost of £6m in the half-year to meet new arrangements for accrued holiday pay. Mr Perks said: "I'm just amazed. It does seem like a mixture of being archaic and altruistic. It's quite bizarre." Other (more routine) exceptional charges knocked a further £14m off interim profits.

Richard Hyman, chairman of Verdict Research, says the partnership structure can place heavy constraints on the way that Sir Stuart and his team are able to manage the company: "It does make it more difficult for them to keep a lid on things like wage costs."

Mr Hyman says that if John Lewis is to avoid the same fall from grace as other retailing stalwarts such as Marks & Spencer and J Sainsbury, it must wise up to the realities of the modern world. "I think John Lewis still has a competitive edge in all its markets, which buys it a bit of time. But it has got to become more outward looking and start taking its competitors a bit more seriously."