John Lewis takes partners along on road to revival

Despite emerging later from recession than its rivals, the non- quoted retailer now looks set to prosper, writes Richard Phillips standfirsty standfirsty
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"NEVER knowingly undersold" is a severe discipline to live by, says the John Lewis chairman, Stuart Hampson. But not, it seems, one that hinders the company's performance.

Last week, it reported pre-tax profits of £116.8m for the year to 28 January, up 25 per cent. That follows a 31 per cent profits increase last time.

So the good times seem to be returning, at a business that was once widely accused of having missed the so-called retail revolution engulfing the British high street. And that has drawn a huge sight of relief from the stock market's army of retail analysts, who follow John Lewis closely because it releases monthly trading numbers that reinforce its status as a gauge of consumer trends and confidence.

Could the partnership concept - which holds its employees in an all but cradle-to-grave embrace - have found a role for itself itself again in the 1990s? Mr Hampson has an almost religious zeal for the benefits of partnership. "We do not need to satisfy the short-term requirements of external shareholders, like pension funds. Equally important, it reduces conflict. There is none of this management versus staff opposition that can happen in other places."

Nor does partnership mean a surrogacy for trade unionism, he emphasises. "What we have is true industrial democracy."

He grants that this can mean decisions take longer than at rivals. "Everybody must have the chance to participate in the decision-making process," he says. But the upside is that when agreement is reached, implementation is swift. "Partnership, having employees as shareholders, means we have complete unison. When a decision is made, everybody is pointing in the same direction."

It also means everybody has a real stake in the business, he adds. "That allows everybody to create success."

During the late 1980s the profits of John Lewis evaporated in the recession as surely as those of its peers. But the company's recovery has been more drawn-out than those of rivals. Its pledge to offer a broad range of goods in its department stores means it has been hit hard by the slump in the housing market. Last year was the first sign of recovery in furniture sales, which account for two-thirds of department store volumes.

While the likes of Sainsbury and Marks and Spencer dusted themselves down and returned to healthy profits, John Lewis seemed to struggle.

And its Waitrose supermarket chain - which contributes about a fifth of profits, despite accounting for almost half of group sales, because of its low-margin mix - failed to respond to the challenge of the price cutters. It had also "ludicrously underinvested in new technology", says David Shriver, an analyst at NatWest Markets.

Finally, John Lewis took a strong line against Sunday trading - a move that its competitors loved.

Consequently the partnership bonus, a litmus test of the company's well- being, reached all-time lows. In 1992, it had fallen to 9 per cent, the lowest level since the Korean War. By 1993, it was at 8 per cent. Last year, was the first sign of an upturn.

For an organisation that prides itself on putting its staff first - they are, in theory at least, also the shareholders - it was bitter medicine to swallow.

Its culture, too, had seemed under threat in the brash climate of the 1980s. New retail formats flourished, while the John Lewis concession to the yuppies was to expand the range of exotic fruit and vegetables on sale in Waitrose. Peter Jones of Sloane Square, naturally, never lost its attraction for the women that lunch.

But otherwise, John Lewis seemed increasingly outdated, and its paternalistic values outmoded in the era of Thatcherite entrepreneurs.

Now, though, the balance seems to have swung back in its favour. When the 1980s bubble burst, it sorted out the stayers from those with less stamina. Value was back in fashion - and, as its famous "never knowingly undersold" slogan implies - that has always been a prime John Lewis selling point. That is why it is still here, and expanding, while many of its high street competitors have disappeared or retrenched.

Last week, the annual partnership bonus edged ahead to 12 per cent of annual pay - a £43m pot shared among the 34,000 partners. The year before, the bonus was only 10 per cent.

Waitrose's hesitancy in investing in new technology looks less foolhardy and more like a calculated gamble that may pay off. Most of the stores have been fitted with state-of-the-art equipment; the rest are to be upgraded by the year end. And it has begun Sunday opening at many branches, with others due to follow suit later this year.

The business must be unique among big private-sector employers in boasting five out of its 12 current board directors that have Civil Service backgrounds, or in one case, the RAF. Mr Hampson himself worked for the old Board of Trade for 13 years and was a high flyer at the time of his departure in 1982. Finance director, David Young, served at the Ministry of Defence from 1963 to 1982.

What is it about John Lewis that allows former civil servants to flourish? Mr Hampson says top-flight civil servants are increasingly making their mark in British industry, and points to Robert Ayling, managing director at British Airways and a contemporary of his at the Board of Trade. But he also accepts that the less aggressive John Lewis atmosphere may benefit public-sector recruits as they adapt to commercial mores. Because it is unquoted - and with no intention of changing that - John Lewis is much more a law unto itself, taking a longer-term view than retailers with a stock market quotation that relentlessly questions their strategy, as Kingfisher has found recently.

NatWest's Mr Shriver says the latest results are impressive. "What the numbers show is that the group is feeling a lot more confident. Sunday opening will give it a one-off gain, but the pressure on sales at Waitrose has been alleviated." In Mr Hampson's words: "We are not asleep."