Store partners see profits sinking in the suburbs: The Waitrose supermarket chain, grocer to the middle classes, has been hit by a fall in sales and a decision to shun Sunday opening

WEYBRIDGE, Beaconsfield, Dorking, Marlow, Wokingham, Godalming, Bromley . . . the roll-call of Waitrose supermarkets sounds like a journey through the leafy suburbs of the Home Counties. If ever a grocery chain has targeted the middle classes of the South-east, it is Waitrose.

Waitrose's recent fortunes have plunged as unnervingly as those of its white-collar customers. Its underlying sales are falling, its profits are down and its staff are fed up.

In some shops up to one-third of customers have deserted to rival superstores, tempted by keener prices, longer opening hours, quicker queues and the chance to shop on Sundays. While most supermarket chains now open seven days a week, Waitrose refuses to countenance the idea.

Waitrose is different. Founded in 1906 by Messrs Waite, Rose and Taylor, it was bought in 1937 by the John Lewis Partnership, Britain's biggest worker co-operative. John Lewis has no shareholders to please. Instead its 30,000 employees are 'partners'.

Stewart Hampson, chairman, this week warned staff: 'Let us not duck the issue: Waitrose is suffering from the combined effects of sales eroded by burgeoning competition, illegal Sunday trading . . . and the weight of capital investment in scanning and new distribution chain improvements.' Waitrose's profits fell to pounds 41.7m in the year to 30 January, its lowest for five years, on sales of pounds 1.15bn. He said that 'the short term carries the strain', a hint that the annual bonus may have to be cut again.

The bonus has been an important component of pay, rising to more than 20 per cent of annual salaries in the late 1980s, enough to finance an exotic holiday for the humblest shelf-filler. But it has fallen every year now for five years, sinking to a 33-year low of 8 per cent last year.

Mr Hampson says Waitrose is losing pounds 1m in sales every week because of Sunday opening by rivals. But other supermarket groups insist that Sunday opening is not the real cause of Waitrose's problems. Its underlying sales record over the past five years is one of the poorest in the industry. Privately they say Waitrose management has been sleepy and has under-invested in the business. According to one rival: 'It's full of ex-RAF officers and civil servants rather than entrepreneurial types.'

Only one of Waitrose's 103 supermarkets has scanning machines - which make pricing, stock control and automatic re-ordering more efficient - at the check-out.

Belatedly Waitrose has realised it needs to catch up and has earmarked pounds 20m to introduce scanning over the next two years. It is also investing in its two distribution centres.

It is also lengthening its opening hours. But again it has trailed its rivals, some stores extending their hours only last October. Customers complain about having to pay for parking in some town-centre stores where the car-parks are operated by local authorities.

No one at John Lewis would admit that paying record bonuses in the 1980s might have been a mistake, that the money should have been re-invested. But Waitrose is now looking weak - hamstrung by its inability to raise capital on the stock market and its unique constitution, which makes closing loss-making stores difficult.

Waitrose still has an unrivalled customer base and still equals the best in the business in one key measure of performance: sales per square foot.

But competition is intensifying. Bill Myers, food retailing analyst with the stockbrokers Henderson Crosthwaite, said: 'A possible solution is for John Lewis to think the unthinkable. At the moment Waitrose is exceedingly saleable but it will become less so as Sainsbury, Safeway, Tesco and Iceland step up the artillery barrage.'

John Lewis said the question did not arise: 'Waitrose is a first-class supermarket with a good future.' But hanging on could be a mistake, warned Mr Myers: in three to five years problems at Waitrose could be so severe as to threaten the entire John Lewis Partnership.

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