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Is John Lewis in danger of turning into an Argos for the middle classes? That was the charge put to management last week as the staff-owned group embarked on an overhaul that will involve more department store closures.
Instead of its familiar, large, multi-storey shops, the business is planning to add dozens of John Lewis-branded areas among the groceries at sister chain Waitrose. The set-up is akin to Sainsbury’s relationship with its Argos brand.
Last year, John Lewis closed eight branches, including a £35m store in Birmingham that had opened – with much fanfare – only five years earlier. Now up to eight more of the remaining 42 could be axed, after chair Sharon White said that there was “no getting away from the fact that some areas can no longer profitably sustain a John Lewis store”.
Before the pandemic, John Lewis estimated that £6 in every £10 spent on its website was prompted by a visit to one of its shops. Today that ratio is £3 in every £10 as the pandemic has tilted the world towards the web. Shopping habits had changed “irreversibly”, White said.
The shoppers it has polled told them that, post-Covid, they want to get their John Lewis fix closer to where they live, in more convenient locations. But what shoppers say now and what they might feel like doing in 12 months’ time could be two completely different things. After a year of browsing websites, they may welcome being able to physically go shopping again.
In some ways White, who had previously been a career civil servant, seems a reluctant retailer. She cites declining retail margins and has set a target of generating 40% of profits from a string of new ventures including garden centres, financial services and even social housing.
The John Lewis partners are what makes the business special – their skills enabling shoppers to navigate a big purchase
Such pessimism seems in danger of ignoring the opportunity. John Lewis looks to be the last man standing among the mass-market department store chains. Debenhams is no more and House of Fraser has not prospered under Mike Ashley’s control.
John Lewis is currently negotiating with landlords over the at-risk stores, and some argue it has a window of opportunity to take advantage of plummeting shop rents and grab a bigger share of the market.
In normal times its department stores take between £40m and £100m a year. Who’s to say, once the health crisis is over, that the relationship between stores and website won’t recalibrate again?
White admits that “no one has a crystal ball” to predict how the economy will recover in the coming months. So is now the time to make a call on the future of retail? And what of the staff, the partners – those for whose benefit the whole model is designed to work?
The £517m loss for 2020 – after nearly £650m of one-offs as it slashed the book value of the John Lewis store estate – meant the partners did not get their annual bonus for the first time in 67 years.
That was despite the fact that, underneath the bonnet, the retailer actually did quite well given the circumstances. The expectation is that staff won’t get a bonus next year either, given plans to invest £800m on revamping the business.
The John Lewis model is supposed to be what makes the business special – with partners’ selling skills enabling shoppers to navigate their way through a big purchase. It’s hard to see how that translates to online shopping, where human contact is reduced, or to a supermarket, where purchases are loaded into a trolley. It seems like a downgrade.
Pippa Wicks, boss of the John Lewis department stores, was emphatic: “We are absolutely not the Argos of the middle classes.”
Time will tell.
Rolls-Royce will need to act fast to keep flying
For a period last spring as the coronavirus’s global reach became clear, Rolls-Royce was in serious peril. Most of its jet engines were grounded, which meant the manufacturer was deprived the of the regular revenues it gets for servicing them, and it became clear that drastic action was needed.
A year on, the steps Rolls-Royce took appear to have just about done the trick, despite a £4bn loss in 2020. Successive fundraisings have shored up its balance sheet, and it can now draw on £9bn in cash or credit. Redundancies for 7,000 workers have dented morale, but lower costs are starting to feed through to the finances.
Warren East, the boss of the Derby-based manufacturer, felt confident enough last week to declare that “the worst is behind us”. That may indeed be the case, but any deviation from the expected swift recovery path could spell trouble further down the line.
East predicted positive cash flow, a key metric for analysts, by the start of next year. Generating cash again is important because of the constant need for expensive development of new engines. Those needs will rise as Airbus and Boeing make decisions on the next generation of aircraft, as well as belatedly accelerating efforts to lower the carbon footprints of planes.
The pandemic has already made Rolls-Royce push back some investments, but every delay to its next-generation UltraFan engines raises the risk of them becoming outdated soon after launch. A growing portion of research and development investment – 20% by 2023 compared with 7% now – will go towards “lower-carbon” technologies.
The sooner these are developed the better. If a delay to the recovery in air travel forces Rolls-Royce to put off investments further, it could be bearing the costs of the pandemic for longer still.
Deliveroo delivers, but Royal Mail makes a profit
Which would you prefer to own? Delivery company A was founded in 2013 and made an operating loss of £224m last year. Its shares will soon be available at a valuation of £7bn or thereabouts.
Or would you prefer company B? This one can trace its origins back 500 years and, although it hasn’t always made profits, it is currently spitting them out – £700m at an operating level this financial year, it said last week. The valuation is lower too: £5bn.
There are no prizes for guessing that we’re talking about Deliveroo and Royal Mail, a duo that have little in common other than the fact that they are in the delivery game. Both, though, are lockdown winners. Deliveroo has enjoyed the boom in food takeaway orders while Royal Mail, despite being hit by the collapse in the volume of letters in the UK, has found that the surge in parcels has more than compensated. The postal service’s share price has trebled in the past 12 months.
Both companies, it should be said, come with industrial relations headaches. Royal Mail, however, reached agreement with the CWU union on a pay, jobs and working practices deal last month. At Deliveroo, investors can’t be wholly confident what the courts will decide next on the rights of self-employed riders.
Royal Mail, of course, is a regulated business and has heavy investment and modernisation demands, so there are natural caps to the returns it can generate. Deliveroo is fleeter of foot with lower capital demands, grew its value of transactions at 64% last year and doesn’t have to answer to anyone. The sky, in theory, is the limit.
But look at those operating figures again – a £700m profit versus a large minus number. Maybe Deliveroo will overtake on that measure one day, but a £7bn valuation in its current form looks extremely punchy.
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