Why does John Lewis want to scrap its partnership?
By its own telling, the John Lewis Partnership’s staff-owned structure is what makes the beloved British business so special.
The firm’s constitution, first drawn up by John Spedan Lewis in 1928, pledges to work towards “a happier world” under the complete ownership of more than 70,000 partners who make up the workforce.
Yet desperate times call for desperate measures and the situation, it seems, is becoming increasingly desperate.
Dame Sharon White, John Lewis’s chairman, warned this week that inflation had hit the business “like a hurricane” as she scrapped the year’s staff bonus and announced a fresh round of job cuts.
Now Dame Sharon, a former top civil servant who joined John Lewis in 2020, is reportedly mulling one of the most radical options possible: selling a stake in the business, which would dilute the holding of employees for the first time in a century.
Selling a chunk of the debt-ladened business would allow it to raise between £1bn and £2bn to reinvest, according to the Sunday Times, which first reported the plans.
However, the seismic proposals would weaken the power of staff within the business and could pave the way for demutualisation of the business, some speculate.
Under the current model, John Lewis’s 74,000 employees share the running and profits of the business, making it the biggest employee-owned company in Britain.
There is no mechanism to raise capital from partners, or to do so by selling new equity, leaving John Lewis restricted to borrowing on commercial terms if it needs to raise additional capital.
In fact, the existing constitution expressly forbids the partnership and its bosses from taking actions that “risk any loss of financial independence”.
Selling part of the business is sure to fall foul of this clause and the proposals would require a change of the constitution, which must be approved by two thirds of staff.
A source told the Sunday Times that the priority in any potential deal will be to ensure employees retain majority control, while prospective investors will need to have an affection for the retailer and its many “quirks and eccentricities”.
Yet White and the board may not be in a position to dictate strict terms.
“Looking at potential new equity investors is an indication of distress, not strength,” says Clive Black, a retail analyst at Shore Capital.
“John Lewis is a loss making business and it's got a reasonable amount of debt. Frankly, this is an indication that they are running out of runway.”
Despite a post-pandemic bounceback in visits to its shops, John Lewis and its supermarket Waitrose are still struggling to regain momentum. Sales fell 2pc in 2022/23 and annual losses ballooned from £27m to £234m.
Pressure from debt is also mounting. According to the latest results, the partnership’s £1.7bn debt pile is now 4.1 times the value of its assets, up from a multiple of 3.9 in 2019/20.
One seasoned private equity investor says a retail business with a large physical store presence is not particularly attractive, especially at a time when rising interest rates have made markets more risk-averse.
However, the John Lewis brand still carries enough weight that “people will definitely take a serious look”.
How much leverage the John Lewis board has over a potential investor depends on how many bidders there are.
In order to secure the necessary investment, the board may be forced to compromise on principles that have underpinned the business for more than 100 years.
That could even entail demutualisation and conversion to a for-profit, limited company, with an outside investor handed dividends or guaranteed that they will be paid a certain price per share should partners seek to buy them out in future.
To some, these kinds of changes are antithetical to the very essence of John Lewis.
Neil Saunders, managing director of GlobalData Retail, tweeted on Sunday: “While I understand the financial challenges, I am opposed to this.
“The partnership’s aim should not be to turn itself into any other old retailer. I think the business has made quite a few bad calls lately and this looks like another one.”
Critics say John Lewis’s woes are not only down to tough industry conditions, but poor management of its store estate and a neglect of the qualities that used to set it apart from rivals, such as customer service.
Many observers believe it still has too many shops, weighing it down with costs. Shops that bosses would like to keep are in dire need of an upgrade. Bringing Waitrose stores alone up to scratch, with self-checkouts and other measures that will improve efficiency, could cost the company as much as £250m.
Black says: “If they can bolster the balance sheet, it might give them the resources and options to deliver a brighter future.”
However, the business is also facing structural problems: department stores around the world are struggling to find their place in a world increasingly dominated by online sales.
“John Lewis has gone from being a brand that everyone felt really warm about, to one where you now question: If it didn’t already exist, would someone invent it?,” adds Black.
“What was a culture centred on customers has almost become a retail social club with a sense of entitlement around a bonus and a pension – and I think a lot of shoppers would say the experience isn't what it used to be.”
Dame Sharon has been trying to position the group for the future but change is hard. Pippa Wicks recently departed as John Lewis managing director after a culture clash and turnaround expert Nish Kankiwala has now been drafted in as the partnership’s first group-level chief executive to try and supercharge transformation.
The private equity investor argues that bringing in other parties could force John Lewis to confront some of the difficult choices it has put off for years.
“Clearly, what they're doing at the minute is not working,” the source adds. “Not only do they need capital, they need fresh ideas.”
Shore Capital’s Black agrees. “John Lewis needs resources to survive and necessity is the mother of invention.”
A John Lewis Partnership spokesman said: “We've always said we would seek partnerships to help fund our transformation and exciting growth plans. We've done this with Ocado in the past and now with abrdn.
“Our partners, who own the business, will be the first to hear about any developments.”