It has taken more than 50 years for the John Lewis Partnership to tap into product synergies across its department store chain and upmarket supermarket Waitrose.
But JLP, which has seen profits fall continuously since 1998 from a peak of £250.3m, needs to save costs wherever it can, as margins come under increasing pressure. It has warned that for the year ending January, it will fall short of last year’s £150m pre-tax profit.
This week, for the first time, the Waitrose brand has begun to appear in John Lewis stores. Waitrose branded washing powder, conditioner and other laundry cleaning and personal hygiene products are now on sale in John Lewis.
It would be logical for the relationship to work the other way. Pots and pans on sale under established brand names in standard Waitrose stores could be replaced with kitchen equipment tagged with the John Lewis name or the department store’s own-label brand, Jonelle.
The benefits are obvious: retailers achieve higher margins on own-label goods. JLP will also be able to reap rewards from a simplified supply chain and cross-marketing opportunities across the John Lewis and Waitrose businesses – both of which appeal to an ABC1 customer base.
A spokesman for John Lewis says: “We were looking at some of these products for a packaging review and considering how best we could source them.” It makes sense, he says, to be supplied by “one of the best” product labels.
Richard Perks at Mintel Retail Intelligence says: “Traditionally they [John Lewis and Waitrose] have been run as two separate businesses. They are rather different businesses and the product overlap between the two is minimal.
“But they do have the same customer base unlike M&S, whose clothing does not target exactly the same customers as the food.”
Whether the cross-over in own-branded products will result in Waitrose food lines appearing in John Lewis stores is debatable. Analysts see John Lewis as being in the business of non-consumables rather than food. And a Waitrose insider adds that food would not deliver the requisite turnover to justify the necessary store space in the department stores.
But conversely, JLP already operates two stores under the brand Waitrose Food & Home, which stock a range of home products sourced from John Lewis including china, glass, electrical goods, lighting, toys and furniture – with the Jonelle brand accounting for the bulk of the merchandise. JLP is due to open two further Waitrose Food & Home branches, at Canary Wharf and Cheltenham this year.
The merchandise will be extended for the first time to include clothing. It is not clear which brand will be used on the limited range of men’s, toddlers’ and sports clothing. John Lewis has a number of brands apart from Jonelle.
Richard Hyman, chairman of Verdict Research, does not believe that Waitrose or John Lewis customers will get confused if they see brands appearing in both outlets. He says: “I think that among John Lewis shoppers and Waitrose shoppers there’s a very, very high recognition of the fact that they are all part of JLP and I don’t think there will be confusion.”
Analysts have mixed views on Waitrose Food & Home stores. Hyman says: “I would have thought if they had been a raging success, JLP would have opened them more quickly.”
But he adds that JLP is known for waiting for the right retail site to appear.
Furthermore, JLP is not a public company able to raise large amounts of cash through the City to fund a rapid expansion drive. Its assets are controlled by a trust and the profits from the company are paid out annually to employees. This structure will have militated against chairman Sir Stuart Hampson being forced out because of the continued fall in profits. David Stoddart, an analyst at Teather and Greenwood, admits that if JLP was a public limited company then Hampson “would be under pressure” from shareholders.
But Hyman says: “It’s very important to view a downward trend in profits in the context of the store chain out-performing the majority of its competitors.”
He claims the decline in profits over the past four years is “not a disaster” and that it coincides with high investment in physical expansion. The department stores are being refurbished and, in some cases, rebranded John Lewis at a cost of £200m over the next few years. Analysts are agreed that there is a constant need to update department stores.
Hayman also claims that JLP was hit by the fall in retail trade following the September 11 terrorist attacks in the US. In fact, for the six months to July 28, 2001, JLP saw pre-tax profits rise 15 per cent to £44.1m and group sales increase by ten per cent to £2.1bn. Sales at John Lewis increased by seven per cent, despite price deflation and at Waitrose they were up 13 per cent, boosted by the acquisition of 11 former Somerfield stores. But in the half year to January 26 the 26 department stores failed to meet an ambitious sales target increase – set in May 2001 – of 9.4 per cent, while Waitrose exceeded expectations.
The group, as a whole, is set to absorb £30m in costs related to its Internet ventures which have yet to make a profit. John Lewis bought the UK version of buy.com last year, but is to shut it down in March and merge it with the existing home-shopping service, johnlewis.com. The company has also acquired a stake in Ocado, the Internet food retailer.
The investments came at a time when other companies were either bailing out of Internet operations or cutting back on investment. But JLP has set a target for its Net operations of £50m in sales within the next five years.
One factor in JLP’s favour is that its customers are considered by analysts to be extremely loyal with Waitrose, despite the absence of a loyalty card. It scores the highest among supermarket brands in Verdict’s latest loyalty research.
However, the group, like Marks & Spencer, has recognised that the market is more competitive. In order to attract new consumers at existing sites, as well as at new stores, it has had to invest more heavily in advertising. Both John Lewis and Waitrose have increased their spend with the supermarket advertising on TV for the first time last year. Once the department store chain has rebranded the majority of its outlets to the John Lewis name, it may also consider using TV as a medium to drive sales.
This could lead to the John Lewis and Waitrose brands becoming more connected through advertising, as well as in store.