John Lewis morale might be up, but profits are down

I’d wager John Lewis staff are amongst the happiest in the UK, with every employee being rewarded an extra seven weeks pay this week, as part of the Partnership’s bonus scheme. But how happy is the business underneath that?

At a time when bonus culture, particularly in the banking sector and amongst the top level top retail execs is getting a lot of bad press for not reflecting what is truly deserved, John Lewis is getting it right.

Granted, this year’s bonus is less than in previous years – a reflection of falling profit at the retail group – but employees elsewhere in the retail industry, or other sectors, would be thrilled.

By giving everyone from the bottom to the top the same proportional bonus, 14% of annual salary this time around, each member of staff feels equally valued for their part in the business.

Consequently, by rewarding shelf stackers and directors alike for their hard work, and giving them a portion of the profits, the bonus has the effect it is designed to do – namely motivate staff and encourage further hard work and success in the business.

While it might be good for the business in terms of staff, underneath those figures though, the falling profit across the business signals that despite strong performance in the downturn, something might be giving at John Lewis.

John Lewis and Waitrose, emerged as the darlings of the recession. Waitrose, which was expected to do badly due to its relatively high price point compared to other grocers grew phenomenally well through clever operations and marketing initiatives such as brand matching the supermarkets that meant it stayed relevant and more successful than ever.

Ditto John Lewis, which has made the nation fall in love with its TV ad campaigns that rather than push products and consumerism, stir up emotions and warm fuzzy feelings towards the brand. It has also been able to offer wallet-friendly value by matching rival’s prices through the Never Knowingly Undersold pledge, without cheapening its brand by shouting about slashing prices.

John Lewis warned in its previous results that increased promotional activity in the market would mean profits would be hit as it continued to match the discounted prices offered by competitors. In the full year to 28 January operating profit across the group was down 8.7% at John Lewis department stores it was down more than 20%.

On top of the ever increasing cost of its price matching promise, Never Knowingly Undersold, the group has invested £381m in benefits for staff in the past year, to further motivate, as well as increased investment in systems, operations and innovations that it says will drive future efficiencies in the business. The question is, when will John Lewis see the pay off from its long-term investments against the short-term impact on profit.

The retailer hasn’t yet shown any signs of shifting away from Never Knowingly Undersold and it’s almost unthinkable that it would step away from its investment in employees, but at what point does a business like John Lewis say enough is enough – our profit cannot take another hit?

For a short time a successful business can take a hit on profit to secure its long-term health, but it cannot do this for too long, before it becomes an unsuccessful business.