Why John Lewis’s new boss could be in for a tough ride

With falling profits, planned staff cuts and concerns over its online operation, John Lewis’s newly appointed managing director Paula Nickolds inherits the department store chain at a challenging time.

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Earlier this week, John Lewis announced that former marketing director Paula Nickolds would replace Andy Street – who is departing for the world of politics – as managing director.

Nickolds is “just what’s needed for the next phase of modern retailing”, according to Sir Charlie Mayfield, chairman of the John Lewis Partnership, who also praised the experience of a woman who has been with the business for more than two decades.

However, Nickolds’ transition won’t be as easy as it sounds. For the six months to 30 July, John Lewis saw a 75% fall in profits to £56.9m, something it blamed on “deep structural changes to the retail market”.

And although this included a £25m charge for the write-off of sites it no longer intends to develop, if you strip this out profits were still down by 15%.

Read more: Three ways brands can learn from John Lewis’s loyalty success

Online issues

Part of the problem has been John Lewis’ inability to match its high in-store standards in the ecommerce space, according to Robert Haigh, marketing director at Brand Finance.

By 2020, John Lewis is committed to boosting its online business so it accounts for 50% of total sales, but Haigh has concerns.

“Online is an obvious point of weakness compared to other retailers such as Amazon that are much better in areas like delivery, where John Lewis has been forced to outsource and has seen negative feedback as a result. Amazon is leading in so many areas and John Lewis is finding it hard to catch up.”

He adds: “The big challenge Nickolds faces is the fact that on one hand she has a big, expensive retail estate to service to a high standard while on the other she has to rapidly improve the online offering. It is a tough balancing act.

“There is no doubting the quality of its in-store offer and the customer service, but this isn’t necessarily linking up to the ecommerce experience right now.”

Maintaining brand security

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Is the big John Lewis Christmas ad showing signs of fatigue?

One of the defining features of the John Lewis brand is the partnership’s approach to treating staff like partners, who each have a share in the business. However, with the retailer recently admitting there will be a “steady reduction” in staff numbers this reputation is under threat.

Haigh explains: “They are currently employing management consultancies to cut overheads across the business and that will probably result in store closures and people losing their jobs.

“This is problematic for the brand as they are seen as very ethical and progressive, and John Lewis is regularly praised as a sort of business panacea by the British government. If they suddenly make big cutbacks, the brand benefits from the John Lewis Partnership will be diminished.”

On a more positive note, with less than two months to go until Christmas, John Lewis is at least assured of a sales boost from its much-hyped festive ad, according to TCC Global’s Bryan Roberts.

“There is no doubting the quality of its in-store offer and customer service, but this isn’t linking up to the ecommerce experience.”

Robert Haigh, marketing director, Brand Finance

“The bulk of its sales and profitability is in the golden quarter so they skew their ad budget accordingly,” he says. “It is a very successful model.”

But with senior marketers such as Dixons Carphone CMO Gary Booker claiming the “big weepie” John Lewis approach to Christmas ads is showing signs of fatigue, Roberts says the department store giant might have to slightly adjust.

“There is always scope to create more emotional connections throughout the year,” he adds. “I guess the risk is by continuing to overly invest in the Christmas ad cup final, you neglect the other nine months and rivals can use that period to steal your customers.”

Maintaining low prices and strong homeware

With Amazon and Sainsbury’s – bolstered by its acquisition of Argos – offering more low-end ranges than the more premium offer of John Lewis, pricing is also an important battleground.

Anusha Couttigane, a senior analyst at Kantar Retail, says John Lewis will have to remain competitive or face customer migration.

“While pricing is likely to be impacted by macro-economic issues, John Lewis needs to ensure it remains competitive on basic products,” she says.

She advises: “Pricing and service should remain key areas of focus. It has received some bad press over the last year or so for selling over-priced goods – its pre-sliced apple fiasco being a good example. For a retailer that trades on the slogan ‘never knowingly undersold’ and one that is also aligned to family values and family needs, it needs to make sure its pricing reflects this.”

For the week ending 22 October, John Lewis saw sales of homeware up 2.3% and fashion up 10.3% year on year. Particularly impressive considering the general merchandise struggles its rival M&S currently faces.

But despite fashion and home being the “bread and butter of the business”, Couttigane fears it could become neglected.

She adds: “The investments that John Lewis has made in its home division have made these really strong departments. Innovations like the House collection, Kin and, most recently, Modern Rarity mean that these are clearly treated as flagship departments by the retailer. Kin and Modern Rarity also show that despite its upmarket positioning John Lewis is still working to offer a staggered price architecture in its fashion department.

“However, much of John Lewis’ investment plans are focused on expansion so these product development needs will have to be balanced against those budget priorities, especially given its squeezed finances. That will be tough.”

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John Lewis continues to be boosted by the popularity of its homeware range

Avoiding complacency

Roberts hopes the popularity of John Lewis as a brand doesn’t lead to complacency at board level.

“It are one of most impressive multichannel retailers around and thanks to Andy Street it is market leading on mobile and click-and-collect,” he says. “But if it focuses too much on [cutting overheads], there are plenty of rivals waiting to pick up the baton.”

Should bigger stores become less of a focus, Roberts expects John Lewis to embrace smaller stores for homeware, much like Sainsbury’s is currently doing with its Mini Habitat concessions.

“What interests me is [John Lewis has] dipped its toes into airports and there is certainly further scope to expand this type of format at different terminals,” he says. “There are also opportunities for stores at railways too, which could result in more smaller John Lewis Home stores. This would be a good way for it to expand its UK footprint.”

Whatever the direction, Haigh of Brand Finance says one thing is for certain: “This is a very difficult time for Nickolds to take on the role, it will be a tough ride. I’m not hugely pessimistic about the future as I believe John Lewis will recover but the next five years will be super challenging.”

Over to you Paula.

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