John Lewis Partnership Would ending 100 years of staff ownership save the retailer?

Could breaking the staff-ownership model be the answer for the owner of John Lewis and Waitrose, which is considering bringing in outside investment of up to £2bn as a way to secure its future after reporting hefty losses?

The John Lewis Partnership has been owned by its employees since the 1920s, meaning they receive an annual bonus based on profits, a set-up that motivated staff and helped it expand into a stalwart of the British high street.

The model was so successful that just a decade ago the then deputy prime minister, Nick Clegg, was hailing it as a template for a future “John Lewis economy” where workers took stakes in the firms that employ them.

However, hefty losses of £234m in the past year – despite £12bn of sales – have diminished its resources, forcing the JLP to scrap its staff bonus this year for only the second time since 1953.

Its chair, Sharon White, is looking for innovative ways to raise funds to turn around and develop the business, but under its current model cannot issue new shares to investors to raise money without a major change to its constitution – and its image. White believes the group’s retail arm can no longer sustain the profit levels sufficient to pay a regular bonus to employees and so wants capital to expand into financial services and build to rent above Waitrose stores.

Currently the firm has a fairly strong balance sheet, with £1bn of cash and short-term investments, and undrawn bank facilities of £420m. It has net debt of £1.7bn, led by lease obligations. Only £50m of that must be paid off short-term – in December this year – and a further £300m in January 2025.

However, with debt markets currently tight, the partnership is heavily reliant on its own cash resources to invest and meet its obligations.

Richard Hyman, a veteran retail analyst, says that JLP’s consideration of selling a stake is “being done from a position of growing weakness”. He suggests that losing staff-owned status would be a “big, big price to pay” and potentially the thin end of a wedge that could cost John Lewis and Waitrose their crucial point of difference over numerous rivals.

Hyman describes mutuality as an essential element of the brands, which “permeates everything”, and is sceptical that White would be able to persuade JLP’s staff council, a key part of its democratic structure, to agree to shift from 100% employee ownership.

He suggests that the £400m JLP has set aside to invest in shifting into build-to-rent and other new areas would be better spent on improving its retail business – upgrading stores, IT and products to help lift sales, and improving the availability of products.

“Their eye is already not sufficiently on the ball and [shifting into] non-retail would only take the eye more off the ball,” he said. With better cash flows from retail, and less emphasis on potentially expensive and risky new lines of business, the partnership would have less need to raise new money.

“Something clearly needs to change,” says Nick Bubb, an independent retail analyst. He says that the business “needs better management” with more retail experience, questioning the appointment as CEO last week of former Hovis boss Nish Kankiwala, who has never run a British high street shop and was selected from the JLP non-executive board.

However, Bubb says he doesn’t believe ending total staff ownership would damage morale. “What’s damaging morale is not making money or paying a bonus,” he said.

John Lewis has suggested that it could find ways of handing over a minority stake in return for investment without the group losing its mutual status.

The Employee Ownership Association said that some staffowned models do allow minority shareholders – for example for founders such as Guy SinghWatson at Riverford Organics. A spokesperson said that employee owned businesses were “often at a disadvantage to traditional models when it comes to access to capital” and some “simple tweaks to UK legislation” could improve that.

There are several potential models around the world which allow mutuals to access “patient capital”, rather than turning to hedge funds or private equity.

In the UK, the governmentowned development bank British Business Bank created British Patient Capital, which has a £2.5bn investment programme including over 1,000 companies such as the Dementia Discovery Fund, Advent Life Sciences and LoveCrafts.

Whether such funds would consider investing in an ageing retailer is another question.

Nick Bubb