John Lewis bonus payouts built on crippling debts but salad days are gone

John Lewis has underperformed for much of the past decade. PA

We've just had Employee Ownership Day in the UK. I know, me neither.

Businesses belonging to their workers is, though, a hot topic again. At the last count there were 1,300 employee-owned businesses in the UK, from Arup, the design and engineering firm, to Zetter, the recruitment agency.

Increasingly, staff having a stake in the firm is seen as appealing. Employee-ownership has more than doubled in the past three years. The top 50 such businesses produced revenue of £21.7 billion last year; at nine in 10 employee-owned businesses the staff have a say in decisions on the working conditions; 85 per cent have some or a lot of say in new working methods.

For that information I’m grateful to Dame Sharon White, chairwoman of the John Lewis Partnership, best-known of the employee-owned organisations, operator of the John Lewis department stores and Waitrose supermarket chain, famed for middle-class staples quinoa and rocket salads. White, a former senior civil servant and therefore not a time-served retailer – something held against her by her critics – has turned into something of an evangelist for her sector.

She marked its national celebration day (seriously, it exists) by highlighting the surge in industrial strife in the past year and the damage caused to the economy through strikes and go-slows, and asking: “Is there an alternative to industrial action? If workers felt they had more of a stake – or greater sense of ownership – in the business or the public service they were providing, there could be fewer disputes and more limited industrial action.”

In a country that lost 3.7 million working days to strikes last year, not only in the public services, in schools, railways, hospitals, but also in private enterprises, such as Amazon and Heathrow, anything that can bring that total down and instil harmony and keep things running, is welcome. Doubtless, they would work harder, too.

This week marks the 75th birthday of the NHS, and it was not that long ago, during the David Cameron-Nick Clegg coalition era, that government thoughts turned to restructuring the health service along the lines of the mutual model. Those arguments have resurfaced, as in the intervening period, the NHS’s problems have worsened and we are facing a septuagenarian structure that is no longer fit for purpose.

Back then, the example that was upheld repeatedly by ministers, policy-formers and the media was John Lewis. It was before White’s time, but her organisation was seen as promising nirvana, producing outstanding performance while properly rewarding fulfilled workers or ‘partners’. Each year they would receive an annual bonus, the announcement of which became a media event.

The two went together: the production of great results by staff who had a stake in the business. There was a third benefit: customers were also delighted, marvelling at the care and level of service afforded by John Lewis employees who seemed to go further than managers and sales assistants elsewhere.

Since then, it’s not just the NHS that has experienced decline. John Lewis made a loss of £243 million in 2022 and its staff did not receive a bonus.

White, who took charge in 2020, has been taking drastic action, closing 16 John Lewis stores, trimming 13 Waitrose branches and cutting head office costs. Among the casualties is the “Never Knowingly Undersold” price promise, deemed out-of-date in today’s online, shop-around environment. Another is the Partnership’s very own golf course (who knew) at Maidenhead, in Berkshire.

John Lewis fell victim to the switch to online and was also hit by rising costs at its extra-large high street sites. Waitrose, meanwhile, was caught, stuck between low prices at the bottom of the market, sparked by the budget invaders Aldi and Lidl and a competing Tesco, Morrison’s and Sainsbury, and at the top end, a revitalised Marks & Spencer.

White found that democracy has its downside, as her fellow partners made their feelings known about her leadership. In May this year, almost a quarter of staff representatives voted against her in a confidence ballot. Of the 55 members of the staff council who voted, 24 per cent were against White continuing to head the business, while 92 per cent said they did not support her performance over the past year.

What’s telling, though, is to revisit those glory years when politicians, commentators, could not get enough of John Lewis. From 2000 to 2015, the business expanded rapidly. John Lewis grew its stores from 25 to 43, Waitrose went from 126 to 336 branches, the number of employees or partners climbed from 40,000 to 90,000. Sales more than doubled, from £4bn to £10.8bn, but profits stayed the same as margins were hit by Aldi and Lidl, and the growth in online shopping.

Profit per partner fell substantially, but significantly, over that same period, the Partnership bonus averaged 14 per cent. At the same time, to pay for the expansion, the organisation borrowed heavily, with net debt rising from £1bn to £3.7bn.

John Lewis, then, was effectively running on, or close to, empty but the partners were still being paid a hefty bonus. In effect, the organisation was borrowing to meet those staff payouts.

They were content, and because the workers were cheery, there was not a pipsqueak of complaint anywhere. The John Lewis Partnership was widely lauded for its brilliance.

White has injected a dose of realism. On her watch, bonuses will only be paid where they’re affordable. She’s taken out £300 million in costs with another £600 million still to go. Borrowings are down. Sustained profitability, White insists, is returning.

But clearly, not all her colleagues are enthused, hence the backlash. Questions remain too about the level of funding needed to execute her plan to refurbish the stores and boost IT – there has been talk of transforming some of the department stores, changing them to part-retail, part-apartments.

White is reluctant to borrow and she can’t pursue the other traditional route of corporate fund-raising, of going to external investors, since she does not have any. White has indicated she would countenance altering the business model, to seek funding from outside investors. She could reduce employee ownership from 100 per cent to 75 per cent, without destroying the overall premise. Employees would keep control, but with 25 per cent held externally.

Clearly, it’s now apparent, John Lewis was not as marvellous as all that. Nevertheless, as models go, employee ownership is not bad either. Anything, to reduce our twin diseases of strikes and low productivity.