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John Lewis battered by financial crisis

• Tough competition pushes profits down 54%
• ‘Never undersold’ pledge costs partnership £9m

John Lewis, middle England’s favourite shop, has been battered by tough price competition on the high street and slumping consumer confidence with profits falling sharply in the first half.

The figures are the worst from the partnership since the financial crisis of 2009.

Charlie Mayfield, the employee-owned group’s chairman, blamed discounting by rivals, increased capital expenditure on new stores and weak sentiment among hard-pressed consumers for the reverse.

He said operating profit at John Lewis stores plunged more than 54% to £15.8m, and expected conditions to remain “challenging through the rest of this year and into 2012″. The chain’s margins were squeezed, partly because it was forced to make good on its pledge that it is “never knowingly undersold” and cut prices when rivals ran promotions.

John Lewis said most of the guarantee costs, which topped £9m, were incurred in the electrical and technology department, involving white goods such as washing machines as well as TVs and computers, where competition is rife.

There was better news from the Waitrose business, where operating profit fell by a more modest 13.8% to £110m. Mayfield said: “Planned investment in our customer offer [at Waitrose], in service and efficiency and future growth held back profit delivery.”

He added the group wasn’t afraid to invest for the future even when the economic climate is uncertain. “We have often said we are a business with a long-term outlook. Our sales momentum today has much to do with decisions taken to invest during similarly difficult market conditions in 2008 and 2009.”

However, some analysts expressed surprise at the severity of the profits decline, with the partnership overall reporting an 18% decline in pre-tax profit to £90.4m. The decrease does not bode well for the staff’s annual bonus payment – paid out of profits each year in March. This year they received 18% of their annual salary after a 20% increase in full year profits.

“Any notion John Lewis can stand above what is happening on the high street has been shredded by these figures,” one observer said.

Nevertheless, John Lewis’s figures are better than those reported by many competitors, as retailers face up to the most dire trading since the slump of 1980-3.

Waitrose’s like-for-like sales advanced by 4%, but the picture was worse at John Lewis stores where like for likes were up by 1%, and would have been down 3.6% if not for a 27% increase in online sales.

John Lewis provides weekly sales updates and these have usually shown outperformance, especially in the electricals sector, providing an antidote to the gloom that has become the norm for much of the industry. But on Wednesday , it showed how it too was being affected by the downturn and the reluctance of consumers to spend.

Mayfield was far from downcast, claiming 300,000 more customers shopped at Waitrose each week than a year ago, though that is largely the result of new stores opening. Its market share had increased 0.2% to 4.1%. Waitrose is targeting smaller stores for fresh food top-ups, and has 21 shops in this format. It plans to open a further 12 by the end of this year and has set a target of 300 by the end of the decade.

Despite difficult trading conditions, John Lewis won share in many markets, particularly in electricals. The home division was adversely affected by the housing market.

Mayfield said: “There are huge changes taking place in the way people shop as a result of technology reaching every part of our lives, and there is an even greater demand for convenience and value.”

He added: “We are not simply waiting for recovery, but instead we have increased the pace of investment and innovation across the partnership, putting us in the best possible position to seize the opportunity created by a rapidly changing retail environment. Our momentum is strong, and I am confident we will build on that in the second half.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds