Would the world fall apart if the John Lewis Partnership were not 100% owned by its staff? Would the shoppers revolt if an outside investor – say a sovereign wealth fund or benevolent pension fund – were to acquire a 25% stake, as suggested by the tentative plan emerging from the boardroom?
Actually, the answer is probably no on both counts. A few Waitrose and John Lewis shoppers might cut up their loyalty cards in disgust if their cornflakes and kitchenware came without a full helping of mutuality, but one suspects they would be a tiny minority.
In any case, the priority should be chasing shoppers lost during the cost of living crisis. Waitrose shed a chunk of market share last year and reported a decline in sales when virtually every other supermarket chain showed a headline boost thanks to inflation. It suggests price, stock availability and competitiveness are what really drive customer behaviour, which is hardly a revelation.
There is probably more weight in the thought that morale – seen as key to JLP’s still-high customer service scores – would suffer if co-workers had to coexist with an outside investor. But, again, the worry may be overdone. It has been years since we’ve seen pictures of happy partners crowding balconies at the Oxford Street department store to cheer the announcement of the annual bonus. Last year’s loss was £234m and the partners’ bonus was zero. “What’s damaging to morale is not making money or paying a bonus,” says retail analyst Nick Bubb. Fair point.
You can, then, imagine how chair Sharon White could pitch a proposal to the partnership’s governing council and hope to get the necessary two-thirds majority. She’d appeal to self-interest. The strategy wouldn’t be guaranteed to work, but would stand a fair chance.
One can also understand why the idea of recruiting an external investor is being studied. The balance sheet may not be creaking – net debt of £1.7bn including leases is reasonably conservative for a business this size – but the point about being a mutual is that you can’t let borrowings enter even remotely dangerous territory. You have no shareholders to call upon in an emergency.
John Lewis has £300m to repay in January 2025 (plus £50m sooner) and has a hefty restructuring and cost-cutting programme to fund in the meantime. The IT systems at Waitrose are years behind the market, rivals say, and the partnership’s £500m adventure into rental property with fund manager Abrdn is a project with a long payback period. So, yes, the judgment that more capital is required to fund investment is reasonable. The partnership is still recovering from opening too many stores in the 2005-15 period.
Here, though, is the problem. Who are these kind-hearted, far-sighted creatures – in other words, not private equity – willing to punt £1bn or £2bn for a non-controlling stake in a currently loss-making business? The world is not awash with such institutions. And even the cuddliest type of pension fund or family office still wants to see a return on its investment. On the numbers currently being speculated, the back-of-the-envelope arithmetic looks daunting.
To raise £2bn for a one-quarter slice, you have to believe the partnership would be worth £8bn after a capital injection, which looks challenging when Marks & Spencer has a stock market value of £3bn and an overall enterprise value (ie adding its borrowings) of £6bn. M&S is profitable and reviving – indeed, it is the source of some of John Lewis’s trading problems.
Or view the financial puzzle through the prism of dividends. Shares in Sainsbury’s currently yield almost 5%. Any pension fund parting with £2bn might want to see a similar 5% income stream – so £100m a year. When would the partnership be in a position to pay such a sum reliably? Not soon, probably. The current plan only imagines that profits – 100%, not 25% – will be £400m in 2025, and no large retailer distributes all its earnings.
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On the plus side, £12bn of annual turnover and 20 million shoppers are not to be sniffed at. There is room for trading recovery, especially at Waitrose. The retail weather should improve as inflation falls.
But White is fishing in an extremely small pool of potential investors if candidates have to be culturally like-minded and happy to lock themselves into a minority position in an unquoted vehicle for the long-term. The partnership may find that any financial offers of help are less than compelling. The plan has a whiff of desperation about it.
