11/08/2018 John Lewis new signage “John Lewis and partners” on Oxford street.
John Lewis department stores have been hit by a shift away from high margin homeware sales and heavy discounting by competitors © Charlie Bibby/FT

Employee-owned department store chain John Lewis will cut staff bonuses to their lowest level in 65 years in the face of difficult trading on the UK high street.

Staff will receive a 3 per cent bonus for 2018, the sixth consecutive year that the amount has been cut after pre-tax profit before exceptional items fell 45 per cent to £160m for the year to the end of January.

While profit at the group’s supermarket chain Waitrose rose 18 per cent, with new ranges boosting margins, John Lewis department stores were hit by a shift away from high margin homeware sales and heavy discounting by competitors.

“It was the most promotional market in at least a decade,” said John Lewis managing director Paula Nickolds. The company is moving rapidly towards selling more own-label ranges partly to mitigate the effects of rivals cutting prices on branded goods, which John Lewis must then match because of their “never knowingly undersold” promise.

Charlie Mayfield, chairman of the parent company John Lewis Partnership, said he expected that profits would improve in 2019, driven by Waitrose and an improvement in John Lewis profits in the second half of the year.

Sir Charlie said that there had been “a cheer louder than when we paid out 15 per cent” in the staff cafeteria when the bonus figure was announced.

The group had said in January that it would “need to consider carefully” whether to pay a bonus at all, given the business climate. Bonuses had already declined sharply, from a peak of 18 per cent of salary in 2011 to just 5 per cent last year. This year’s payout will cost the company around £45m.

But Sir Charlie warned on Thursday that more tough times lay ahead and said: “We have to live within our means.” Competitive and economic pressures would continue into 2019, he added, so the group would need to maintain high cash reserves.

A review of pension arrangements is due to complete in May, and Sir Charlie said staff increasingly faced a choice between having money today in the form of bonuses or, at a later date, as a pension. “You can’t have it twice,” he said.

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John Lewis started to reduce bonuses and store openings several years ago.

In theory, it should have benefited from the difficulties of its main rivals. Trading at House of Fraser deteriorated sharply during 2018 and it was eventually bought out of administration by Sports Direct. Mid-market rival Debenhams issued three profit warnings and has had a 90 per cent collapse in its share price.

But John Lewis is hamstrung by its price-matching promise, which obliges it to match discounts offered by increasingly desperate competitors. Ms Nickolds said that around a quarter of the profit decline at John Lewis was due to discounting and promotions.

Waitrose fared better despite intense competition from the premium ranges offered by mainstream supermarkets and discounters Aldi and Lidl. Its managing director, Rob Collins, said the supermarket had invested in new ranges and reduced duplication, boosting margins.

He added that Waitrose.com had a 24 per cent rise in sales last week after online grocery retailer Ocado said it would stop selling Waitrose products from September 2020.

Mr Collins said Waitrose’s own website was already making almost as much in profit as it currently receives from Ocado.

But five supermarkets — in Devon, Nottinghamshire, Leicestershire and Glamorgan — will close because they are no longer profitable. Last year, the company sold five stores in Manchester, Birmingham and London to Aldi and Co-op. It said that it reviews its estate constantly but does not envisage further closures.

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