RESPONSIBLE Capitalism. Moral Markets. Whatever you call it, the debate raging around executive pay and “predator” business shows no sign of dying down. All political parties have tried to claim the issue as their own, but they have struggled to articulate what a fairer form of capitalism might look like. Enter John Lewis, the patron saint of retailers, which has achieved an almost deific status in recent weeks. In a speech earlier this month, Nick Clegg, the deputy Prime Minister, said he wanted to build a “John Lewis economy”. He was referring to the retailer’s employee-owned business model, which sees profits from John Lewis department stores and Waitrose food shops shared among the partnership’s 80,000 or so staff.
Charlie Mayfield, chairman of the John Lewis partnership, appears a little bemused at all the attention when we meet in his office at the partnership’s Victoria headquarters. A former army officer who served in Northern Ireland aged just 19, Mayfield, like John Lewis, is quintessentially English. Dressed in a pale blue shirt and green woollen tie, he is well-mannered, well-spoken and oh so proper. Although he chooses his words carefully, he says Clegg’s decision to use the John Lewis brand “as short hand” has confused an important debate about different forms of ownership.
“It’s good, I suppose, that there’s some recognition that what we’re doing has some value beyond the partnership,” he says. “But the danger is the impression is given that we know the answer to all the economy’s ills. I’ve never said that and indeed our model is not right or practical for everybody.”
That doesn’t mean Mayfield isn’t an evangelist for the co-operative model – far from it. He says there is “increasing evidence” that partnerships like his are “not just a nice thing do” but are also good for business. That would certainly seem to be the case for John Lewis, which has expanded throughout the downturn while many of its rivals have retrenched or floundered. In recent years, says Mayfield, the retailer has taken market share in all its four key areas of business: home and furniture, fashion, electricals, and food
But if co-operatives are so good for business, why are there only two – John Lewis and The Co-Op – on the high street? “What’s happened in the UK is we’ve ended up with a monoculture around the Plc as a dominant form of ownership,” says Mayfield. “If you’re an entrepreneur and looking to sell your business, an adviser would be very unlikely to suggest any kind of co-operative model. If you suggested it, they would probably tell you not to as they don’t really understand it. There’s a lack of awareness that it’s a serious option.” The tax and regulation system is also a disincentive, he says.
For Mayfield, John Lewis’ partnership model is by far its main strength. Because its 80,000 or so employees own the group and share in its successes or failures, they are more likely to do the right thing by the business. They earn more and stay longer, says Mayfield, meaning the customer service is much better. “In a world where the internet is commoditising a lot of things, what customers really value is deep knowledge and expertise. Whether you’re working on the fish counter in Waitrose or on electricals at John Lewis, you can’t turn that on with a one-day training course.”
“A lot of retailers have a staff turnover in the order of 50 per cent a year, so of every £100 you spend on training, £50 of it walks out the door every year. Whereas we have a turnover of less than 20 per cent and a core that stays for a very long period of time. If you are selling complex products, nothing can beat that experience.”
Mayfield says John Lewis can’t offer employees a “job for life” but he says it is still possible for staff to have a “lifetime of employment” if they are willing to re-train. Over the last six years, it has managed to keep on 75 per cent of staff who were at risk of redundancy. In addition to a share of profits, employees can join the group’s non-contributory final salary pension scheme after three years, and also benefit from free life insurance, subsidised canteens and cheap holidays at one of the firm’s five vacation facilities (including a 16th Century castle with a private beach in Devon).
Last year, employees pocketed a bonus worth 18 per cent of their salary, although the figure is likely to be substantially lower this year. “It’s been a tough year for the economy as a whole and particularly so for the retail sector,” says Mayfield. “Personally I’m not of the view that necessarily the economy is going to bounce back. We are in a different phase for the economy. We’ve been saying this for quite a long time that it’s going to be a period of slow growth. For retailers that means to prosper they’re going to have to take market share.”
As a consequence of the downturn, John Lewis has had to scale back its expansion plans. Whereas five years ago it expected to build a further 10 full-sized department stores, now Mayfield says the number will be closer to six. In their place, the group is trialling new formats such as John Lewis At Home and smaller department stores.
Last time John Lewis was so much in the headlines, it was during the MPs’ expenses crisis. Politicians had been feathering their nests with soft furnishings and appliances from the “John Lewis list” and the public were furious. Part of the outrage stemmed from the incorrect belief that John Lewis is more expensive than its rivals, a misconception it works hard to counteract with its “Never Knowingly Undersold” price promise. The guarantee costs the retailer “tens of millions”, says Mayfield, although he argues the cost of doing nothing would be even greater. “We’re constantly checking prices and in some areas the number of reductions we have been making has been rising. It’s part and parcel of our offer but it does run into a large amount of money. I don’t view it as a cost, more as a promise we’re keeping. The flip-side is we sell more.”
Waitrose is also trying to improve its value credentials, with a price-match on some well-known brands and a new “Essentials” range. “It’s about saying to people you can get a fantastically good, Waitrose product with all you would expect at a price you wouldn’t. It’s a simple but compelling offer and it provided customers with assurance that perhaps they were looking for at the time”.
When I suggest that Waitrose is still much more expensive than the likes of Sainsbury’s for things like fresh meat and poultry, he is unapologetic. “When it comes to our own Waitrose brand or produce, so much of food retailing is about quality and provenance. All the chicken we sell is sourced in the UK. So if we are comparing that with chicken sold in another supermarket, we need to know we are comparing the same thing.”
All these price cuts and employee perks eat into the firm’s bottom line. In 2010, it made £367m of profit on sales of £8.2bn, giving it a margin of around 4.5 per cent. In the same year, Debenhams booked £139.9m of profit on sales of £2.2bn, making its margin almost 200 basis points higher. Mayfield is unfazed, believing that investment in staff and product now will secure the partnership’s long-term future.
“One of the advantages we get from our model is the ability to be longer term in our decision-making. In some ways that’s most evident in difficult times. So the year we’re in now we have increased our capital investment versus the prior year. It would be short-termist to stop just to make slightly higher profits this year at the expense of a more sustainable business in the long run.”
It’s an enviable position to be in, but does he sometimes think of leaving for a Plc, where the rewards are considerably higher than the £868,000 he earned last year. “I love the partnership. I think we get well paid in the partnership and it’s a privilege to work in this position. I’ve got plenty more years in me.”
Maybe John Lewis does do jobs for life after all.
CV | CHARLIE MAYFIELD
Education: Radley College public school, Sandhurst
1988: Captain, Scots Guards
1992: SmithKline Beecham, marketing manager for Lucozade
1996 : McKinsey, consultant
2000: John Lewis, Head of business development.
2005: John Lewis, Managing Director
2007: John Lewis Partnership, Chairman
Family: Lives with wife and three children in Berkshire