Price matching was expensive but worth it

NEVER knowingly undersold. It has been the guiding principle behind the John Lewis offering since 1925. Despite this the group still has an upmarket image, as exploited by a famous Dixons advert in 2009. “Step into middle England’s best loved department store... where an awfully well brought up young man will bend over backwards to find the right TV for you. Then go to Dixons.co.uk and buy it.”

This image is something of a double-edged sword for John Lewis: it attracts people seeking quality but it repels bargain hunters. Hence the need for such a firm price promise. The guarantee still doesn’t apply to online-only retailers like Amazon (or Dixons.co.uk for that matter), but it has been broadened to include the websites of its high street rivals.

Last year, it became more expensive to keep the promise, as rivals slashed their prices to entice hard-pressed consumers through their doors. John Lewis said it “invested” an additional £23.8m in price matching on top of the tens of millions it already costs. Some will remark that the £40.5m profit drop at the department store business would have been much smaller if John Lewis had restricted the promise in various ways.

That misses the point. First because John Lewis needs to counter that expensive image and second because by price matching it managed to grow its share of a shrinking pie.

That means the rebates it earned from suppliers increased substantially last year, allowing it to hold its gross margin of around five per cent steady. There are very few retailers who can claim to have done the same in the annus horribilis that was 2011.

david.crow@cityam.com