First published in the March 2015 international edition of Accounting and Business magazine. 

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British retailing is a very difficult, competitive market, and many companies are being squeezed between weak growth in UK retail sales, channel substitution (internet retailing), and niche or cost leadership companies.

The established British supermarkets - Tesco, Morrisons and Sainsbury’s - have been caught in a vice between relatively recent German arrivals, Aldi and Lidl. And Marks & Spencer (M&S), despite 10 years of effort, still hasn’t got anywhere near to the operating profit margin it had back in the 1990s.

However, pre-eminent retailer the John Lewis Partnership (‘the group’), with its partnership structure so unusual in retail, seems to be fitted with some kind of antigravity device. It is continuing to grow and generate comfortable returns on net assets in both upmarket grocery retailing and in its larger, non-food lines. Its partnership ownership - its 90,000 staff are all partners - means that it is less subject to the relentless pressure to report earnings growth; it is also freer of the short-term pressure to achieve results.

"The John Lewis Partnership... seems to be fitted with some kind of antigravity device."

The upmarket grocer

The group’s most competitive operating environment is grocery retailing, in which it operates under the name of Waitrose.

The Waitrose business seems to be defying the trends because it is positioned as a more niche, premium-priced operator, with a differentiation strategy in terms of both products and service. The Waitrose customer experience is very much one of surprise (‘Oh, I just have to try some of that!’) and of low stress. And many customers are willing to pay a premium for those things.

But there are three questions here:

  • Why is a substantial segment of the market still so keen on distinctive quality and prepared to find a budget for it? 
  • Why are the competitors less able to address this? 
  • How is the group able to seize this lucrative territory?

It seems that better-off people with more discretionary spend are still prepared to pay more on certain occasions; they still enjoy treats, and they can use Waitrose as a kind of ‘restaurant at home’. In the latter case, they are spending more than they would at other supermarkets but are making savings relative to the cost of a meal out

There are advantages in specialisation. While bigger grocers such as Tesco have some premium lines, it is harder for them to create an atmosphere of ‘spoil yourself’, as such offerings are surrounded by price deals on commoditised products and a busier shopping environment.

Waitrose, by contrast, combines clever merchandising skills, a distinctive, visually appealing store environment that is pleasant to walk around, and eager and competent staff. Its brand is envied across all industries.

Waitrose also exhibits multiple and reinforcing layers of competitive advantage, or a ‘resource-based theory’, which suggests that strategic assets are often more decisive in creating superior performance than having a favourable environment.

Price promise

The John Lewis department store has a slightly different business model, promising that you will not find a better price elsewhere. Its promise, ‘Never knowingly undersold’, is well known. If you spot that a product is being sold more cheaply, the retailer will match the price. This on the surface has the feel of a ‘cost-leadership’ strategy. But John Lewis’s main stores are full of high-quality products. These are by and large not commodities, so the chance of spotting an obviously overpriced product is much lower. 

"Its promise, ‘Never knowingly undersold’, is well known."

This promise doesn’t mean that all their prices are level with the cheapest and that all products are sold elsewhere. But that promise is key in making it unnecessary to shop around. Also, John Lewis has a broad choice, so the average spend per store visit is high. That makes for a productive store and offers economies of scale – a different formula but with the same result: sales growth and good profitability. 

Underpinning both these successful models is a high-quality skills base and a distinctive, service-led culture. Anyone visiting the group’s head office will pick up a high-quality feel to the organisation. Getting an idea of a corporate culture is rather like sensing a climate; just like getting off the plane in Dubai, you know you’re in a warmer place. Competitors can imitate parts of the group’s competitive advantage, but not as easily as its culture. Some of this is also down to the partnership structure and the organisational strategy that supports this, which its competitors cannot adopt due to corporate constraints.

Know your onions

One thing that is truly distinctive and most enviable is that the group knows totally what it is about; it has a very clear strategic vision, which it has stuck to over decades, making it a great institution, but also one that is prepared to experiment - for example, with smaller branches of Waitrose. 

Unlike its rival M&S, which similarly has department stores and upmarket food stores, it doesn’t operate these under the same brand. Nor, unlike M&S, has it generally operated both outlets out of the same premises (could it do more of the latter?). While these are strategic choices, they can be revisited.

The results in the group’s 2014 annual reports are remarkable for a retailer, especially in the extremely competitive UK. In addition, Waitrose had nearly double the profit margins of other supermarkets. 

So far, we have just used a few MBA ideas to understand the basis of this success: differentiation, resource-based theory, strategic vision, business models, and so on. What other ideas might be out there for its future development?

  • more developments with both shops on the same premises
  • international expansion
  • using the trusted name even more as a fully fledged bank – not just credit cards
  • expanding its internet retailing, including to develop the brand internationally
  • other areas of retailing (Waitrose cafes?)
  • looking more generally at areas where the brand might stretch.

Obviously there would need to be full alignment within the business portfolio and with the culture, brand and skills base. On the edge of this might be the example of ‘John Lewis funerals’ (after all, the Co-operative Society is the market leader in the UK).

Meanwhile, you might want to ask yourself the following questions:

  • What lessons can your business learn from John Lewis’s success? For example, the stability of its purpose, philosophy, its values and its service delivery, and finding a place in the competitive landscape where it has some natural advantages relative to the competition.
  • What areas in your company’s culture truly differentiate it from competitors and lead to superior returns?

Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School