Streets ahead: Does John Lewis offer a revolutionary way forward for big business?

“I like it,” he said of the department store that has become
synonymous for customer service and respectability. “It’s got
everything. It’s very clear. When I buy electricals there’s the guarantee
and they have people to talk to you.” When told how it operated,
however, he looked stunned. “It’s like socialism.”

John Lewis, with its “Never Knowingly Undersold” slogan, is the
supplier of sofas, dining tables and widescreen televisions to the nation’s
sensible shoppers. The Queen buys its haberdashery and household goods. When
MPs stuffed second homes at the taxpayers’ expense, the Commons Fees Office
checked claims for rugs and sideboards against John Lewis prices. Only Marks &
Spencer and the BBC can match it in terms of public affection.

Now, however, the John Lewis Partnership (which owns the department store and
the upmarket grocery chain Waitrose) is increasingly on the receiving end of
public admiration as well. Last year Which? members voted John Lewis best
high street retailer; this year they gave the award to Waitrose. A poll of
6,000 people by Verdict Research in 2008 named John Lewis “Britain’s
favourite retailer”.

This autumn, John Lewis will take a further step forward with the launch of
the first in a planned chain of Home stores that will offer its core range
in a smaller format; in effect, a John Lewis convenience store. The store
will open in Poole, Dorset, in October; if it is successful, another 50 will
open across the country. For retail commentators, the expansion is yet
another example of John Lewis doing things right. They attribute its success
to its long-term approach and, underlying this, its revolutionary
partnership structure ? something of which roughly half its customers are
aware.

Unlike other big businesses, the John Lewis Partnership is a plc owned not by
investors but by its staff. “Partners” are paid more generously
than employees at other retailers. On top of that, they receive an annual “partnership
bonus” ? a share of the profits ? that has ranged between 13 and 20 per
cent of salary in the past five years. They receive five weeks’ annual
holiday, a 25 per cent discount and a final salary pension.

There are other perks, too. They can rent subsidised rooms in two large
country estates, or stay at lakeside hotels in Snowdonia and the Lake
District, or in a 16th-century castle in Dorset. Five cruising yachts can be
rented cheaply. And then there is the £60 annual subsidy on exhibitions,
theatres, visitor attractions and comedy shows.

What sets the company apart from its rivals, though, is not its perks but the
fact that its staff ? shop assistants, warehouse workers, delivery drivers ?
are involved in the running of the business. Staff are represented in
workers’ councils from top to bottom of the company. They have the power to
sack the boss (though no chairman has been unseated). They can hold
management to account and vote to change company policy. They can ? and do ?
write letters of complaint about the business to an internal newsletter, for
which they cannot be disciplined.

With a £7bn-a-year turn-over, a constitution, its own democratic structures
and a public commitment to maximising the happiness of its staff, John Lewis
operates almost as a shadow state within corporate Britain. Is it too good
to be true? Or, if not, should other companies be following its lead?

???

John Lewis is not the only “social enterprise” whose cautious
outlook and wider social mission have found it favour in a post-boom world
an-gered by huge corporate bonuses. The Co-operative’s food shops are
gaining market share and turnover for the group (which includes the largest
chains of independent travel agents and funeral parlours) passed £10bn for
the first time last year. The mutual Nationwide Building Society is thriving
amid all the trouble at demutualised former societies such as Northern Rock
and HBOS.

But John Lewis is different, because ? unlike these other institutions, which
have their roots in Victorian self-help societies ? it is owned not by its
customers but by its staff.

John Spedan Lewis initiated this state of affairs 80 years ago. The wealthy
shopkeeper noticed that he, his brother and his father ? John Lewis, who had
founded a single draper’s shop in Oxford Street in 1864 ? earned more than
the combined salaries of all 300 staff. So, on assuming control of the
business in 1928, he began (in 1929) to hand over ownership to the
employees. Under his benevolent stewardship John Lewis flourished, acquiring
in the 1930s the 10 shops of the Waitrose chain (founded by David Taylor,
Wallace Waite and Arthur Rose). He finally relinquished all control in 1950.

In a BBC interview recorded in 1957, he explained that he realised his father
would have been happier and the business stronger if he had given the value
he gave to shoppers who exchanged money for merchandise to staff “who
exchanged their worth for his money”. Enunciating every syllable
carefully, he stated: “The present state of affairs is a perversion of
the proper working of capitalism. It is all wrong to have millionaires
before you have ceased to have slums. Differences of reward must be large
enough to induce people to do their best, but the present differences are
far too great.”

The answer, he suggested, was to treat employees respectfully, as lawyers
treated their clients.

Today, the John Lewis Partnership enshrines his values throughout 27 John
Lewis outlets, 213 branches of Waitrose, the 4,000-acre Leckford Farm in
Hampshire, John Lewis.com, and greenbee, an online ticket, entertainment and
financial services provider. As well as owning the firm, partners are
represented on councils mirroring management at branch, divisional and
national level. Eighty partners sit on the highest body, the Partnership
Council, which meets twice a year to scrutinise the board.

The Partnership Council has to make tricky decisions: last year its partner
members voted to trim some pension benefits, a decision not in their narrow
self-interest.

“We are not running the business. We influence our management. It’s
absolutely clear the management run the business,” stresses
price-checking executive Dave Suddock, who says his fellow councillors are “guys
that drive trucks, people who work on check-outs and at the deli counter”.
Being a partner is “a hugely motivating factor,” he says. “You’re
not just an employee; you are an owner of the business. That makes you feel
differently about everything.”

Staff also have the opportunity to rise through the chain. Chairman Charlie
Mayfield, in overall charge of the partnership, was appointed two years ago
following a marketing role in SmithKline Beecham. But the bosses of John
Lewis and Waitrose both came through the ranks. Mark Price, the son of a
grocer and self-proclaimed “chubby grocer”, became managing
director of Waitrose two years ago after starting his career as a graduate
trainee in 1982. Andy Street, appointed MD of John Lewis at the same time,
joined the business as a graduate trainee in 1985.

Sitting in his open plan office on the fourth floor of John Lewis HQ in
Victoria, London, Street says that the democratic structure engages everyone
in the business. But he stresses that what makes John Lewis a great business
is not the partnership but the qualities that this engenders ? engagement,
loyalty, co-operation.

“To me,” he says, “what co-ownership and democracy are all
about is that all day, every day, the partners in the haberdashery
department in Liverpool are working with their managers in a collaborative
way as to how they are going to improve the business together.

“This is not about waiting for a formal meeting where one of them stands
up and says we’ve got that wrong. So it is about the spirit of collaboration
working for the best of the business.”

He describes debate within the company as “vigorous”. The Gazette,
the weekly newsletter, is allowed to print anything that would be in order
in the House of Commons. Letters from partners range from the food in the
dining room to the iniquity of the rules for the discount scheme. Among the
thornier contributions have been requests for information about directors’
expenses and an explanation of why the pension scheme has invested in the
delivery company Ocado.

Occasionally partners vent their frustration on the outside. The Digital Spy
website, for example, has comments purporting to be from John Lewis staff
members. “As an employee of John Lewis I am sickened by the myths
perpetuated by the media,” says one. “Don’t be fooled into
believing we own the business ? no, the operation is run by a board of
directors and profits are distributed as they see fit. The fabled democracy
is a sham … The staff councils are just talking heads who rubber-stamp
management decisions.”

But subsequent contributors were more supportive of the company. One wrote: “The
profits this year for John Lewis were before tax £319m, they have paid out
£155m in bonuses, £85m to the non-contributory pension fund, that along with
the £60m worth of discounts etc brings a total handed out to £300m. Not bad
really.” Another added: “At the chain I worked for before, there
was no annual bonus, subsidised lunches or anything.”

Whatever the disgruntlement of some partners ? and retail in general is not
well paid ? the partnership has better terms and conditions than its rivals.
Average salary with bonus for partners, including nearly half who are
part-time, was £14,800 last year. At Marks & Spencer and Debenhams,
which also have a large proportion of part-timers, average pay including
share options was £12,750 and £10,300 respectively. As a result, says
Street, “our staff turnover is substantially less than other retailers
? we have a huge number of people who have been with us for life”.
Each year, around 700 partners are given a six-month sabbatical after
reaching 25 years’ service.

Senior management, by contrast, are paid less than their peers in City-run
firms. Street earns £400,000 to £500,000 a year ? half the £939,000 earned
last year by Debenhams chief executive, Rob Templeman, whose business is the
same size. “Some of the executive pay excesses in this country are
verging on the obscene,” Street says, scrupulously avoiding mentioning
any names.

“The senior people here are not badly paid, let’s be clear about it. But
the simple point is this: you decide with John Lewis if you want to be part
of that industrial experiment. And if you fail to be motivated by that then
you should leave.”

A determined, contemplative man, the son of two scientists, Street grew up in
Birmingham in the 1970s, when industrial relations were at an all-time low,
notably at the British Leyland car plant. “Day after day we saw the
pickets, the collapse of British industry as a result of bad industrial
relationships ? and both sides were to be faulted,” recalls
Street. “What I saw here was an organisation that did not have
confrontation, everybody was on the same side. That’s what this is all
about: working together for the common good.”

At the turn of the century, there were signs that John Lewis might have been
losing its way. The group’s flagship store in Oxford Street was looking a
little dowdy, while the chain as a whole lacked pizzazz. But that was in the
boom years, when image mattered more than substance. Since then, the
partnership has invested tens of millions of pounds upgrading the shops and
developing a media presence, launching its first TV advertising campaign six
years ago. And like other retailers, it has had to adjust to a major
economic downturn.

When the recession first struck, the group suffered as much as anyone else.
After bumper annual results at the start of last year, sales of “big
ticket” items dipped at the department stores with like-for-like sales
down 1 per cent. Like-for-like sales fell about 5 per cent at the start of
this year. Waitrose shoppers started to drift away to cheaper stores, such
as Tesco.

But Waitrose fought back with the launch this year of the Essentials “value”
range of 1,400 lines. And last month, sales perked up 2 per cent at John
Lewis and 11 per cent at Waitrose on last July. Already, the future seems
promising. Waitrose is reputed to be in talks to buy the Prince of Wales’s
organic biscuits-to-soup firm, Duchy Originals, and plans to open 22 stores
this year (a 10 per cent expansion).

John Lewis, meanwhile, hopes to open another 20 “full line” stores,
with its next opening in Cardiff next month.

“When we saw the recession coming the thing we said right from the
beginning was: let’s not worry about the short-term numbers; let’s worry
about how strongly the brand comes out of it at the end of the recession,”
recalls Street.

According to the retail analysts Verdict Research, John Lewis’s share of the
department store market rose from 17.5 per cent in 2003 to 19.9 per cent in
2008, while Marks & Spencer and Debenhams lost share.

It’s conceivable that any perceived drabness in the brand may have been an
advantage in this climate. “You still would not say that John Lewis is
the sexiest, most interesting place to buy fashion,” says Rita Clifton,
chairman of the London office of the global branding consultancy,
Interbrand. “But it’s not that kind of shop. It’s a very middle-class
shop, in a broad sense. Nothing smelly or violent is going to happen in John
Lewis or Waitrose.”

But, she adds approvingly, the group is also a shining example of “a
company that truly lives its brand through everything it does. It has done
that with real clarity and total consistency over the years. “It is
inclusive of its employees and if you treat staff well then tend to treat
customers well as well.”

“I think there’s a lot to be said for a partnership structure,” says
Neil Saunders, consulting director at Verdict, “because the people that
work there feel they have a real stake in the business and they probably
give a bit more to the business than they would if they were in a different
company. The customer service is exceptional. John Lewis doesn’t always get
things right. It does sometimes make mistakes. But it cares, and when it
does get things wrong it puts them right.”

Seven years ago, John Spedan Lewis was voted Britain’s greatest-ever business
leader, ahead of the likes of Andrew Carnegie and Joseph Rowntree. According
to him, “The John Lewis Partnership was started to find out what would
happen if business were managed otherwise”.

Today, the results of his experiment seem to be becoming a little clearer.
With conventional business models in disarray, “otherwise” has
begun to seem increasingly attractive.

In the recession, John Lewis has not lapsed into “knee-jerk”
cost-cutting but instead has played the long game: “It’s very different
from companies with shareholders governed by the City. Although it has been
suffering, it’s not going to do it any harm in the long term, and when we
come out of recession I expect it will resume very strong growth.”

So why don’t other firms become partnerships? “You can’t have bits of
this structure,” replies Street. “It would be very easy for a
company to set up a works council. It would be very easy for a company to
set up a profit-sharing scheme and think they have got it. But what is
magical about John Lewis is that it’s all internally consistent. It hangs
together. Others think, ‘I can’t do all of that.’ And they can’t.”

The key, of course, is that, to set up a partnership, you need to cede power.

“Co-ownership exists because our founder gave the business away. Can you
imagine today’s entrepreneurs ? Richard Branson ? giving the business away?”

Employee ownership: Can it work?

Sean O’Grady, Economics editor

Co-operatives, mutuals and partnerships are not, despite the utopian visions
of some of their founders, socialist paradises where the normal laws of the
market are suspended. They are private businesses and behave as such.

After all, until it was floated on the New York stock market a few years ago,
Goldman Sachs, the “great vampire squid” of capitalism (as Rolling
Stone magazine described it) was owned by its partners, not shareholders. So
are most of the world’s big accountancy and law firms and hedge funds ? the
ultimate capitalists. And there was a time, difficult as it may be to
believe now, when retailers in this country complained loudly about the
Co-Op’s dominance of the grocery trade.

All over the world, businesses that are owned by their employees are having to
face tough choices. In the US, the United Auto Workers union owns 55 per
cent of Chrysler, and has had to decide where the company (now in
partnership with Fiat, who own 20 per cent of the firm) will build the Fiat
500 model to be sold in the US. Obviously the UAW would like to make the car
in America; but labour rates in Mexico are about a tenth of the UAW’s and it
would make more business sense to build the little car there, which is what
looks like happening.

Jobs tug employee-owners in one direction; profits ? and longer term business
viability ? pull them in another. Instead of unions having arguments with
shareholders through the firm’s management, the process is short-circuited.
But the economic fundamentals are unchanged.

In Spain, particularly in the Basque country, cooperatives are big businesses.
The giant Mondragon group of worker cooperatives is dealing with the same
choices, as Spain’s seventh-largest industrial grouping has implemented
lay-offs and pay cuts in order to avoid redundancies and closure.

Then again, as we’ve seen with many conventional private companies across the
continent, such cooperation is not necessarily confined to cooperatives. And
while it is fair to say that the mutual Nationwide Building Society, owned
by its members, has done better than most banks in the credit crunch, the
Britannia Building Society has had to be rescued ? by the Co-Op ? and other
societies have gone bust.

So the recession hasn’t necessarily proved that alternative models of
ownership are superior to the joint stock company. On the other hand, it may
well be that, in bad times, these mutual models make sharing the burden of
change a little more equitable.

Other employees e-owned companies

Unipart: Formerly a division of British Leyland, the Oxford-based
Unipart is a logistics company with clients including Asos.com, Vodafone and
Homebase. In 1994 it launched the Star Options scheme, billed as “an
executive-style options programme available to all employees”. Created
to encourage deeper employee involvement in the privately-owned company,
staff reportedly now own 55 per cent of Unipart.

Savant Software: IT firm Savant started as a family business in 1982
and now has 40 employees and an annual turnover of £3.5m. When the
co-founders retired in 2001, ownership was transferred to the employees
through an Employee Benefit Trust which owns 100 per cent of the shares,
allowing them a portion of shares based on their salary. Savant boast that
the assets of the company “go home every night”.

Scott Bader: A polymer manufacturer with an annual turnover of £150m,
Scott Bader has been wholly owned since 1963 by its charitable trust, the
Scott Bader Commonwealth, of which 77 per cent of its 630 employees are
members. Employees have no direct stake in the company but benefit from a
profit share arrangement, and may join bodies which oversee the running of
the business.

SChreiber: One of the world’s largest consumer-brand dairy companies,
famed for supplying processed cheese. Employs more than 5,000 workers, who
can acquire stock through the Employee Stock Ownership Plan (ESOP) which,
when combined with pay, retirement and benefits, also gives the employee a
competitive compensation package. Company policy states that when the
employ-ee makes a positive impact on business results, their shareholder
value and ESOP account increase.

Norton Publishing: Founded in 1923 by Warder and Polly Norton in New
York, this is the oldest employee-owned publishing house with a workforce of
400. After her husband’s death in 1945, Polly sold most of her share of the
company to its employees; Norton’ authors now include the economist Paul
Krugman and the historian Ian Kershaw.

Arup: The structural engineering company responsible for the Sydney
Opera House and the Pompidou Centre (among many other starchitect-designed
buildings) is owned in trust for the benefit of its employees. The company
has no shareholders or external investors; money left after reserves and
investments is paid out to employees as a profit share. Arup has a group
board that reports to trustees and to the firm itself. Hannah Waldram

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