Why John Lewis is having a problem with Waitrose

When Waitrose workers opened an email from retail director Tina Mitchell last week, few were surprised to find it was about cost cutting.

“The challenges we’re facing as a business are not relenting,” Mitchell wrote. “Waitrose is one of the least productive grocers in the UK.”

Supermarket staff would need to become more flexible on the hours they work, she said, after years of the grocer having either too many or too few workers on duty at any given time.

“For every full-time equivalent partner we make a £400 loss every year,” Mitchell said. This, at a time when parent company, the John Lewis Partnership, was suffering heavy losses, was no longer acceptable.

As well as pushing more flexible working patterns, Waitrose told staff it was preparing to scrap the night shift in 18 shops. Workers in those roles “are at risk of compulsory redundancy”.

In 17 other shops, Waitrose has launched a consultation over reducing how many hours staff work and will be offering employees voluntary redundancy.

Collectively, the changes could save the supermarket £50m a year. The cost-cutting push comes ahead of a crucial set of half-year results for the John Lewis Partnership this week, as chairman Dame Sharon White faces pressure to show her turnaround plan is yielding results.

In March this year, Dame Sharon unveiled plans to strip £600m of costs out of the partnership – which owns John Lewis and Waitrose – on top of the PS300m that had already been cut.

The turnaround plan followed a loss of £230m last year after the business was battered by inflation and the cost of living crisis. John Lewis has hired turnaround expert Nish Kankiwala to help in the new role of chief executive.

Until now, much of the cost cutting has focused on the department store.

March’s results show £47m of savings were found in John Lewis last year, while Waitrose delivered £29m. The smaller savings come despite the fact Waitrose delivered higher sales than its stablemate, suggesting there may be more fat to cut.

“John Lewis department stores have really been through it in the past few years,” says one former executive at the partnership. “Waitrose is late to the party, but I’d imagine we’ll see more there.”

Sharpening focus is the fact that performance at Waitrose is deteriorating faster than at John Lewis. Sales dropped by 3pc at the supermarket, while they were flat at the department store. Trading profits are also falling faster at Waitrose.

Its market share fell from 4.6pc to 4.4pc last year, according to Kantar, and is down from 5.3pc in 2017. Customers who do come are spending less: Waitrose said earlier this year that shoppers were putting less in their baskets amid intense cost of living pressures. In March, it was revealed that Waitrose had called in consultants at US group Bain to help supermarket chief James Bailey identify areas where it could free up cash. Suggestions included reducing the range of products stocked on its shelves, meaning less “duplication” of products.

Now, focus has turned to tackling its bloated staff costs. Mitchell told workers last week that Waitrose’s operating model was “complicated, slow, inflexible and unaffordable”. The supermarket estimates that it spends around £855m per year on staff pay, its second-largest cost after stock.

Executives are understood to have looked at how rival supermarkets have made their teams more productive in recent years, focusing on how rotas have become more flexible.

The likes of Asda, Sainsbury’s and Tesco have all already implemented changes to worker contracts, taking steps such as cutting bonuses and requiring staff to be more flexible about their hours.

Identifying what needs to change is one thing, but doing it is quite another.

Waitrose is a different beast to other grocers. Staff, who are known as partners, each have a stake in the business and collectively own it. Driving reforms requires a greater degree of consensus than it does elsewhere.

Some insiders fear changing staff hours could undermine Waitrose’s brand.

“The problem with Waitrose – and John Lewis for that matter – is that the very reason people go to those businesses is because of the quality of the customer interactions that they have,” says one former executive.

By changing how and when staff work, “you risk removing the very reason that people go there in the first place”, they say. “The whole point of the partnership model is that you invest in people and so they give better customer service.” On the partnership’s internal forum, staff have been fretting that axing the night shift in certain stores could mean less availability of stock when branches open in the morning. Others have been upset by Mitchell’s claim that each Waitrose worker costs the business £400 a year, with one employee complaining that people feel “undervalued”.

Executives hope the changes to Waitrose staffing patterns will give customers a “better experience”. Mitchell told workers last week: “If we get it right, it’ll feel better to work here.”

But as one partner asked: “The question is how are we at this point – and why do we always seem to get it so wrong?”

Observers are keen to see progress from Dame Sharon’s turnaround effort. Shore Capital analyst Clive Black says the partnership needs to show “evidence that the programme is going in the right direction” in its half-year results on Thursday.

While John Lewis is not publicly listed and is instead owned by its staff, interest in the City is still strong, not least among banks and bondholders.

At the end of its last financial year, the partnership’s net debts stood at around £1.7bn, including £350m due to be repaid before January 2025.

What’s more, John Lewis has mooted the idea internally of bringing in an outside investor, though Dame Sharon has since downplayed this idea.

Black says: “We need to see that it is starting to deliver in terms of revenues, margins and cash flows.”waitrose trails bigger supermarkets

Typically the first half of John Lewis’s financial year is tougher than the second, which gets a boost from the festive period. This means the figures may still appear challenging, though there are expected to be green shoots.

Meanwhile, finding new areas to hit in the £600m cost-cutting plan will get increasingly difficult.

Richard Hyman, a retail consultant, says: “It’s been highly pressured for years, so not many retailers have loads of costs that they can easily cut without adversely impacting their ability to generate revenue and profit.”

For John Lewis, which has already stripped hundreds of millions of pounds out, the low-hanging fruit has already been trimmed back.

John Lewis Partnership insists that the changes at Waitrose are about providing “the very best service to our customers and this means having the right amount of partners doing the right tasks at the right time”.

A spokesman for Waitrose said: “To do this, we’re asking some partners across our shops to change their working pattern, and are proposing to cease night shifts at a small number of stores. This isn’t something we take lightly and we’ll be supporting our partners through any changes.”

The supermarket is not expected to ask workers to agree to any changes to their contracts if it would negatively affect either the total hours they work per week or their contractual pay.