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Why is John Lewis is tightening its belt? Why is John Lewis tightening its belt?
(about 4 hours later)
The John Lewis partnership is cutting its annual bonus for staff. The group, which owns dozens of department stores and the Waitrose supermarket chain, has also been cutting jobs and reining in expansion.The John Lewis partnership is cutting its annual bonus for staff. The group, which owns dozens of department stores and the Waitrose supermarket chain, has also been cutting jobs and reining in expansion.
The cost savings come despite a 21.2% rise in pre-tax profits to £370.4m, before the staff bonus and one-off items, while sales rose 3.2% to £11.4bn.The cost savings come despite a 21.2% rise in pre-tax profits to £370.4m, before the staff bonus and one-off items, while sales rose 3.2% to £11.4bn.
So why is John Lewis reducing payouts to its workers, known as “partners” as they jointly own the business?So why is John Lewis reducing payouts to its workers, known as “partners” as they jointly own the business?
Pay risesPay rises
The introduction of the new minimum wage for over 25s – “the national living wage” – has increased costs for all retailers. John Lewis has always tried to attract better quality staff, and retain them for longer, by offering pay above the legal minimum alongside other benefits ranging from a decent pension to the use of company holiday homes.The introduction of the new minimum wage for over 25s – “the national living wage” – has increased costs for all retailers. John Lewis has always tried to attract better quality staff, and retain them for longer, by offering pay above the legal minimum alongside other benefits ranging from a decent pension to the use of company holiday homes.
Maintaining that differential, and ensuring even better pay for staff who have been in place longer or have taken on additional responsibilities, cost the company £36m. Simply complying with the national living wage would have cost it only £3m. On average, non-management staff pay rose 5% to £8.67 per hour last year. As a result, those staff members still saw an overall increase in the combined value of their pay and bonus for the year..Maintaining that differential, and ensuring even better pay for staff who have been in place longer or have taken on additional responsibilities, cost the company £36m. Simply complying with the national living wage would have cost it only £3m. On average, non-management staff pay rose 5% to £8.67 per hour last year. As a result, those staff members still saw an overall increase in the combined value of their pay and bonus for the year..
John Lewis said pay would be going up again in April when the national living wage increases to £7.50 an hour from £7.20.John Lewis said pay would be going up again in April when the national living wage increases to £7.50 an hour from £7.20.
PensionsPensions
Part of John Lewis’ attraction as an employer has always been its pension scheme. In 2015, the group was one of the last to move away from a scheme based entirely on final salary. It now offers a cheaper hybrid scheme based on a mix of staff contributions and final salary and has pumped more than £300m in additional contributions into the scheme in the past year. But low interest rates have delivered lower returns for the scheme’s investments and it had a deficit of £479m in March this year.Part of John Lewis’ attraction as an employer has always been its pension scheme. In 2015, the group was one of the last to move away from a scheme based entirely on final salary. It now offers a cheaper hybrid scheme based on a mix of staff contributions and final salary and has pumped more than £300m in additional contributions into the scheme in the past year. But low interest rates have delivered lower returns for the scheme’s investments and it had a deficit of £479m in March this year.
Partly because of this deficit, the group’s total debts have increased to more than four times its annual cash flow. With uncertain times ahead as the UK undertakes the complex process of leaving the EU, John Lewis’s management say they need cash to reduce this burden.Partly because of this deficit, the group’s total debts have increased to more than four times its annual cash flow. With uncertain times ahead as the UK undertakes the complex process of leaving the EU, John Lewis’s management say they need cash to reduce this burden.
Yes it’s BrexitYes it’s Brexit
The company didn’t use the B-word, but the fall in the value of the pound against the dollar and the euro since the Brexit vote has made life more difficult for retailers. The cost of goods, such as clothing and electronics, has risen dramatically because contracts are agreed in dollars. At the same time, shoppers’ disposable income is being squeezed by rising fuel and food costs, so retailers’ battling for attention are finding it difficult to put up prices. That squeeze is only likely to increase this year, meaning retailers must find other ways to cut costs.The company didn’t use the B-word, but the fall in the value of the pound against the dollar and the euro since the Brexit vote has made life more difficult for retailers. The cost of goods, such as clothing and electronics, has risen dramatically because contracts are agreed in dollars. At the same time, shoppers’ disposable income is being squeezed by rising fuel and food costs, so retailers’ battling for attention are finding it difficult to put up prices. That squeeze is only likely to increase this year, meaning retailers must find other ways to cut costs.
Shift to onlineShift to online
John Lewis and Waitrose have led the way as their wealthier customers have been keen adopters of shopping online.John Lewis and Waitrose have led the way as their wealthier customers have been keen adopters of shopping online.
Online sales for the department store jumped 16.2% as shopping via mobile phones soared 73% last year while sales in stores fell 1%. Waitrose did not break out its online performance for the full year, but internet sales rose 4.3% in the first half while store sales fell.Online sales for the department store jumped 16.2% as shopping via mobile phones soared 73% last year while sales in stores fell 1%. Waitrose did not break out its online performance for the full year, but internet sales rose 4.3% in the first half while store sales fell.
The shift online requires major development of infrastructure, such as automated warehouses to process parcels efficiently as well as investment in IT to keep pace with shoppers’ constantly evolving demands. The department store chain alone is spending £500m over five years on IT and distribution systems – so costs must be saved elsewhere.The shift online requires major development of infrastructure, such as automated warehouses to process parcels efficiently as well as investment in IT to keep pace with shoppers’ constantly evolving demands. The department store chain alone is spending £500m over five years on IT and distribution systems – so costs must be saved elsewhere.
Better stores and exclusive productsBetter stores and exclusive products
The ease of online shopping means that high street stores have to work harder to tempt people away from the sofa.The ease of online shopping means that high street stores have to work harder to tempt people away from the sofa.
Waitrose has been installing cafes and wine bars and these food services increased sales by nearly 5% last year, helping to offset falling grocery sales. The group is rolling out sushi counters and looking for other ideas, all of which will be costly to install.Waitrose has been installing cafes and wine bars and these food services increased sales by nearly 5% last year, helping to offset falling grocery sales. The group is rolling out sushi counters and looking for other ideas, all of which will be costly to install.
John Lewis has hired extra designers to help it produce more exclusive products that will help it rise above the whirl of commodified price checking online. It is also installing more services, such as spas and cafes.John Lewis has hired extra designers to help it produce more exclusive products that will help it rise above the whirl of commodified price checking online. It is also installing more services, such as spas and cafes.