JOHN LEWIS' Christmas 2011 advertising campaign drew plaudits and derision in equal measure. The 90-second advert charting the story of a little boy as he impatiently waits for Christmas Day to arrive only to ignore his own presents in favour of giving his parents their gift left celebrities in tears and was lampooned mercilessly on the internet and by Gordon Ramsey for a Channel 4 promotion.
But there was nothing laughable about the financial performance of the middle class’ favourite department store during the Christmas trading period. Like-for-like sales were up 6.2% from the previous year. The performance continued over Easter with a “stunning” week’s trade as sales jumped 27.5% year-on-year to £66.7m in the week to 7 April. But Rachel Osborne , who joined as FD in July 2011 after a two-year stint at services group Sodexo, cautiously points out that “one Christmas does not make a calendar year”.
“Last year was tough. The market itself declined but we outperformed the market and outperformed in our big three areas of electrical, fashion and home,” Osborne tells Financial Director. “Since February we have seen an increase in our outperformance of the market. We are gaining more market share than last year.”
The past year has been tough for retailers and John Lewis has been no exception. Operating profit for the year ending 28 January 2012 was down £40.5m to £157.9m and Osborne concedes that the economy is “bumping along the bottom”.
However, she is confident the business is supported by the employee-owned partnership structure of the parent John Lewis Partnership.
“When you’re in a plc, you aren’t always acting as if you owned the business because you are sometimes having to make short-term decisions,” she says. “We always keep an eye on the long term. If we were to take profit at the expense of next year and the year after that, it would be the wrong set of values for the partnership.”
That has not diminished what has been bumper times for the store’s partners – the employees that own the business – with bonuses reaching 14% of salary.
The partnership structure is just one of the cultural changes that Osborne, who is one of many FDs to have cut their teeth at Kingfisher, will face at John Lewis. Osborne is an autonomous finance director yet the partnership committee, which oversees Waitrose and the department store business, has just hired a new finance director in Helen Weir, who will replace the outgoing Marisa Cassoni in June.
Osborne does not expect this to test her independence and is familiar with matrix structure reporting lines that were “common practice” at Sodexo, Kingfisher and PepsiCo.
“It’s quite a decentralised partnership,” she says. “It has a high-level strategic direction but it’s no more dictatorial than that. John Lewis and Waitrose are quite autonomous. That doesn’t mean we have free reign; we have to be accountable.”
Osborne will also have the benefit of having worked with Weir, another FD to have graduated from Kingfisher. Interestingly it was Weir who recruited Osborne while she held the top finance job at Kingfisher. While the pair did not work directly together at Kingfisher, the previous connection can only serve to cement their working relationship.
“She is good at working and agreeing an agenda with people and letting them get on with it,” Osborne says of Weir. “She expects people to be able to deliver.”
Kingfisher has a reputation of being a good place to learn retail financial skills, but it was Osborne’s nine years spent at PepsiCo where she really learned her trade in a “very strong” finance function.
“Learning the ropes at PepsiCo was better grounding for being a strong finance executive than just purely Kingfisher by itself,” she says. “Kingfisher added to that skillset with broader retail.”
Investment in the business has continued apace. Two new home stores, plus a full-range store in Stratford and investment in IT and distribution infrastructure to support multi-channel trading saw an outlay of £182m.
“We are increasingly a multi-channel retailer which means we have to be distributing in a different way to a lot of our customers,” says Osborne.
The department stores now sell £808 per square foot of floor space, higher than it has been in five years, but a key concern for Osborne will be the dearth of opportunities to expand the full range of stores because of the scarcity of suitable sites.
John Lewis’ major department stores have a selling space of 132,000sq ft. Osborne says that the intention is to increase its presence with a new, flexible format that will offer a full assortment that is edited down to reflect the individual locations.
The flexible store format, which averages between 65,000 and 100,000sq ft, will allow John Lewis to penetrate previously untapped catchment areas.
“There are some big catchments that we are not in where customers can only access online so we need to put bricks there. If we get customers to interact with us online and in store it has a multiple effect,” she says.
The full-range store in Stratford is considered by analysts to be a rare exception and, therefore, gives the online business – which Osborne says is the “fastest growing part of retail” – particular importance when it comes to investment.
Johnlewis.com sales were up 26.3% to £141.7m, while customers’ use of Click and Collect operations to buy online and collect in store is the fastest growing form of customer purchases.
The changing customer behaviour also poses a strategic dilemma for retailers that have come from bricks. However, Osborne’s past experience as B&Q’s director of strategy means that she is well placed to capitalise on the convergence of technology to enable communication and customer trends in personalisation.
“When two trends hit each other, you get that tsunami effect and suddenly something changes and moves off at pace’” she says. “People saw it a long time ago but it didn’t move as fast as predicted. Now you can see customers changing their behaviour and accepting technology.”
In December John Lewis launched an iPhone app that provides customers with access to 200,000 products while they are on the move.
“Customers increasingly want what they want, when they want, where they want,” she says. “Retailers that react to that are going to be in a stronger position to those that don’t. The convenience aspect of online meant you could do it at home; mobile is the natural next step.”
Horns of the dilemma
The growth in online retail creates some challenges specific to the finance function. On the plus side, online is not very capitally intensive and is potentially higher returning whereas stores require a lot of working capital investment.
Osborne predicts that 33% of John Lewis’s markets will go online, with customers used to shopping instore migrating across. Whether money comes through the front door or from a click of mouse should not matter but, according to Osborne, the migration online matters for the finance function.
“It matters because the financials are different; they are different business models,” she says. “One is high fixed cost, high marginal contribution; one is low fixed cost but lower marginal contribution because the variable costs associated with online are higher.
“Marketing is more variable than it is with shops. When you set up with Google, you pay per click so you are paying all the time for people to come through to you. So there is leverage in that but more variable cost.”
How to shift the business model in a way that helps grow profits rather than hurt the business is a dilemma that all retailers are facing.
“You have to make less of your costs online variable, so fix as many as possible,” says Osborne. “In store you have to look at how you can make more of the costs variable but in a way that you can manage through a downturn without too much hitting your bottom line.”
The Holy Grail for Osborne is to get customers to shop across the two so that they spend more. “The prize we are really after is to get people to shop in an omni way,” she says. “Therefore, the business model works because you are getting a greater share of wallet with your customers.”
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