Two of the biggest names on the British high street have spelled out the damage being done by the coronavirus lockdown, putting tens of thousands of staff on the goverment’s job retention scheme and slashing spending as sales plunge.
Primark and John Lewis have together furloughed more than 80,000 staff. John Lewis said it feared department store sales could fall by one third. It is furloughing 14,000 staff and slashing hundreds of millions of pounds from its spending plans.
The employee-owned group, which also owns the Waitrose supermarket chain, said it was planning for a “worst-case scenario” in which John Lewis would experience steep sales declines until June, followed by a period of weak demand.
Associated British Foods (ABF), the owner of Primark, said it had furloughed 68,000 workers around the world. It has also written off £284m of stock, including Euro 2020 merchandise and spring fashions, which it is unlikely to ever sell.
The fashion chain has also rented nearly a third more warehouse space to help store £1.5bn of stock already ordered from suppliers which it cannot sell because its entire global network of 370 stores is closed during the crisis. It does not sell online.
The group has cancelled its interim dividend, worth £95m last year, while executive directors will halve their pay during the crisis. The company said Primark was losing £650m in sales and paying out £100m in cash for every month its stores remained closed.
George Weston, the chief executive of ABF, said he was keen to reopen Primark’s stores but urged the government not to lift restrictions too early as a second lockdown would be the “worst thing”.
The company said it had the necessary finances to survive even its worst forecasts, under which stores would remain closed until next May. Weston said: “In time we can rebuild the profits. We can’t replace the people we lose.”
Sharon White, who was installed as the John Lewis group’s chairman in February, said it was a time of “great uncertainty and volatility” with the full-year picture for its finances “impossible to predict”.
What’s the problem?
Physical retailers have been hit by a combination of changing habits, rising costs and broader economic problems as well as the coronavirus pandemic. In the past few years names such as Mothercare, Karen Millen, Toys R Us, Maplin and Poundworld have disappeared from the UK high street as a result.
In terms of habits, shoppers are switching to buying online. Companies such as Amazon have an unfair advantage because they have a lower business rate bill, which holds down costs and enables online retailers to woo shoppers with low prices. Business rates are taxes, based on the value of commercial property, that are imposed on traditional retailers with physical stores.
At the same time, there is a move away from buying "stuff" as more people live in smaller homes and rent rather than buy. Uncertainty about the economy has also slowed the housing market and linked makeovers of homes. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit and the coronavirus, have coincided with economic and political uncertainty that has dampened consumer confidence.
What help do retailers need?
Retailers with a high street presence want the government to change business rates to even up the tax burden with online players and to adapt more quickly to the rapidly changing market. Retailers also want more investment in town centres to help them adapt to changing trends, as well as a cut to high parking charges, which they say put off shoppers. Many businesses which deal with complex supply chains also want additional help with the new red tape and import charges imposed after Boris Johnson's Brexit deal saddled them with extra costs.
What is the government doing?
In the December 2019 Queen's speech, the government announced plans for further reform of business rates including more frequent revaluations and increasing the discount for small retailers, pubs, cinemas and music venues to 50% from one-third. It has also set up a £675m "future high streets fund" under which local councils can bid for up to £25m towards regeneration projects such as refurbishing local historic buildings and improving transport links. The fund will also pay for the creation of a high street taskforce to provide expertise and hands-on support to local areas.
“Over the course of the full year, this worst case would result in a sales decline of around 35% in John Lewis – around double the current level – while at Waitrose it would result in a more modest decline of less than 5%.”
The store group’s financial performance has been hit hard by the lockdown which forced the closure of John Lewis’s 50 stores. Online sales have soared 84% since the middle of March – as Britons established home offices, schools and gyms – but that has not offset sales lost through shop closures.
Shoppers were “buying more Scrabble but fewer sofas”, White explained, which was resulting in a profit squeeze. Over the past five weeks John Lewis sales were 17% down on 2019.
In common with other food retailers, Waitrose has seen a huge pick up in sales, up 8% over the last three months, as shoppers stockpiled rice, pasta and frozen foods. However, running costs have also increased as it installed safety gear in stores, such as plastic shields, and expanded its online grocery service.
Last year, the group started merging the Waitrose and John Lewis management teams to cut costs, eliminating the posts of managing director for both Waitrose and the John Lewis department stores chain. The annual report, published on Tuesday, revealed that the Waitrose boss, Rob Collins, and his counterpart at John Lewis, Paula Nickolds, would collect a pay off of about £900,000 each.
News of the big payouts came as the group said it was giving staff – barring senior managers – a one-off award of £200 each. The senior management team, including White, is taking a 20% cut in pay.
The chancellor’s business rates holiday would save it £135m this year, the company said, while deferring its VAT bill until 2021 would also help its short-term cashflow. Although some John Lewis staff have been redeployed to Waitrose, the retailer said more than 14,000 department store staff were being transferred into the government’s emergency wage support scheme.
Other cost-saving measures announced by the group included buying less stock and shaving £100m off its marketing spend. The company, which is owned by its employees, known as “partners”, is also slashing more than £200m from its spending plans.
