The John Lewis Economy: Why Is Downing Street Looking to Britain’s Most Beloved Department Store?

In Britain, big department stores tend to be as concerned about pedigree as the country’s consumers. Ultra-posh stores like Harrods and Harvey Nichols cater to luxury lovers, while dowdier chains like BHS serve the budget-minded. But John Lewis, the country’s largest and most successful department store, has become a national institution by doing both. At the 148-year-old chain, which has 29 department stores and eight smaller home stores around the country, members of the 1% drooling over $6,200 Maurice Lacroix crocodile-leather watches commingle with value shoppers angling for $31 unisex plastic Casios. Imagine wrapping a Bloomingdale’s, Macy’s and J.C. Penney into one in the U.S. “In class-conscious Britain, it manages to be fairly democratic,” says Michael Poynor, founder of the consulting firm Retail Expertise. “No one is ashamed to be seen with a John Lewis bag.”

John Lewis is such an entrenched cultural fixture that its nickname is the Bellwether of the High Street — a term commonly used to refer to Britain’s Main Street. The high-low strategy has paid off throughout the recession even though the U.K.’s retail sales have been falling or flat since 2009 and shopping districts and malls are littered with vacant shops.

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Through it all, John Lewis has maintained an unbroken 10-year streak of outsize sales growth. In an ailing economy, John Lewis’ group sales — which include the department store and its upscale grocery chain, Waitrose — jumped 6.4% to a record $13.48 billion in its last fiscal year, besting competitors like Marks & Spencer and House of Fraser, whose sales rose a meager 2% and 1.5%, respectively. The company wasn’t immune to the downturn: profits dipped nearly 9% to $607 million last year, partly because it invested more in its businesses. But the move didn’t hurt sales, which surged 11% in the first 24 weeks of the year from the same period a year earlier.

One of John Lewis’ secret weapons is its unusual structure: it’s 100% owned by its 81,000 full-time employees. That makes its shareholders — who have a bigger stake in the company’s success than floating shareholders of public companies — acutely focused on the long haul. “Our ownership model creates the right conditions for success,” says Charlie Mayfield, John Lewis’ chairman since 2007. Research shows that employee-owned businesses fare as well as or better than traditionally owned enterprises in good times and bad. They’re more profitable, they create jobs faster than other companies, and they shed less staff, according to a recent study by London’s Cass Business School. And they’re outpacing rivals: business at worker-run shops is growing 50% faster than the British economy as a whole, according to new figures from the U.K. government. Amid news of exorbitant bonuses and a barrage of high-profile corporate scandals — Rupert Murdoch’s phone-hacking scourge and Barclays’ alleged interest-rate rigging being the latest — Downing Street has found a champion in John Lewis. Deputy Prime Minister Nick Clegg is amping up calls for a “John Lewis economy,” one that encourages a more responsible brand of capitalism through employee-owned businesses. In July, days after the Barclays scandal broke, Clegg announced plans for a government office that will advise businesses on how to become employee run, along with tax breaks to sweeten the deal. Barclays, he said in a speech, is “a timely reminder that our economy desperately needs an injection of responsibility, greater checks on unaccountable power, power in more hands.”

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John Lewis employees — or partners, as they’re called — don’t actually own shares individually. They’re held in a trust on their behalf. It’s a profit-sharing arrangement, so when the company performs well, workers pocket a fat annual bonus. Last year it was worth 14% of their yearly salary, or roughly seven weeks’ pay. Each store has an employee forum that elects representatives all the way up a food chain ending in a 14-member partnership board chaired by Mayfield, which meets four times a year. There, twice yearly, Mayfield puts his job up to a vote that could have him sacked. “And that’s real power,” says Mayfield, 47, who earned the same 14% bonus — for a total of $179,000 — as the rest of his staff last year. The equivalent bonus for Marc Bolland, CEO of Marks & Spencer, totaled $1.03 million.

Ceding power and pay is a lesson learned from the company’s history. Founded by John Lewis as a curtain store in London in 1864, the shop quickly grew into a successful department store. As communist thinking spread in the early 20th century, John Spedan Lewis, the founder’s son, began to fear for the business. He viewed the vast sums that his father, his brother and he earned — which totaled more than the pay of all their employees combined — as a tinderbox. The more reticent father shunted his son’s designs on improving working conditions and doling out paid holidays, tasking him instead with turning around a smaller family-owned shop, the Peter Jones department store. When the elder Lewis died in 1928, Spedan Lewis took over the namesake store and set up an initial profit-sharing scheme. In 1950, he handed full ownership to the employees in a trust tied to a constitution. It touts the virtues of “worthwhile and satisfying employment” for the “happiness of all its members.”

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As a result, a typical John Lewis sales floor feels “more like a family” than a cutthroat retailer, explains Elizabeth Dunbar, a John Lewis stock auditor. “We are protective of each other and protective of the business.” No wonder. In addition to granting hefty annual bonuses, the company owns and operates five resort hotels for its employees’ use, including Brownsea Castle, a 16th century edifice with a private beach on an island off England’s southern coast. Employees have the run of subsidized vacations (wine-tasting excursions to France, for instance); hobbyist clubs around the country for a range of activities including skiing, snowboarding, sailing and horseback riding; and half-price tuition for classes in, say, Renaissance architecture or Japanese cooking.

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The cushiness comes at a cost. Last year the company spent about $588 million on such benefits, which is more than twice what rival Marks & Spencer spent on benefits for its 82,000 employees over that period. The upside for John Lewis is low staff turnover. Employee churn, which averages around 40% to 50% in the retail industry, is only 20% at John Lewis. “That’s obviously a cost savings,” says Joshua Bamfield, director of Britain’s Centre for Retail Research. The company also keeps layoffs to a minimum, even during downturns, by offering to retrain and redeploy most partners whose jobs get cut. That kind of security, coupled with the ownership glow and perks, imbues employees with a passion for their job and a devotion to their customers, says Lisa Byfield-Green, an analyst with London consultants Planet Retail. And Retail Expertise’s Poynor estimates that John Lewis spends at least 25% more than its rivals on staff development, and it shows: some 80% of its sales are to 20% of its most loyal customers.

Of course, the model isn’t a fix-all. Partnerships tend to work best for small- to medium-size companies. John Lewis’ recent expansion abroad could fail if the cultural advantages are lost on foreign franchisers. Unlike with publicly traded firms, employee-owned companies are also less regulated, which can make raising outside capital harder, since banks and bond buyers have less data to assess risk. “That can lead to a lack of scrutiny that can be disastrous,” says Bang Dang Nguyen, a finance lecturer at Cambridge University’s Judge Business School. Take Arthur Andersen, the major employee-owned accounting firm that tanked in 2002 after a few bad seeds helped Enron hide its losses.

Still, investors in employee-run firms tend to be more patient about returns. And employees are often better stewards of a founder’s vision than outsiders. John Lewis employees overruled a push to sell the company to outside investors in 1999 — which promised a windfall payout of roughly $150,000 per employee — fearing that cutbacks by any new owner would squelch company culture. “Since that wobble,” says Poynor, “the business has gone from strength to strength.”

Only 3% of British businesses are employee owned, compared with 10% in the U.S. But Britain’s numbers could grow by about 10% this year, adding another 100 companies, according to Iain Hasdell, CEO of the Employee Ownership Association in London. As the country’s public coffers dwindle, sluggish government agencies that have gone private, like the Royal Mail and elder-care providers, are the likeliest contenders.

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The John Lewis economy is on prominent display at the London Olympics. The company has a large department store in the Westfield Stratford City mall in East London, which abuts the Olympic stadium. To accommodate the rush of business accompanying the Games, the store’s employees are willingly working later, keeping the store open till 10 p.m. most nights, two hours later than usual. With its shops filled with London 2012 souvenirs and trinkets, sales of gift items are already up 60% over last year. True to John Lewis’ mid-market ethos, the range is high to low. Can’t afford $4,464 for a commemorative gold coin from the Royal Mint? Grab a minireplica of the Olympic torch — a steal at $15.50.

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