Written evidence from John Lewis Partnership (ISP0030)

Executive summary

●        Productivity across the UK economy has stagnated over the past decade, with the UK being home to a ‘long-tail’ of underperforming businesses.

●        The retail sector is undergoing profound structural change following an exponential increase in the number of consumers choosing to shop online. This has increased competition for traditional ‘bricks and mortar’ retailers, many of whom are now ‘omnichannel’.

●        With more shopping being done online and advances in Robotic Process Automation (RPA), research from the retail sector trade body - the BRC - indicates that the sector will have fewer overall employees in the coming years.

●        The John Lewis Partnership, thanks to its employee ownership model, is well-positioned for the future retail market, having embraced online retailing early and taken long-term investment decisions to solidify its market position. This includes £500m investment in a state of the art distribution centre at Magna Park, Milton Keynes.

●        Employee ownership is proven to boost productivity as workers have a stake in their business and, importantly, share in the rewards of the business. All profits made by the John Lewis Partnership are either reinvested in the business or remunerated to its Partners (employees) through wages, pensions, or annual Partnership Bonus.

About the John Lewis Partnership

The John Lewis Partnership is the UK’s largest employee owned business, employing 84,000 Partners (employees). We operate over 400 John Lewis and Waitrose shops across the UK, with annual sales of more than £10bn.

The Partnership exists today because of the vision of its founder, John Spedan Lewis, who created an experiment in ‘industrial democracy’ – where Partners share profit, knowledge, and power. The Partnership has a written Constitution which underpins our business principles, our role in society, and how we work with suppliers and in the communities in which we trade. The ultimate purpose of the Partnership is to balance the happiness of its Partners through their worthwhile and satisfying employment in a successful business.

Flatlining productivity is the most important economic issue facing the UK

The UK’s average productivity growth - the main barometer of the health of the economy - has stagnated over the last ten years, growing at an average of just 1.7%. Economic recovery following the financial crisis has been slow and bears little similarity to the recoveries of the past.

Employment levels over the ten year period have, in general, held up culminating in the present level of 75%.

However, beneath the surface of what are generally positive economic indicators (high employment, historically low inflation, low interest rates), significant concerns exist about the financial resilience of the UK’s citizens. Wages have been flat or falling in real terms since the financial crisis across western democracies. Indeed, research conducted by McKinsey & Co has found that 70% of British households faced falling market incomes from 2005-2014,[1] while figures from the Resolution Foundation reveal that real income fell in the first two quarters of 2017.[2] 

Weak wage growth is symptomatic of an economy where productivity growth has been close to flat for a decade. It is only through increasing the nation’s productivity that we will generate the surplus required for investment, both in people and in technology. Improving productivity growth should, therefore, be seen as a strategic priority for both policy makers and business leaders.

While the UK is home to some of the most productive companies in the world, it is also home to a high number of underperforming firms - the so-called ‘long-tail’ of companies - who have further potential to be unlocked. The variance in performance between businesses in the UK is significant, and is larger than those of our French or German counterparts. It also cannot be explained by differences in size or sector. There are, however, specific sectors which consistently report poor levels of productivity, this includes the retail sector.

It is, therefore, encouraging that the Government has prioritised a new approach to its Industrial Strategy, accepting the case for strategic intervention in some markets where there is potential for the UK to have a competitive advantage.

Retail is in the midst of profound structural change. Retailers are focusing on improving productivity in a highly competitive environment

Competition in the UK retail market is fierce. In the face of major structural change in the industry, the need to improve productivity is clear, and is a vital part of ensuring retail businesses are fit for the future.

Embracing technological innovation is a vital component in improving productivity and advances in digital technology and artificial intelligence (AI) are leading to increased automation of roles. The speed of automation is expected to increase in coming years, with McKinsey & Co noting that 78% of predictable physical work can be automated on current technology.[3] Retail is a sector particularly sensitive to future automation, with McKinsey highlighting that 53% of jobs in the sector having the potential to be automated.

While technological innovation is vital for the future success of retail businesses, it does mean a structural shift in the composition of those businesses. The retail sector is currently the largest private sector employer in the UK, providing a living for over 3 million people.[4] However, this figure has been slowly declining since 2008 with 191,000 fewer people working in retail between 2008 and 2014.[5] This is a trend which retailers expect to continue resulting in fewer overall jobs in the sector. Research by the British Retail Consortium has indicated that there could be 900,000 fewer jobs in retail by 2020.[6] While technological advances may mean fewer traditional jobs in the sector, it is important to note that improved productivity also increases wages, with the BRC highlighting that wages in retail rose by 69% in 2017, with productivity increasing by 2.2% in the year to June 2017 - compared to 0.8% in the UK as a whole.

Productivity and the John Lewis Partnership

The John Lewis Partnership was an early adopter of technological innovation in the retail market and, due to its employee ownership model, has been able to make long-term investments. By 2020 our John Lewis trading division expects 50% of its sales to be made online. In order to adapt to this change, we have integrated our business divisions to offer Click and Collect services to our customers from both John Lewis and Waitrose shops. In 2017 Click and Collect accounted for 52% of John Lewis orders, with 72% of those collected from a Waitrose branch.[8]

The Partnership has embraced Robotic Process Automation (RPA) technology which can remove repetitive, low value-add human activity in Head Offices. This includes high volume, non-customer facing administration tasks in our shops which, by freeing up Partners from the repetitive process, allows Partners to spend more time engaging with customers. Successful pilots ran throughout 2016 and have paved the way for the establishment of Automation Practice to run this year. RPA allows the business to create better jobs for our Partners and will also enhance the financial sustainability of the Partnership through cost reduction and enhanced customer outcomes.

In addition to digital automation the Partnership has also invested in tangible assets, with the largest of these being £500m investment in Magna Park National Distribution Centre. Magna Park, near Milton Keynes, is a state-of-the-art distribution centre which places the Partnership in a position of strength to perform in the retail sector of today and the future. Magna Park embraces automation and large sections of the distribution centre are worked by relatively few Partners. This underpins the Partnership’s business plan - It’s Your Business 2028 -  which recognises that, although there will be fewer overall Partners in the coming years, our ambition is to ensure those that remain are in better jobs, which are better performing, and earning better pay. This decline in employment at the Partnership reflects the wider trend in the retail sector for fewer jobs.

A further key component to improving the Partnership’s productivity will be delivered via the reskilling and upskilling of our Partners and creating more productive roles with higher rates of pay. Apprenticeships are a cornerstone of this approach and we want to introduce thousands of apprenticeship opportunities by 2020 to support existing Partners to progress in their roles and develop new skills. While we support the objectives of policies designed to boost skills, such as the Apprenticeship Levy, we are encountering some practical challenges with its implementation and reaching the scale of our ambition.

The John Lewis Partnership’s democratic structure: how it improves productivity and fosters accountability

The Partnership’s employee owned model is a key driver in facilitating improvements in its productivity. By linking the rewards of economic growth directly to Partner remuneration (through pay, pension, and an annual Partnership Bonus), we help to foster a collective sense of responsibility for the financial sustainability and success of the business.

As an employee owned business, the Partnership also operates its own structure of democratic employee representation, delivered through a unique set of institutions. We democratically elect representatives to be independently minded, to represent the views of their constituents, and who share Partner opinion with our leaders. This acts to help the business in its decision making process by providing a regular feedback loop between many layers of management. We believe the best way to get things done is through regular conversations with line managers, and senior leaders. As co-owners, Partners' are expected to get involved in our democracy which is something we aspire to as a way of life in the Partnership and a part of our day-to-day responsibilities.

We have elected representatives who represent Partner opinions at four different levels. The systemic nature of democratic engagement in the business is demonstrated below.

Promoting employee ownership and improving productivity

The number of employee owned companies in the UK is growing, with a 60% increase in the number of companies adopting the business model in the last year. There are now over 300 businesses operating under employee ownership in the UK, employing over 200,000 people.[9]

Research indicates that employee owned companies are more productive than those which operate under other models, such as PLCs and private companies. This is highlighted by the fact the top 50 employee owned businesses had combined sales of £22.7bn, helping to achieve a 10.1% YoY increase in operating profits.[10] Productivity in the employee owned sector increased at a higher rate than national productivity with a 6.2% YoY increase for the former and a 3.4% YoY growth for the latter.[11]

The Partnership believes that government has a role in encouraging the adoption of employee ownership models in the business community. Through sharing in its rewards, employee owned companies foster a collective responsibility amongst its employees. The John Lewis Partnership shares its profits with its Partners through an annual ‘Partnership Bonus’, distributing our profits to Partners as a percentage of their salary.

Recommendations for incentivising productivity growth

Much of the change required to grow productivity is in the hands of individual businesses. However, there are three core areas where public policy interventions could facilitate an operating environment for businesses that supports productivity growth. These are:

1. A skills policy framework that is flexible enough to respond to the needs of business and the changing world of work.

Ensuring that businesses have the right mix of skills, in terms of leadership and management capabilities and an adaptable workforce, is crucial to improving productivity. Access to high quality, relevant business and management education ensures that businesses know what steps they could take to improve their productivity and how to go about implementing change in their organisations. As productivity changes are then implemented, be it through new technology or innovation, it is then also vital that businesses have access to the resources to develop and evolve the skills of their workforce to respond to, and maximise, the benefits of these changes.

We welcome the Government’s recognition that skills policy should be employer-led. However, it is important that when positive skills interventions are implemented, this is done so in a way that gives businesses flexibility in where they focus their resources on training and upskilling. For example, we believe in the value of apprenticeships as a meaningful tool for progression and are investing heavily in increasing apprenticeships across our business. However, we are encountering some practical challenges with the implementation of the new Apprenticeship Levy, which are limiting us from delivering as many apprenticeships as we’d ideally wish to provide. This includes the lack of sufficient, high quality apprenticeship standards and the time taken to develop and approve new standards.

These challenges are shared by businesses across the economy and recent research from the CIPD shows that nearly a fifth of employers - and over a third of levy-paying SMEs - surveyed plan on writing off the Levy as a tax, rather than investing it into apprenticeships[12]. This is a real missed opportunity as not enough of this multi-million pound investment by employers is being invested back into training and skills, while we know that the UK faces a skills shortage in many areas. Data on apprenticeship starts in the first quarter since the Levy was introduced shows a 59% decline in the number of starts, compared to the same quarter in 2016.[13] Small, targeted changes to the administration of the Levy could significantly help in increasing the number of apprenticeship starts. In addition, there are a number of areas where investment in skills capabilities would be beneficial, but where apprenticeships may not be the appropriate mechanism to do so, such as digital skills.

Recommendation: In the short term, the deadline for spending Apprenticeship Levy funds should be extended from 24 - 36 months, in recognition that this policy is still bedding in. This would give employers and education providers sufficient time to develop the new apprenticeship standards needed to meet the target of 3 million apprenticeships by 2020.

Recommendation: Government should consider the case for providing greater flexibility in how Apprenticeship Levy funds are spent, to ensure this significant tranche of skills funding is put to its most productive use. Government should work with employers to identify areas where the funds collected through the Levy could be invested into meaningful and high quality skills initiatives, not covered under the current apprenticeships framework. For example, on areas of upskilling, such as the development of digital skills, or high quality business and management education initiatives.

2. An economic and legislative environment that incentivises investment by businesses in innovation and productivity-boosting measures

The Industrial Strategy recognises the importance of supporting businesses to invest in capital and innovate. Thoughtful, evidence-based and targeted tax incentives, such as the R&D tax credit, can play an important role in fostering innovation and growth. However, in some instances, the current taxation system actively works against productive investment. The current business rates regime is an example of this.

Business taxation has not kept pace with the changes in the modern economy and has become increasingly weighted against people and property-intensive businesses. The current business rates system disproportionately disadvantages ‘bricks and mortar’ retailers that contribute to thriving high streets and employ large numbers of people across the UK. It also tips the balance in favour of companies with smaller physical footprints in the UK.

At the same time, the system of valuation, based on property values rather than economic performance, reduces the incentives for physical businesses to invest in property and improvement works, which could increase property values and business rates.

Recommendation: Government should review the taxation system, specifically non-domestic rates, with the ambition towards creating a level playing field for retailers with a physical presence, employing a significant number of staff, and those which are online, employing significantly fewer staff.

3. A legislative framework that supports the creation and growth of high productivity, employee owned companies

Raising awareness of the employee ownership business model should be a key ambition for any government. As noted above, employee ownership can have a positive effect on employee engagement and business productivity, as employees have a stake in the success of their business.

Research reveals that when business owners are aware of the employee ownership business model, many will consider it, especially at the point of business succession or scale up/growth. However, a lack of awareness remains the norm in the UK, particularly among professional advisers - the common touchpoint for large and small business owners across the UK - many of whom do not recognise the relevance of employee ownership to their clients.

There is potential for employee ownership to be adopted in the future by small, family businesses who are considering succession planning and who will run their businesses in the future. However, research suggests that succession planning is low down on the list of priorities for British businesses, with 43% of family owned businesses noting that they do not have a plan in place for their future.[14]

In Scotland and Wales both devolved Governments have funded support to promote employee ownership, recognising that the business succession stage is a key strategic moment.  It is through this support that both administrations are able to educate professional advisors, provide a single point of access for support, and deliver subsidised legal services to support the transition to employee ownership.

Previous governments have introduced a number of incentives - both financial and to raise awareness - to encourage the adoption of employee ownership as a business model, most recently through the Nuttall Review. These have had a positive impact on the growth of the sector and there may be a case to consider where further, targeted support could be provided, in line with government’s industrial strategy objectives.

Recommendation: The Committee may wish to examine the employee ownership sector’s current, and potential, contribution to productivity as part of its future work in this area. Government should also explore options to raise awareness of the employee ownership business model.

Recommendation: The ONS and HMRC should ensure that the size, distribution and characteristics of the employee ownership sector are regularly surveyed and reported on as part of existing data collection.

Recommendation: Government should analyse programmes in place to support employee ownership in the devolved administrations, and in other countries, with a view to introducing similar support in the UK.

Recommendation: Government should encourage the transfer of ownership to Employee Ownership Trusts (EOTs) as owners retire. This can be supported through the exemption of vendor loans to EOTs from inheritance tax.

Recommendation: Government could review a sliding scale for Capital Gains Tax relief - i.e. 50% CGT relief for the disposal of shares over 25% of a company’s ordinary share value, with the tax relief increasing to 75% until the controlling interest has been disposed off, at which point no CGT is paid (as is the case under current tax reliefs).

28 February 2018