The economy is slowly opening after the lockdown. Hopefully, the ice will gently thaw, albeit warm weather may be some way off. We have already written about how an economic slowdown should encourage evaluation, and the latest news on this came from the John Lewis Partnership. This goliath of the high street announced last week that they are looking for a partner to help them expand beyond retail to services. They have also refused to rule out the permanent closure of some less viable stores after the lockdown. The plans are part of a scheme by their chair, Dame Sharon White, to accelerate changes in response to a lack of footfall after the pandemic. John Lewis currently offers some financial services and home services, but it wants to pursue a more substantial diversification. In their statement they added that remaining an employee-owned business is non-negotiable.
In summary, the announcement states that they will be an employee-owned business, change the game and team up with perhaps investment help. To examine each strand:
1: Employee-Owned Business
John Lewis has always argued that being an employee-owned business is more productive. The statistics do bear this out as there are now some 350 UK employee-owned businesses that produce more per capita on average than those that are non-employee-owned. Another reason why being an employee-owned business is a really exciting model is that it can also be used as a great exit strategy for owners, particularly post COVID-19. Why? As the owner, you, along with your advisers, control the timing, not the trade buyers or investors, and within the bounds of cashflow over say 5-8 years, the valuation. Furthermore, since March 2020, Entrepreneurs’ Relief has been capped at £1 million, this means that share sales are now at 20% whereas a sale to employee ownership is a highly appealing 0%. This makes an employee-owned transaction a very attractive option today, regardless of the pandemic.
2: Changing the Game
This is essential in business, employee-owned or not, yet it invariably requires leaders to make brave choices; in particular, disruption of their business model and competing with themselves. IBM famously chose not to disrupt themselves and compete with themselves due to the vested interest of the status quo. In the late 1970’s they had a leading position in both PC hardware and software. Working with Bill Gates on operating systems they failed to buy the code as they believed hardware was the future, leaving Bill Gates the OS software license and the rest is history. Today, Microsoft is far more valuable than IBM. Whilst the spirit of John Lewis entering the services arena is positive and a well-trodden path akin to Marks & Spencer, they are late to the party and one wonders whether partnering and investment are correct or a series of well-placed acquisitions may make more sense. For example, there may be a number of highly cost-effective travel acquisitions available post-COVID-19. Yet long term with the John Lewis brand you would say owning rather than partnering in this sector would be a fair bet.
3: ‘Teaming up’ and Investment
This is interesting as an employee-owned business usually works alone but ‘teaming up’ as they are behind the market does make sense. Who with and what are the next steps? Post-COVID-19 ‘teaming up’ may also make sense for many companies to secure both economies and synergies, particularly around infrastructure and management. There is also material scope to team up to secure investment. Is it better to own 30% of something that in 3-5 years is worth 3 to 4 times as much and de-risk on the sale of the first 70% to an investment partner? There is over $1.8 trillion of investment money (‘dry powder’) looking for a home at present in private companies. This is because yields are poor in both property and stock markets leaving investors looking at private companies for a return. If you ever wondered why they use the term ‘dry powder’, this is a military term for dry gunpowder being stored for future use. Despite the recessionary pressures that the coronavirus pandemic has caused, this ‘dry powder’ money needs a home, providing an opportunity for potential sellers to de-risk and secure growth capital for the next phase of their journey.
The John Lewis Partnership Board has decided that attack is better than defence post-COVID-19 and this defines the future leaders. Whether investment, employee-owned business or changing the model, the central theme is where are you going to attack?
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