John Lewis Partnership plc

Company Profile

Publication Date: 29 Oct 2010

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TABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview..............................................................................................4
Key Facts...............................................................................................................4
SWOT Analysis.....................................................................................................5

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Company Overview

COMPANY OVERVIEW

John Lewis Partnership (JLP or “the company”) is a privately held retailer operating supermarkets
and department stores. The company is a worker co-ownership where all the staff members are
partners in the business. JLP operates in the UK. It is headquartered in London, the UK and employs
about 70,000 people.

The company recorded revenues of £6,734.6 million ($10,640.8 million) during the financial year
ended January 2010 (FY2010), an increase of 7.5% over 2009. The operating profit of the company
was £3,89.7 million ($615.7 million) in FY2010, an increase of 20.5% over 2009. The net profit was
£106.5 million ($168.3 million) in FY2010, a decrease of 54.4% compared to 2009.

KEY FACTS

Head Office John Lewis Partnership plc

171 Victoria Street
London SW1E 5NN
GBR
Phone 44 0207 828 1000
Fax
Web Address http://www.johnlewispartnership.co.uk
Revenue / turnover 6,734.6
(GBP Mn)
Financial Year End January
Employees 70,000

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SWOT Analysis

SWOT ANALYSIS

John Lewis Partnership (JLP or “the company”) is a privately held retailer operating supermarkets
and department stores. The company is a worker co-ownership where all the staff members are
partners in the business. The company's brands, Waitrose and John Lewis enjoy strong brand image
which enabled it to better weather the weak economic backdrop. However, the electricals and
homewares markets have been underperforming owing to sluggish consumer spending, weak
housing markets and weak product cycles. This will impact John Lewis' top line growth adversely.

Strengths Weaknesses

JLP well-placed to continue performing well Weak price positioning as customers

in a difficult market continue to trade down
Exceptional quality perception is the highest John Lewis forced to scale back expansion
loyalty driver for Waitrose plans
Value message through price matching with Misrepresentative commercials will tarnish
Tesco brand image
John Lewis looks to launch new store
formats to expand geographical reach

Opportunities Threats

Online channel continues to boom and will
enable JLP to boost revenues
Deals to expand convenience offering
Increased acceptance of private label
brands in electricals
Rising popularity if premium in-home dining
Continued weakness in demand for
electrical goods and homewares
VAT rate increase to 20% will further limit
the retail growth
Financing the pension fund deficits as they
grow

Strengths

JLP well-placed to continue performing well in a difficult market

The company owns two of the strongest retail brands in the UK. John Lewis was voted the UK’s
“Favorite Retailer” and Waitrose the UK’s “Top Food Retailer” in a recent poll of customers by Verdict.
For the fifth consecutive year, Waitrose retains first place in the customer satisfaction index as
measured by Verdict, Datamonitor’s research arm. Waitrose has reaped the rewards of maintaining
high instore standards and providing outstanding customer service. Though consumers are more
measured and cautious in their spending in the current climate, Waitrose reputation from service,
quality and value, has led to sustenance of growth in a very challenging market. While affirming its
credentials as a premium food specialist through the launch of its ‘Seriously’ range, Waitrose has

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SWOT Analysis

broadened its appeal and value perception through its ‘Essentials’ range. Indeed, it is Waitrose’s
broad range and price architecture that has appealed to frugal consumers looking to save money
without sacrificing quality, while perfectly catering to the trend of trading up to premium food to
entertain at home rather than eating out. Several significant investments and innovations were taken
across Waitrose, with the shops and the brand becoming more accessible to many shoppers. In
addition to Seriously range, the company also launched Menu From, a restaurant-quality ready
meals, in addition to agreeing a contract to develop the Duchy Originals brand. These initiatives
have helped contribute to an additional 400,000 shoppers per week visiting Waitrose stores. The
visitors increased from 9 million in 2009 to 9.4 million in 2010. This is due to improved price positioning
and value range.

Similarly, John Lewis has been able to develop a niche for itself due to its service which has been
a differentiating factor. Despite its upper-mid-market positioning, the department store has consistently
achieved double digit weekly sales growth in 2010. By sticking to its long-term plan of innovation
coupled with quality, value and service, John Lewis was able to sustain sales growth even in tough
economic situations. Adding a greater number of products online has seen John Lewis Direct
performing particularly strongly, whereas the new Cardiff store and its trial Home concept have
added new revenue streams. Moreover, investment into its Magna Park distribution center and into
making store operations more efficient has helped to keep margins stable. According to Verdict,
John Lewis has outperformed its peers in second quarter of 2010 which has proven to be a highly
turbulent times. With price, quality and service essential in gaining spend and loyalty, Waitrose and
John Lewis are well placed to continue performing well in a difficult market.

Exceptional quality perception is the highest loyalty driver for Waitrose

Waitrose has been ranked high in quality which is enabling it to develop a niche customer base. The
shoppers that Waitrose retained in 2009–10 continue to value the quality it delivers above all and
are willing to pay for the privilege, especially now the grocer has become price competitive. Waitrose
has above average loyalty scores for range, service, ambience and layout, but none of these are
as strong as its quality score of 74.2% against the second best 28.3% for Sainsbury and an average
of 17.4%. At the same time, range is less of a disloyalty driver, due in the most part to the Essentials
range. Waitrose has also exploited the trend to dining at home through stretching its architecture up
into gourmet ranges and attracting customers from a broader demographic. However, while Waitrose
has broadened its customer base by attracting more C1, C2 and DE shoppers, trading up in certain
categories like replacement to eating out, leading to a net gain in visitors. The customer highly value
Waitrose’s quality which has enabled it to command high levels of loyalty over the past several years
and even in times of high price competition.

Value message through price matching with Tesco

Waitrose and John Lewis have launched several programs to improve the price perception, important
amongst them being price matching with Tesco. John Lewis is seeking to heighten its value credentials
by launching a new John Lewis Value range and emphasizing its 'Never Knowingly Undersold' tagline
in marketing. According to Verdict, this is the right strategy in response to the current economic
climate and the grocers' market share gains. The John Lewis Value range initially comprised 100

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homewares products, but is set to double in size in 2010 to include basic fashion lines. As well as
being a response to an increasingly austere consumer, John Lewis hopes the range will allow it to
compete more effectively with the grocers and high street rivals. Thus, while the range will not be
priced as cheaply as the grocers' own value ranges, prices will be benchmarked against Tesco's
own brand.This range is one component of an overall strategy to realign John Lewis' value positioning,
with the department store also planning a major marketing campaign to explain to the consumer its
'Never Knowingly Undersold' tagline and changing all point-of-sale and packaging information to
emphasize the low price message. While consumers are often prepared to shop at John Lewis for
more expensive purchases, many make more basic purchases at cheaper rivals. The launch of this
new value range and marketing activity that emphasizes the retailer's already strong value positioning
should serve to persuade a higher proportion of consumers to buy these products at John Lewis
stores.

The success of the price matching with Tesco was witnessed in Waitrose’s case which launched a
similar promotional strategy. Waitrose posted a sales rise of 9.4% in the first week of its campaign
to price match Tesco on 1,000 branded products. The sales figure of £92.9 million ($146.7 million)
for the seven days represented a 23.5% jump on the same week two years earlier. It is the first time
the company has adopted price-matching tactics associated with budget rivals such as Asda and
Morrisons. This price matching is expected to add incrementally as the company has so far not
competed on price and yet established a niche customer base. The loyalty coupled with value
positioning is estimated to drive footfall and drive top-line growth.

John Lewis looks to launch new store formats to expand geographical reach

With the development pipeline now extremely sluggish and opportunities for favorable property deals
in existing outlets increasing, John Lewis is trialing a new, smaller format store called ‘Home’. The
new store concept, opened in October 2009, stocks home products, including 20% of floor space
dedicated to electricals. Located on an out-of-town retail park in Poole, Dorset, John Lewis has taken
over a former Courts furniture shop that had been vacant for five years. Situated alongside Homebase,
Laura Ashley Home and Boots, the 40,000 square feet store is around a third of the size of a typical
full-line store. If the trial store proves successful, John Lewis intends to roll out the concept, seeing
potential for 30 to 50 new locations, the majority of which are likely to be out-of town.

John Lewis has been able to capitalize on the downturn, cashing in on the chance to acquire space
cheaply, fill unwanted out-of-town retail space and lay the foundations for future growth. At the same
time, the retailer has been able to gain space ahead of rivals, which are being stifled by their
shareholders requiring short-term returns on investment. While its larger department stores have
been cannibalizing each other, these smaller stores can exist outside catchment areas and will allow
the retailer to target areas which it has not reached before. This plan is a substitute to the original
plan of opening several large department stores, the development of which is delayed owing to the
developer’s financial crisis.

By opening smaller stores, John Lewis intends to place one of its outlets within a 40- minute drive
of all UK shoppers. At present, less than 60% of the population have this level of access, so more
stores are needed. A greater number of stores in convenient locations will help facilitate online

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SWOT Analysis

fulfillment, especially as many customers now use click and collect services. Indeed, Johnlewis.com
has been shown to perform much stronger in areas surrounding a store.

Weaknesses

Weak price positioning as customers continue to trade down

With competition intensifying and the likes of Sainsbury and Morrison continuing to place emphasis
on quality, Waitrose has lost customers to these rivals due to their better price positioning. Waitrose
has also strengthened its price architecture to entice frugal consumers and broaden its appeal. To
this end it launched its Essentials range in early 2009 and invested £14.0 million ($22.1 million) in
price and promotional activity during 2009–10. Nevertheless its loyalty score for price has worsened
further, falling to 8.8% from 9.6% previously. This may be because it has also launched its Seriously
brand of indulgent products to maintain its position as a leading destination at the premium end of
the market. However, while Waitrose has been successfully broadening its customer base by attracting
more C1, C2 and DE shoppers who are trading up in certain categories, partly as a replacement to
eating out, it has lost its share of AB shoppers, who’ve traded down to rival Sainsbury, following its
increased focus on quality and price.

The gap in price has been seen even by October 2010. When compared in terms of price, Morrisons
took the top spot, although there was just 74p between it and second-placed Asda. Morrison offered
the highest number of cheapest items (6) and had the greatest number of promotions (13) with six
round-pound deals. Waitrose managed to offer a single cheapest item own-label cider vinegar at
93p. Compared to Morrison, Asda, Somerfield and Tesco, its basket was the only one to cost more
than £60 ($94.8) and it was £8.39 ($13.3) more expensive than Morrisons. Waitrose also had the
greatest week-on-week increase in the price of the basket (62p).

Similar loss of customers has been seen in case of John Lewis as well. According to Verdict’s How
Britain Shops survey, John Lewis suffered its first drop in visitor share in electricals for several years
in 2009. In recent times, as it has expanded its electricals offer, its visitor share had grown, but its
premium positioning, in an environment where consumer confidence is deteriorating, has seen this
fall. Despite a strong focus on improving its clothing offer, the percentage of John Lewis shoppers
using it for clothing has dropped 4.1 points. Despite John Lewis launching an entry level price point
homewares range in 2009 to broaden its customer base, the percentage of John Lewis shoppers
using it for homewares has dropped by 2.8 percentage points to 45.1%. JLP has launched several
initiatives to improve value perception. While this is underway, the company has been losing some
of its main customers although overall customers are increasing.

John Lewis forced to scale back expansion plans

John Lewis had to scale back expansion of its department stores as the developers face financial
crunch. The department store chain had planned to open eight stores over the next few years.
However, a sluggish development pipeline has derailed full line store investment plans. The major

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store opening program has been held up, at least temporarily, in the light of difficulties faced by the
developers of centers that John Lewis' stores were intended to anchor. Its new 275,000 square feet
store in Leeds, originally due to open in 2010, now no longer has a scheduled opening date because
Hammerson, the developer of the Eastgate Quarters project, has delayed the start of the main
construction phase. In Oxford, developer Capital Shopping Centers has also put its redevelopment
of the Westgate centre on hold. Similarly developments in Preston, Portsmouth, Sheffield, Crawley
and Spruce field in Northern Ireland face similar uncertainties.

Dates for developments in Oxford, Leeds, Preston, Sheffield, Sprucefield, Northern Ireland, Crawley
and Portsmouth are now unclear. At the same time, Hammerson and Westfield have delayed
developments due to funds tightening as a result of the credit crunch, while Westfield has extended
the completion date for planned shopping centers in Bradford and Guilford. To compensate for this
pipeline of new stores drying up, John Lewis might consider building smaller shops covering around
100,000 square feet — about a third smaller than its typical stores. Therefore, John Lewis’ store
expansion plans are severely thwarted. The company has a very low store base about a fifth of
Tesco’s and has been aiming at expanding further. John Lewis’ plans have been severely thwarted.
Not only will this result in delays but the company is forced to focus on the alternate plan for expansion.

Misrepresentative commercials will tarnish brand image

A commercial aired by Waitrose has been banned after complaints from the customers. Television
ads for Waitrose pork have been banned for misleading viewers into thinking it came from pigs which
had spent their whole lives outside. The commercials, starring celebrity cooks Heston Blumenthal
and Delia Smith, advertised outdoor bred meat and featured pigs in fields. One even showed Heston
Blumenthal talking to a farmer in Norfolk who told him that the quality of the pork was due to the
animals' environment, diet and getting plenty of fresh air. However, several customer complaints
were received by the authorities that in fact the pork came from pigs which were born outside but
were later put in sheds. Five viewers complained that the adverts were misleading as it implied the
pigs spent their whole lives out of doors. The Advertising Standards Authority agreed said that the
commercials breached truthfulness guidelines and should not be shown again. Such misrepresentative
ads will negatively affect the customer perception on the brand and will tarnish Waitrose’s brand
image.

Opportunities

Online channel continues to boom and will enable JLP to boost revenues

Online retail sales in the UK are estimated to rise by the end of 2010. The industry reports estimate
total-spend for 2010 of £57.8 billion ($91.3 billion), up 16% from £49.8 billion ($78.6 billion) in 2009.
The British shoppers spent a total of £4.8 billion ($7.6 billion) online during September 2010
(year-on-year growth of 24%), equivalent to £79 ($124.8) per person. Apart from home and garden,
which saw a decrease of -1%, all of the retail sectors have shown a year-on-year and like-for-like
growth of at least 10%, with clothing, footwear and accessories up 28% from September 2009. This
impressive growth is attributed to consumers looking to keep spending in check by shopping online

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SWOT Analysis

for the best deals. These figures are particularly significant when compared as the overall retail
growth in the UK is expected to be sluggish in 2010. As the wider electricals market slows, online
penetration continues to increase and according to Verdict online channel will account for 35.7% of
electricals spend by 2013. It will also outpace wider online growth, which will achieve average growth
of just 8.7% over the next five years Online spend as a percentage of the sector’s entire retail value,
at 23.8% in 2009, is the highest of any sector apart from music and video. Online channel has been
growing in popularity as the most preferred channel for several customers. This has increased the
sales from the channel making it an attractive means for retailers to drive top line growth.

The company operates online operations through Waitrose Delivery and John Lewis Direct, both of
which have been recording strong growth. John Lewis grew strongly, with sales up 18.2% in FY2010.
JLP’s multi-channel strategy continued to be a major advantage, helped by an increase in the number
of lines available and a range of new services including ‘Click and Collect’ and Express delivery.
The company has significantly increased the assortment available in fashion category and also
improved the design of the website supporting strong growth in online sales. Online sales at John
Lewis Partnership played a major role in the retailer increasing revenue to £3.8 billion ($6 billion)
for the first half of FY2011, up 12.4%. Profit also saw a boost to £110.5 million ($174.6 million), a
rise of 28%. Online grocery sales were also up 54% in the first half of FY2011. JLP can leverage its
position to participate in the high growth rates offered by the online channel.

Deals to expand convenience offering

Waitrose has entered into deals with Shell and Alliance Boots as part of expanding its convenience
offering. In September 2009, Waitrose announced that it would be opening 300 new convenience
stores throughout the UK, a reaction to the trend for 'top-up' shopping. The travel sector is an
important part of this growth, as reflected in the recent opening of two convenience stores at motorway
service stations and its plans to open an additional nine outlets in 2010. Shell is to trial a number of
Waitrose 'food-to-go' and convenience products at three of its sites in the UK. Fuel giant Shell, the
third largest fuel retailer in the UK with a market share of 14%, is to trial Waitrose 'food-to-go' and
convenience products at three of its service stations in Birmingham. For Waitrose, the introduction
of its products in Shell service stations is a logical progression. Product distribution through Shell
sites would be a comparatively inexpensive way for Waitrose to expand its market footprint, as the
food retailer would not have to substantially invest in new stores. Indeed, the UK-wide coverage of
Shell sites could help the food retailer to achieve expansion quickly.

The tie-in with Boots will help to boost its personal care offer, while strengthening Boots pharmacies
which, being located within a convenience store, will be able to operate longer hours than those on
the high street. Waitrose will benefit from having enhanced health and beauty ranges, with Boots
filling in the gaps in its existing offer, as well as pharmacies in its stores. Few of the major grocers
have a robust pharmacy offer, so this will help to differentiate Waitrose from the other grocers'
convenience formats. Waitrose decided on expanding the convenience offer on the back of
outperformance of this sector. Customers are using local shops more frequently to top up their
shopping with fresh produce or "food for now". This means that high street or local presence is
becoming much more important for food retailers. As a result of this the convenience store market
is now outpacing the growth of the UK general grocery market. According to the recent media reports,

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the UK convenience market was worth £30.9 billion ($49.1 billion) in June 2010 and is forecasting
it will reach £41.3 billion ($65.6 billion) by 2015. Waitrose’ new store formats effectively address the
increasing popularity of convenience stores.

The decision to expand its convenience offer now is a very sensible one for Waitrose. The market
is consolidating quickly with Tesco and Sainsbury aggressively expanding and the symbol groups
actively recruiting new members. With many vacant stores appearing on the high street, Waitrose
should also be able to negotiate some good deals for prime locations as landlords look to fill empty
units quickly. Moreover, if Waitrose had not looked to expand its offer now, it risked finding growth
much harder to achieve later with fewer available vacancies and stronger competition. It will also be
able to take advantage of the growing trends for smaller, more frequent purchases as shopper habits
change and customers look to keep costs down. This expansion should also help it to establish
greater exposure in the North of England, where it currently has a limited presence. Overall, the
move to expand into convenience retailing will lead to incremental benefits for the company.

Increased acceptance of private label brands in electricals

Private label brands have been gaining considerable prominence in the electricals market as well.
Market share for retailer brands have been increasing and have advanced in 14 of the 20 countries
tracked by Nielsen for PLMA's 2009 International Private Label Yearbook. After years of consistent
market share increases, private label now has its strongest competitive position ever. Retailer brands
are estimated to have achieved at least a 30% market share in 10 countries, the most since the first
PLMA Yearbook was published over a decade ago. In the UK and Switzerland, private label accounts
for one of every two products sold. Furthermore, a research, based on polling more than 3,000
buyers in France, Germany and Great Britain, found that the consumer's connection to retailer brands
extends far beyond the issues of price, economic conditions and retail format.

John Lewis launched a range of electrical appliances in 2005, including washing machines and
dishwashers. Smaller appliances were added in 2007 before John Lewis launched its own-label
range of DAB digital radios and digital photo frames in 2008. Adding to this increasingly
comprehensive own-label range, and utilizing its strong brand name, John Lewis launched a range
of high-definition LCD screens in November 2009, marking the first time the retailer has stocked its
own range of TVs.The new own-brand range comes as John Lewis steps up its efforts in the category.
Priced at £200 ($316), £270 ($426.7) and £350 ($553) depending on size, the price points compare
very favorably with Tesco's and Asda’s own-label TVs. However, exceptionally good warranties,
stylish design and the trusted brand name are likely to give them a competitive edge over rival’s
own-label ranges. Indeed, John Lewis is already hailing them a success, stating that they already
account for 20% of all in-store small screen TV sales.

Rising popularity if premium in-home dining

The premium in-home dining market is largest and most well-established in regions such as Western
Europe and North America, where penetration of levels of convenience foods such as ready meals
are highest. Sales of premium ready meals for in-home consumption in the UK and the US are
forecast to increase by almost 68% between 2009 and 2014, reaching a value of $2.21 billion. In

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both the US and the UK, the bulk of the market is made up of premium ready meals, and starters,
appetisers and puddings are also starting to appear so as to replicate the restaurant experience
more closely. The fortunes of the market are closely linked with the performance of the foodservice
industry. The global economic downturn has had a major effect on the eating-out market, which has
also suffered as a result of factors such as the smoking ban and the increasing appeal of the home
as a venue for socializing and entertaining. Sales of premium ready meals for in-home consumption
are expected to remain highest in the UK and the US. In both countries, the share of the ready meals
market taken by premium dishes is forecast to continue to rise.

Through stretching its architecture up into gourmet ranges, Waitrose has also exploited the trend of
dining at home – attracting customers from a broader demographic. The company tied up with Heston
Blumenthal of the three-star Michelin restaurant The Fat Duck in Bray, who is to launch 40 new
products at Waitrose. The "Heston From Waitrose" premium products include holiday treats like
handmade savory pies, stocks, dressings and Christmas pudding. Cash-strapped diners are curtailing
evenings out in favor of a few home-based treats. Supported by the growth in the overall premium
ready meals, the exclusive line of ready-to-eat meals will contribute positively to the sales.

Threats

Continued weakness in demand for electrical goods and homewares

The electricals market has had a turbulent year in 2009 and the trend is estimated to continue in to
2010. The negative impact was partly because of the impact the recession, but was also severely
impacted by a lack of new technology to stimulate the market and drive volumes and higher prices.
The electricals market is highly cyclical and relies on exciting new products capturing the consumer
imagination to drive growth. There has been little to achieve this in 2009 and the pipeline for 2010
looks similarly bleak. Instead, a number of products such as digital cameras, video games and satnav
have reached a wide base of ownership and entered a state of decline, dragging the whole market
down. Moreover, the ability of devices such as smartphones to offer internet access, cameras and
mp3 playback is reducing consumer impetus to purchase multiple items. This is having a huge effect
on volume sales. Therefore, electricals has been one of the lowest priorities for beleaguered
consumers who are low on confidence and is estimated to be the second-worst performing retail
category in both 2009 and 2010. A major effect on the white goods market has been the consequences
of the adverse housing market. This has affected sales of big ticket items in particular, as consumers
have no trigger to equip new houses and lack the confidence in the value of their property to make
large purchases. The video games market has also entered a massive decline due to the lifecycle
of consoles reaching maturity. Hence brown goods have fallen to 51.8% of electricals spending in
2009, down from 52.7% in 2008. Grey goods has received a small boost from growth in mobile
telephone sales, but the poor performance of computers and satnav in 2009 in particular has also
seen overall share fall.

In addition, although the electricals market has traditionally been highly deflationary, the last two
years have seen new waves of mass produced cheaper products arriving to the market which have
captured the imagination of a frugal consumer. The most significant example of this is netbook

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laptops. Much cheaper than traditional laptops, these products have not only reduced revenue
growth, they have allowed retailers to give them away as free incentives for broadband packages,
with further significant impact on the market. In addition, digital convergence is now cannibalizing
sales of existing products. Ultimately, where technological advancements were a boost to the market,
they are now becoming a hindrance to it. Furthermore, there has been no impetus for upgrade.
Where progress has been made it has generally been on a much lesser scale in comparison to
historic advancements. For example, Blu-ray players represent nowhere near as much of a step-up
from DVD players as DVD players themselves did from VCRs. Consequently, there has not been
the same impetus to upgrade. With technological progress slowing, this scenario has been replicated
in a number of other product areas, such as computers and mp3 players. All the factors have led to
weakness in the demand for electricals, and this trend is estimated to continue in 2010.

Furthermore, the UK homewares market is anticipated to witness negative growth in 2010. The
volume levels of the market were in least in fourth quarter of 2009 since 1999. Although the declines
will not be as sharp as in 2009, the market is expected to record -1.7% growth and the volumes will
be at -2.1%. The demand is expected to be just need based and the homewares market is expected
to return to growth only in 2010. The negative market trends may impact the revenues from the
products line adversely. Weakness in the electricals and homewares market will affect demand for
John Lewis’ products adversely and will have a negative impact on the sales.

VAT rate increase to 20% will further limit the retail growth

The VAT rate rise to 20% is estimated to have a negative impact on the spending capacity of the
customers and will lead to constrained retail sales growth. In a recent industry survey, 56 of the UK's
major retailers were interviewed to assess the impact that a 20% rate of VAT would have on their
businesses. While most felt that the government needed to take action to reduce the budget deficit,
many were concerned about how it would affect trade. A VAT rate of 20% would cut retail sales
growth by 0.64% although the government will be able to raise £36 billion ($56.9 billion) from the
retail industry including £4.5 billion ($7.1 billion) in additional tax. Almost 77% of retailers felt that
the impact of a 20% VAT rate on their profits and cash-flow would be 'very negative' or 'quite negative',
and 73% thought that it would have a negative impact on overall sales. The proportion of retailers
expecting a 1%-5% fall in sales was 41%, while a fifth (21%) expected a fall of 5%-10% and almost
11% expected a fall of 10% or more. 10% of retailers also thought that a VAT increase would result
in them having to close 10% or more of their stores. 20% expected a fall in store numbers of between
5%-10%, while 36% thought there would be a slight fall of between 1%-5%. Based on the survey
data and the decline in store numbers in 2009, a 20% rate of VAT could result in the closure of
around 3% of retail stores nationwide, equivalent to 9,480 shops. The report estimates that a VAT
increase would reduce growth in overall retail sales to a little over 1%, instead of the projected 1.7%
in 2011.

The report finds that the impact of any change in VAT would hit lower income groups most severely,
given that they tend to pay above average levels of VAT as an indirect tax on spending. During
FY2009, the bottom quintile of earners paid 28% of their gross income in indirect taxes, with VAT
payments representing more than 12% of their disposable income. This compares to the average
household in the UK which paid 14% of their gross income in indirect taxes, and 7.4% on VAT. High

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SWOT Analysis

income earners paid 10% of their gross income in indirect taxation and VAT represented 5.9% of
their disposable income. Therefore, a rise in VAT clearly constrains the availability of disposable
income to the customers. The rise in VAT will have an overall negative impact on the retail industry
and JLP’s sales growth will also be adversely affected. To weather an already difficult retail
environment, earlier the retailers have absorbed the increase in VAT to let it have least affect on an
already sluggish consumer spending. However, such a move could adversely impact the margins
as well for the company.

Financing the pension fund deficits as they grow

JLP has been funding huge deficits of its pension funds as they continue to grow. The PPF 7800
Index has shown the aggregate balance of the 6,653 schemes in the PPF 7800 index is estimated
to have worsened to a deficit of £53.5 billion ($84.5 billion) at the end of August 2010. The funding
ratio declined from 100.7% to 94.6% and there were 4,701 schemes in deficit, with just 1,952 schemes
in surplus. The projected pension pot of an average 30 year old when he or she retires at age 65
decreased again during August 2010, shrinking by £544 ($859.5) from £19,344 ($30,563.9) to
£18,800 (29,704.4), according to an industry report. The drop in value was due to on ongoing volatility
in equity markets. Furthermore, the 200 largest private UK pension schemes have lost over £45
billion ($77.8 billion) since the end of August 2010, a report published in October 2010, found. And
after another rollercoaster week, Europe and Asia saw fresh sharp falls in stocks once again In
October 2010, knocking the benchmark world equity index to a five-year trough. The equity markets
will continue to impact the pension funds and are estimated to further cause losses.

JLP has witnessed a pension fund deficit of £905 million (1,429.9 million) in FY2010, which was an
increase from £730 million (%1,153.5 million) in 2009. The company has been forced to take several
steps to address the pension deficit. In 2008–09 JLP transferred stake in Ocado into the Pension
Fund and introduced a life expectancy adjustment factor (LEAF) to reduce mortality risk. In 2009–10
the company further made a one-off £95 million ($150.1 million) contribution to the fund, which it
invested in an arrangement with the company that promises either payment of £100 million ($158
million) to the pension fund in 21 years or an amount equal to the size of the deficit at that time,
whichever is lower. Once again in March 2010 the company paid a one-off lump sum cash contribution
to the Pension Fund of £150 million ($237 million). These contributions have led to an increase in
the net finance costs for JLP. Net finance costs which reflect the cost of debt plus the interest element
of pension and long leave increased by a whopping £39.4 million ($62.3 million), from £43.7 million
($69 million) to £83.1 million ($131.3 million). The financing element of pension costs is the difference
between the return on the scheme assets and the interest cost, which are market driven. Depending
on the position of external markets at the balance sheet dates, these can change materially from
one year to the next. They have increased by £19.2 million ($30.3 million), from £5.4 million ($8.5
million) in 2009 to £24.6 million ($38.9 million) in 2010. Any further deficits in the pension funds will
adversely impact the finance cost structure and will also affect the profitability of the company.

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