Nick Bubb’s verdict: Waitrose - wake up and smell the coffee?

The mighty Waitrose PR machine suffered a couple of jolts last week with some unhelpful headlines, but is anything really amiss?

Waitrose is used to good PR for its impressive market share growth, but its serene progress was interrupted not once but twice. Newspapers crowed that Waitrose has been caught up by Aldi and then Saturday’s newspapers talked about a first-half profit warning

After suffering a difficult July in trading terms because of the very tough comps with the heatwave- induced boom in picnic and barbecue fare last year, Waitrose management will have felt a tad sensitive last week ahead of the latest Kantar grocery market share figures, but relieved that the final week of the first half year saw some better progress.

However Waitrose may not have expected the press to pick up on the news from Kantar that Aldi had almost it up in market share, such is the extraordinary pace of Aldi’s sales growth.

Of course not many Waitrose customers have the chance to shop at an Aldi, even if they wanted to (because of all the hype about how “middle-class” Aldi now is), because the discounter has very few stores in what used to be called the “stockbroker belt” in the South-East.

Waitrose’s estimable managing director Mark Price famously said earlier this year that he unashamedly aspires to be “everything the discounter’s aren’t”, with a vision of tasting bars in stores, upmarket service counters, quality delis etc.

But it’s not easy to pretend that shopping at Waitrose is cheap, despite the investment in price-matching with Tesco and the success of the Essentials own-label range.

Mark Price also famously said that Waitrose has “a structurally high gross margin”, thanks to its high fresh food sales participation, and that was why it was able to give a little back, via the free coffee and newspapers to MyWaitrose loyalty card holders    

He probably choked over his latte when he read the silly headlines in the papers about the reasons for his warning last Friday that first-half profits would be down-for instance “Million cups of coffee leave a sour taste” in the Times, or “Free coffee dilutes Waitrose profits” in the FT.

Now, if free coffee cost that much to give away then you would be concerned. But, in the scheme of things, the costs must be relatively trivial and indeed Waitrose say that it invested less overall in the MyWaitrose loyalty scheme than in the first half of last year. The press are barking up the wrong tree there if they’re looking for the reason for margin pressure at Waitrose.

The fact is that the first half of this year was always going to face a higher level of revenue costs because of the phasing of store openings and refurbishments. For instance the first half of last year brought only four new store openings whereas there were 15 in the first half of this year.    

On top of that, Waitrose is investing in building up dot.com capacity and online grocery market share, albeit it is not chasing business quite so actively as back in January when its ‘free champagne’ offer for new customers so enraged the management at Ocado.

There is no doubt, however, that Waitrose had a tougher second quarter, along with the industry, and that a weak July, combined with increased price-matching costs, has taken its toll on the bottom line.

Waitrose is clearly right to invest for the long-term in areas such as online and convenience and it doesn’t have institutional shareholders to answer to, but it must still produce a decent return for the John Lewis Partnership and when it comes to making money it can’t have it both ways

Usually, Waitrose ties itself in knots trying to explain why profits are not as high as they ‘should’ be, and two years in a row of strangely flat second-half profits have engendered some cynicism in the City about “one-off costs”.

Now Waitrose has to defend the fact that profits are falling but Mark Price has got his explanation in first, which is simply that the 5.4% operating margin achieved last year is just a bit too rich.

But you have to be careful what you wish for and, with full-year operating profits set to fall back quite sharply from last year’s £310m in a tough industry environment, the Waitrose operating margin is likely to be well under 5% this year.

“Investing for the long term”, in that immortal phrase, is all very well, but John Lewis partners will hope that short-term profits aren’t too bad this year, because it may be a struggle to maintain last year’s John Lewis Partnership annual bonus at this rate despite the sterling progress being made by the department store division.

The unaccustomed bad PR that Waitrose has received may therefore serve as a welcome ‘wake-up’ call for management: that giving customers free coffee is no substitute for really helping to cut their hefty weekly shopping bills and that as Aldi (and Lidl) further improves its fresh food offer and opens more South-East stores it will become more of a competitive threat.

• Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.