The Big Question: Why is John Lewis giving staff a 20% bonus and why is it doing so well?

(Independent Graphics)

Why are we asking this now?

Because the department store and supermarket group John Lewis, retailer of choice for the aspirational and the affluent, has announced that it is to hand each of its staff a 20 per cent bonus after posting a hefty 19 per cent increase in its profits. Its profits rose to £380m, despite all the talk in the City being of the doom and gloom of falling consumer spending and choppy financial waters ahead. But John Lewis has never been like other companies. It claims it has had a "radical" philosophy, ever since its messianic founder decided to come up with a business that put its staff at the centre.

But what has fuelled John Lewis, currently the high street's greatest success story, has been that both its plush department stores and its luxurious Waitrose supermarket chain have latched on to the aspirational middle classes, happy to spend extra on finer foods and quality products.

There is a sense of kudos in being seen lifting a couple of Waitrose bags out of the boot of the Mercedes, while affluent shoppers can spend a whole day perusing the well-manned departments of John Lewis's seven-storey flagship store in London's Oxford Street.

So how much are staff getting?

Staff were told of their latest windfall during a typically inclusive fanfare in stores across the country yesterday morning. They were soon whooping and applauding when the announcement was made that they were to receive a 20 per cent bonus – equivalent to ten weeks' worth of pay. It will mean that more than £180m of the company's profits will be shared out among the staff. Though the bonus was the biggest in more than a decade, it is an annual event that is central to John Lewis's professed championing of its staff.

How can the firm afford it?

It has been the star turn of the UK retail sector recently. While others have been flinging out profits warnings like they were going out of fashion, John Lewis has been going from strength to strength. That's largely because along with a specific philosophy, it has aimed its shelves at a specific kind of customer.

Take its Waitrose supermarkets. You won't find the "stack it high and sell it cheap" philosophy here. The emphasis is on quality and the customers, made up of City workers, professionals and other upwardly mobile gentry, are willing to pay for the privilege. You can even eat sushi and have a glass of wine at some of its stores. Nice, if you can afford it.

Is it any different from other high street names?

It certainly believes it is, describing its philosophy in the most revolutionary terms – as "visionary", an "experiment in industrial democracy" and "the embodiment of an ideal". It can sound more like a religious movement than a retailer.

The radical philosophy comes from the company's messianic founder, John Spedan Lewis. He had retail in the blood – his father, also John Lewis, had opened a shop in London's Oxford Street in 1864. After rising rapidly through the family business, he wanted to create a company in which the employees had a greater stake.

A system of committees, sub-committees and board positions were created to give workers a say. And crucially, they were given joint ownership of the company. That's why they reap a slice of the profits each year.

Do the employees really own it?

Well, first of all, the employees are not called employees. They are "partners". But it's more than just a gimmick to seem inclusive. Each of the 69,000 partners has a stake in the John Lewis Partnership, which operates the UK's 26 John Lewis department stores, and 187 Waitrose supermarkets. It means that it is not a public limited company, like other high street operations.

But there are responsibilities, too. Staff have to abide by a constitution, setting out their "rights and responsibilities".

Does its approach work?

Judging by the results it posted yesterday, it's hard not to reach the conclusion that motivated staff have a pretty big impact on a company's performance. Its staff retention rate is also very good, with 80 per cent staying for more than a year. And if you ask John Lewis customers, they are often fulsome in their praise of the staff. Whether you're looking for designer slippers or a stylish chair set for the conservatory, it won't be long before you'll be offered the latest footwear from Ted Baker, or leaning back in a classy wicker armchair.

Consumer surveys regularly hand plaudits to John Lewis and Waitrose. Both have come top in their respective categories in the consumer surveys carried out by Which? and Verdict for the last three years. That's a pretty good measure of success in anyone's book.

Are there any other factors in its success?

Yes. It is not just its staff policy that has allowed it to continue its drive in popularity. It is now a brand that consumers want to be associated with. The range offered by John Lewis also protects it from falls in certain sectors, such as homeware recently, due to the falling housing market. It also runs an extremely successful online arm, which often takes more money than its Oxford Street outlet.

Waitrose, despite having just four per cent of the market, is arguably the only supermarket not to be losing market share to Tesco. Analysts say the reasons for that are clear: staff; quality products; and locating stores in pockets where they know they will find their customer base.

Is there any bad news for the store?

Actually, yes – sales in one week last month were down 3.4 per cent compared to the same week a year earlier. That made everyone in the City sit up and take notice. After the high street's top performer reported such a fall, the share prices of some of the UK's biggest retail names plummeted, with more than £1bn in value being wiped out. As one analyst put it at the time: "If John Lewis is finding it difficult then God help everyone else."

But is King John's crown slipping? Not really. It was just a sign that even a brand as mighty as John Lewis will have to contend with tricky market conditions this year, as people feel they have less in their pockets.

In fact, it could be the case that the company is best equipped to deal with falling consumer spending. The people who will still have disposable income burning a hole in their well-tailored pockets will be those in top City and professional jobs. In other words, just the sort of people you might meet scouring the home section of John Lewis.

Is John Lewis really run differently from other companies?

Yes...

* It must be doing something differently, recording increased profits during a difficult period for retailers

* The staff own the company, and its appearance at the top of consumer polls seems to justify that decision

* It has a constitution and staff are involved in all sorts of councils, committees and boards designed to create "industrial democracy"

No...

* Its success is more down to latching on to a growing upper-middle class customer base than any "radical" philosophy

* Many companies hand out bonuses. The shared ownership idea is just a gimmick

* It succeeds not because of its philosophy, but owing to a very successful online operation (which has little to do with staff)