Streets ahead: Does John Lewis offer a revolutionary way forward for big business?

As he emerged into the sunlight outside John Lewis in London's Oxford Street this week clutching a plastic carrier bag, Meir Abutbul, a hotelier, had acquired some carpet cleaner and a cameo role in a long-standing industrial experiment.

"I like it," he said of the department store that has become synonymous for customer service and respectability. "It's got everything. It's very clear. When I buy electricals there's the guarantee and they have people to talk to you." When told how it operated, however, he looked stunned. "It's like socialism."

John Lewis, with its "Never Knowingly Undersold" slogan, is the supplier of sofas, dining tables and widescreen televisions to the nation's sensible shoppers. The Queen buys its haberdashery and household goods. When MPs stuffed second homes at the taxpayers' expense, the Commons Fees Office checked claims for rugs and sideboards against John Lewis prices. Only Marks & Spencer and the BBC can match it in terms of public affection.

Now, however, the John Lewis Partnership (which owns the department store and the upmarket grocery chain Waitrose) is increasingly on the receiving end of public admiration as well. Last year Which? members voted John Lewis best high street retailer; this year they gave the award to Waitrose. A poll of 6,000 people by Verdict Research in 2008 named John Lewis "Britain's favourite retailer".

This autumn, John Lewis will take a further step forward with the launch of the first in a planned chain of Home stores that will offer its core range in a smaller format; in effect, a John Lewis convenience store. The store will open in Poole, Dorset, in October; if it is successful, another 50 will open across the country. For retail commentators, the expansion is yet another example of John Lewis doing things right. They attribute its success to its long-term approach and, underlying this, its revolutionary partnership structure – something of which roughly half its customers are aware.

Unlike other big businesses, the John Lewis Partnership is a plc owned not by investors but by its staff. "Partners" are paid more generously than employees at other retailers. On top of that, they receive an annual "partnership bonus" – a share of the profits – that has ranged between 13 and 20 per cent of salary in the past five years. They receive five weeks' annual holiday, a 25 per cent discount and a final salary pension.

There are other perks, too. They can rent subsidised rooms in two large country estates, or stay at lakeside hotels in Snowdonia and the Lake District, or in a 16th-century castle in Dorset. Five cruising yachts can be rented cheaply. And then there is the £60 annual subsidy on exhibitions, theatres, visitor attractions and comedy shows.

What sets the company apart from its rivals, though, is not its perks but the fact that its staff – shop assistants, warehouse workers, delivery drivers – are involved in the running of the business. Staff are represented in workers' councils from top to bottom of the company. They have the power to sack the boss (though no chairman has been unseated). They can hold management to account and vote to change company policy. They can – and do – write letters of complaint about the business to an internal newsletter, for which they cannot be disciplined.

With a £7bn-a-year turn-over, a constitution, its own democratic structures and a public commitment to maximising the happiness of its staff, John Lewis operates almost as a shadow state within corporate Britain. Is it too good to be true? Or, if not, should other companies be following its lead?

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John Lewis is not the only "social enterprise" whose cautious outlook and wider social mission have found it favour in a post-boom world an-gered by huge corporate bonuses. The Co-operative's food shops are gaining market share and turnover for the group (which includes the largest chains of independent travel agents and funeral parlours) passed £10bn for the first time last year. The mutual Nationwide Building Society is thriving amid all the trouble at demutualised former societies such as Northern Rock and HBOS.

But John Lewis is different, because – unlike these other institutions, which have their roots in Victorian self-help societies – it is owned not by its customers but by its staff.

John Spedan Lewis initiated this state of affairs 80 years ago. The wealthy shopkeeper noticed that he, his brother and his father – John Lewis, who had founded a single draper's shop in Oxford Street in 1864 – earned more than the combined salaries of all 300 staff. So, on assuming control of the business in 1928, he began (in 1929) to hand over ownership to the employees. Under his benevolent stewardship John Lewis flourished, acquiring in the 1930s the 10 shops of the Waitrose chain (founded by David Taylor, Wallace Waite and Arthur Rose). He finally relinquished all control in 1950.

In a BBC interview recorded in 1957, he explained that he realised his father would have been happier and the business stronger if he had given the value he gave to shoppers who exchanged money for merchandise to staff "who exchanged their worth for his money". Enunciating every syllable carefully, he stated: "The present state of affairs is a perversion of the proper working of capitalism. It is all wrong to have millionaires before you have ceased to have slums. Differences of reward must be large enough to induce people to do their best, but the present differences are far too great."

The answer, he suggested, was to treat employees respectfully, as lawyers treated their clients.

Today, the John Lewis Partnership enshrines his values throughout 27 John Lewis outlets, 213 branches of Waitrose, the 4,000-acre Leckford Farm in Hampshire, John Lewis.com, and greenbee, an online ticket, entertainment and financial services provider. As well as owning the firm, partners are represented on councils mirroring management at branch, divisional and national level. Eighty partners sit on the highest body, the Partnership Council, which meets twice a year to scrutinise the board.

The Partnership Council has to make tricky decisions: last year its partner members voted to trim some pension benefits, a decision not in their narrow self-interest.

"We are not running the business. We influence our management. It's absolutely clear the management run the business," stresses price-checking executive Dave Suddock, who says his fellow councillors are "guys that drive trucks, people who work on check-outs and at the deli counter". Being a partner is "a hugely motivating factor," he says. "You're not just an employee; you are an owner of the business. That makes you feel differently about everything."

Staff also have the opportunity to rise through the chain. Chairman Charlie Mayfield, in overall charge of the partnership, was appointed two years ago following a marketing role in SmithKline Beecham. But the bosses of John Lewis and Waitrose both came through the ranks. Mark Price, the son of a grocer and self-proclaimed "chubby grocer", became managing director of Waitrose two years ago after starting his career as a graduate trainee in 1982. Andy Street, appointed MD of John Lewis at the same time, joined the business as a graduate trainee in 1985.

Sitting in his open plan office on the fourth floor of John Lewis HQ in Victoria, London, Street says that the democratic structure engages everyone in the business. But he stresses that what makes John Lewis a great business is not the partnership but the qualities that this engenders – engagement, loyalty, co-operation.

"To me," he says, "what co-ownership and democracy are all about is that all day, every day, the partners in the haberdashery department in Liverpool are working with their managers in a collaborative way as to how they are going to improve the business together.

"This is not about waiting for a formal meeting where one of them stands up and says we've got that wrong. So it is about the spirit of collaboration working for the best of the business."

He describes debate within the company as "vigorous". The Gazette, the weekly newsletter, is allowed to print anything that would be in order in the House of Commons. Letters from partners range from the food in the dining room to the iniquity of the rules for the discount scheme. Among the thornier contributions have been requests for information about directors' expenses and an explanation of why the pension scheme has invested in the delivery company Ocado.

Occasionally partners vent their frustration on the outside. The Digital Spy website, for example, has comments purporting to be from John Lewis staff members. "As an employee of John Lewis I am sickened by the myths perpetuated by the media," says one. "Don't be fooled into believing we own the business – no, the operation is run by a board of directors and profits are distributed as they see fit. The fabled democracy is a sham ... The staff councils are just talking heads who rubber-stamp management decisions."

But subsequent contributors were more supportive of the company. One wrote: "The profits this year for John Lewis were before tax £319m, they have paid out £155m in bonuses, £85m to the non-contributory pension fund, that along with the £60m worth of discounts etc brings a total handed out to £300m. Not bad really." Another added: "At the chain I worked for before, there was no annual bonus, subsidised lunches or anything."

Whatever the disgruntlement of some partners – and retail in general is not well paid – the partnership has better terms and conditions than its rivals. Average salary with bonus for partners, including nearly half who are part-time, was £14,800 last year. At Marks & Spencer and Debenhams, which also have a large proportion of part-timers, average pay including share options was £12,750 and £10,300 respectively. As a result, says Street, "our staff turnover is substantially less than other retailers – we have a huge number of people who have been with us for life". Each year, around 700 partners are given a six-month sabbatical after reaching 25 years' service.

Senior management, by contrast, are paid less than their peers in City-run firms. Street earns £400,000 to £500,000 a year – half the £939,000 earned last year by Debenhams chief executive, Rob Templeman, whose business is the same size. "Some of the executive pay excesses in this country are verging on the obscene," Street says, scrupulously avoiding mentioning any names.

"The senior people here are not badly paid, let's be clear about it. But the simple point is this: you decide with John Lewis if you want to be part of that industrial experiment. And if you fail to be motivated by that then you should leave."

A determined, contemplative man, the son of two scientists, Street grew up in Birmingham in the 1970s, when industrial relations were at an all-time low, notably at the British Leyland car plant. "Day after day we saw the pickets, the collapse of British industry as a result of bad industrial relationships – and both sides were to be faulted," recalls Street. "What I saw here was an organisation that did not have confrontation, everybody was on the same side. That's what this is all about: working together for the common good."

At the turn of the century, there were signs that John Lewis might have been losing its way. The group's flagship store in Oxford Street was looking a little dowdy, while the chain as a whole lacked pizzazz. But that was in the boom years, when image mattered more than substance. Since then, the partnership has invested tens of millions of pounds upgrading the shops and developing a media presence, launching its first TV advertising campaign six years ago. And like other retailers, it has had to adjust to a major economic downturn.

When the recession first struck, the group suffered as much as anyone else. After bumper annual results at the start of last year, sales of "big ticket" items dipped at the department stores with like-for-like sales down 1 per cent. Like-for-like sales fell about 5 per cent at the start of this year. Waitrose shoppers started to drift away to cheaper stores, such as Tesco.

But Waitrose fought back with the launch this year of the Essentials "value" range of 1,400 lines. And last month, sales perked up 2 per cent at John Lewis and 11 per cent at Waitrose on last July. Already, the future seems promising. Waitrose is reputed to be in talks to buy the Prince of Wales's organic biscuits-to-soup firm, Duchy Originals, and plans to open 22 stores this year (a 10 per cent expansion).

John Lewis, meanwhile, hopes to open another 20 "full line" stores, with its next opening in Cardiff next month.

"When we saw the recession coming the thing we said right from the beginning was: let's not worry about the short-term numbers; let's worry about how strongly the brand comes out of it at the end of the recession," recalls Street.

According to the retail analysts Verdict Research, John Lewis's share of the department store market rose from 17.5 per cent in 2003 to 19.9 per cent in 2008, while Marks & Spencer and Debenhams lost share.

It's conceivable that any perceived drabness in the brand may have been an advantage in this climate. "You still would not say that John Lewis is the sexiest, most interesting place to buy fashion," says Rita Clifton, chairman of the London office of the global branding consultancy, Interbrand. "But it's not that kind of shop. It's a very middle-class shop, in a broad sense. Nothing smelly or violent is going to happen in John Lewis or Waitrose."

But, she adds approvingly, the group is also a shining example of "a company that truly lives its brand through everything it does. It has done that with real clarity and total consistency over the years. "It is inclusive of its employees and if you treat staff well then tend to treat customers well as well."

"I think there's a lot to be said for a partnership structure," says Neil Saunders, consulting director at Verdict, "because the people that work there feel they have a real stake in the business and they probably give a bit more to the business than they would if they were in a different company. The customer service is exceptional. John Lewis doesn't always get things right. It does sometimes make mistakes. But it cares, and when it does get things wrong it puts them right."

Seven years ago, John Spedan Lewis was voted Britain's greatest-ever business leader, ahead of the likes of Andrew Carnegie and Joseph Rowntree. According to him, "The John Lewis Partnership was started to find out what would happen if business were managed otherwise".

Today, the results of his experiment seem to be becoming a little clearer. With conventional business models in disarray, "otherwise" has begun to seem increasingly attractive.

In the recession, John Lewis has not lapsed into "knee-jerk" cost-cutting but instead has played the long game: "It's very different from companies with shareholders governed by the City. Although it has been suffering, it's not going to do it any harm in the long term, and when we come out of recession I expect it will resume very strong growth."

So why don't other firms become partnerships? "You can't have bits of this structure," replies Street. "It would be very easy for a company to set up a works council. It would be very easy for a company to set up a profit-sharing scheme and think they have got it. But what is magical about John Lewis is that it's all internally consistent. It hangs together. Others think, 'I can't do all of that.' And they can't."

The key, of course, is that, to set up a partnership, you need to cede power.

"Co-ownership exists because our founder gave the business away. Can you imagine today's entrepreneurs – Richard Branson – giving the business away?"

Employee ownership: Can it work?

Sean O'Grady, Economics editor

Co-operatives, mutuals and partnerships are not, despite the utopian visions of some of their founders, socialist paradises where the normal laws of the market are suspended. They are private businesses and behave as such.

After all, until it was floated on the New York stock market a few years ago, Goldman Sachs, the "great vampire squid" of capitalism (as Rolling Stone magazine described it) was owned by its partners, not shareholders. So are most of the world's big accountancy and law firms and hedge funds – the ultimate capitalists. And there was a time, difficult as it may be to believe now, when retailers in this country complained loudly about the Co-Op's dominance of the grocery trade.

All over the world, businesses that are owned by their employees are having to face tough choices. In the US, the United Auto Workers union owns 55 per cent of Chrysler, and has had to decide where the company (now in partnership with Fiat, who own 20 per cent of the firm) will build the Fiat 500 model to be sold in the US. Obviously the UAW would like to make the car in America; but labour rates in Mexico are about a tenth of the UAW's and it would make more business sense to build the little car there, which is what looks like happening.

Jobs tug employee-owners in one direction; profits – and longer term business viability – pull them in another. Instead of unions having arguments with shareholders through the firm's management, the process is short-circuited. But the economic fundamentals are unchanged.

In Spain, particularly in the Basque country, cooperatives are big businesses. The giant Mondragon group of worker cooperatives is dealing with the same choices, as Spain's seventh-largest industrial grouping has implemented lay-offs and pay cuts in order to avoid redundancies and closure.

Then again, as we've seen with many conventional private companies across the continent, such cooperation is not necessarily confined to cooperatives. And while it is fair to say that the mutual Nationwide Building Society, owned by its members, has done better than most banks in the credit crunch, the Britannia Building Society has had to be rescued – by the Co-Op – and other societies have gone bust.

So the recession hasn't necessarily proved that alternative models of ownership are superior to the joint stock company. On the other hand, it may well be that, in bad times, these mutual models make sharing the burden of change a little more equitable.

Other employees e-owned companies

Unipart: Formerly a division of British Leyland, the Oxford-based Unipart is a logistics company with clients including Asos.com, Vodafone and Homebase. In 1994 it launched the Star Options scheme, billed as "an executive-style options programme available to all employees". Created to encourage deeper employee involvement in the privately-owned company, staff reportedly now own 55 per cent of Unipart.

Savant Software: IT firm Savant started as a family business in 1982 and now has 40 employees and an annual turnover of £3.5m. When the co-founders retired in 2001, ownership was transferred to the employees through an Employee Benefit Trust which owns 100 per cent of the shares, allowing them a portion of shares based on their salary. Savant boast that the assets of the company "go home every night".

Scott Bader: A polymer manufacturer with an annual turnover of £150m, Scott Bader has been wholly owned since 1963 by its charitable trust, the Scott Bader Commonwealth, of which 77 per cent of its 630 employees are members. Employees have no direct stake in the company but benefit from a profit share arrangement, and may join bodies which oversee the running of the business.

SChreiber: One of the world's largest consumer-brand dairy companies, famed for supplying processed cheese. Employs more than 5,000 workers, who can acquire stock through the Employee Stock Ownership Plan (ESOP) which, when combined with pay, retirement and benefits, also gives the employee a competitive compensation package. Company policy states that when the employ-ee makes a positive impact on business results, their shareholder value and ESOP account increase.

Norton Publishing: Founded in 1923 by Warder and Polly Norton in New York, this is the oldest employee-owned publishing house with a workforce of 400. After her husband's death in 1945, Polly sold most of her share of the company to its employees; Norton' authors now include the economist Paul Krugman and the historian Ian Kershaw.

Arup: The structural engineering company responsible for the Sydney Opera House and the Pompidou Centre (among many other starchitect-designed buildings) is owned in trust for the benefit of its employees. The company has no shareholders or external investors; money left after reserves and investments is paid out to employees as a profit share. Arup has a group board that reports to trustees and to the firm itself. Hannah Waldram