October 17, 2013

Talk with Dixons Retail Chairman John Allan

John Allan, Chairman Dixons (photo: Thomas Fedra)
John Allan: "Multi-channel is a superior model"
He's only been there four years, but John Allan is already the longest-serving person on the board – such are the fast-moving times at Dixons Retail Plc group.

But his tenure as Chairman has certainly seen a hefty improvement (+80 per cent) in the share price, during which time the Hemel Hempstead-based retailer has seen off an attempt by US giant Best Buy to muscle onto its turf.

Today, with over 20 per cent of the UK market, Dixons leads the pack among consumer & entertainment electronics specialists. The Brits also dominate their segment in Scandinavia and Greece where they compete with arch-rival Media-Markt.

So this pleasant and courteous Englishman, who has just turned 65, could be forgiven if he rested on his laurels. But that's hard to do when you have Amazon on your back.

In the year to the end of April 2013 Dixons posted group revenues of £8.2bn (€9.7bn) making the company a heavyweight leader in its segment. Around 16 per cent of business was online business. Ebit came in at £136m (€162m), so what's the strategy for boosting profit?

INTERVIEW


Mr. Allan, the recent announcement that you are in the process of selling your lossmaking online business Pixmania in France and the Czech Republic boosted your share price. But, as consumers increasingly shop on the internet, wasn’t this really a major strategic error?

Since former management bought Pixmania in 2006 we’ve come to the view that the most advantageous model is to combine physical stores with a strong e-commerce offering, i.e., multi-channel. We think that this is a superior model to a pure-play like Pixmania.

Superior to Amazon?
Even for the world’s most successful e-commerce retailer, which is not subject to the same economics as the rest of the trade, the jury is still out as to whether they can make money in pure e-tailing.

Then why not stick to physical stores?
Our surveys tell us that around 75 per cent of those shoppers who buy with us use the internet in some way during the transaction, whether that is to do some initial product research, place an order for home delivery or to click & collect.

We therefore integrate the whole shopping experience and make no difference in pricing between our various sales channels

So what is your current e-commerce line-up?
Our predominant offer is via Currys.co.uk and PCWorld.co.uk. Although they are technically separate websites, in effect, they are completely aligned and effectively under the same brand with the same products and prices.

But why retain the two names?
Some shoppers are very attached to PC World and others to Currys, so we keep both brands alive to maximise our appeal. Historically PC World had a largely tech audience and Currys was more popular with families. We’re moving towards 2-in-1 “Currys & PC World”s.

German market leader Media-Saturn beat its breast for a long time as to whether to expand into e-commerce and doesn’t look particularly happy having done so. How do you balance the two?
They run a far more decentralised structure than we do. But, if you are going to have an internet offering, you really can’t allow substantial local price variations from one store to another. We have one price list now for both clicks & bricks, which makes life much simpler.

Surely, your store managers won’t be very enthusiastic about this?
We motivate our stores to maximise sales in their trading area, regardless of whether they come in by e-commerce or not and give our stores a notional credit for internet sales. So, unlike some other retailers, we don’t have a situation where a store would rather lose a sale than recommend a customer to order on the internet.

How does your multi-channel approach differ from what Tesco is doing with its “endless aisles” as recently unveiled at its revamped “Tesco Extra” hypermarket in Watford/England?
I think that “endless aisles” is a poetic image, but for us the most significant thing is that they have really de-emphasised consumer electronics, TVs etc. at Watford.

We also have an extended range that we don’t carry in our stores, but the reality is that, if customers want to look at a proper range of TVs, PCs, tablets, or whatever, they are still going to go to a specialist store.

We no longer think about whether customers buy online or in-store, purely whether they buy from us — a truly multi-channel approach.

What have been the consequences of the online revolution for your physical store base?
Most retailers, and Dixons is no exception, are going through a process of working out how many stores they require and how big these need to be. Over the last four years, we have reduced our UK store count from 680 to 480, and we currently envisage that the optimum number would be about 400.

Where we go from there will depend, of course, on how the market evolves and ultimately what customers want.

Are you still opening new stores?
Yes, but only where it is important to do so in new shopping developments etc. Therefore, the figures I just gave you are net of a small number of completely new stores that we will continue to open in the right locations.

Why are you combining your out-of-town Currys and PC World outlets into megastores?
Historically they were often in the same retail parks, or side-by-side, or opposite each other. As I just said, today, the vast majority of our outlets are what we call 2-in-1 where we have combined Currys and PC World into a single store to make a very powerful offering.

This has also enabled us to shed some sales space as we consolidate the two formats.

Isn’t this just “showrooming” capex for Amazon & Co.?
Of course there is a risk, but we have narrowed the price differential to Amazon so much now that customers will obtain virtually the same prices from us in our stores. Customers tell us they want expert advice and to touch/feel the products.

Suppliers also like us to demonstrate their products, showing the full capabilities of their latest tech. So we believe that this, combined with great prices is a winning formula.

“Virtually the same”?
Obviously, the price differential will differ from product to product, and Amazon.com, like all other e-commerce retailers, moves its prices around faster than we do, but we have reduced them dramatically and on many items we are the same or even cheaper.

We also stock many exclusive items, as suppliers prefer a store environment which demonstrates their products full capabilities.

Meaning?
Depending on which survey you look at, it’s only about 2, 3 or 4 per cent. We believe that such a differential is irrelevant to most customers because we offer them the opportunity to have a range explained to them so that they can work out the right purchase.

Also, when they buy an item from a physical store, they know where they can take it back.

Why not match Amazon’s prices one-to-one?
Clearly, we know that we couldn’t maintain a big price differential to Amazon, but we’ve proven that we can maintain a small one and compete effectively.

In fact, we are even growing fast in product areas, such as accessories, small domestic appliances and tablets, where Amazon are at their strongest and we stock many exclusive items they cannot offer.

Given the steady rise of online retailing, how do you now divide your annual capex between bricks & clicks?

The balance varies each year, but there is substantial investment in both. Incidentally, we don’t see a big spike in capex going forward, and we are not short of the cash to do both well.

That’s a very diplomatic answer, but as Chairman of the Board you will be privy to a whole range of debates on capex allocation. Could you not give our readers an insight into the main areas of discussion?
We obviously direct capex towards our big home delivery operation in the UK so we invest in trucks and things for that. We also invest in computer systems to power our business not just for e-commerce but also for the stores.

Meanwhile the substantial reduction in store numbers and the slight decrease in overall sales area in the UK have lowered capital requirements so that we can concentrate expenditure where we think it’s most effective.

Where for instance?
Over a number of years, we have been progressively refurbishing our stores. As we’ve done so, we’ve learned to reduce the cost per square metre of our refurbishments quite sharply. But we do the whole process rather thoughtfully and prioritise those with best returns.

Alongside our refurbishment plan, we are also reducing out portfolio as leases expire.

You reign triumphant in the UK with over a fifth of the market. After a brief foray Best Buy closed all of its ‘big box’ stores in the UK as per January 2012. How did you see off their challenge so quickly?
We tried very hard to make it as difficult as we could for them. It wasn’t by accident that we opened large mega-stores virtually everywhere they were trading. They were slow and allowed us to respond before they even opened.

At the end of the day, I don’t think they ever fully understood the UK market.

But can it be any comfort to you that the world’s largest CE retailer didn’t see a market in the UK?
I don’t think that was the reason. They had a great track record in the US, but the world is littered with retailers who find what works well in one’s own country simply doesn’t work abroad.

Probably Best Buy decided that it was not worth ploughing money into the UK only to make losses for a very long time when they had to defend themselves against Amazon in the US.

Why do you think that Media-Saturn has never touched the UK?
I think they know that we’re not a pushover, and we know they have lost a lot of money trying to establish a business against us in Sweden. Why should they come and throw further money away here?

My understanding is that they decided a few years ago that their future was in developing markets. Admittedly, that hasn’t worked for them in China etc., but I should be delighted if they continue looking south-eastwards and never come to our shores.

Where do you compete with Media-Markt?
In Sweden, where we are no. 1 and they are no. 2; in Greece, where, again, we are the market leader; and in Italy where they are the largest. We were also competitors in Turkey until we recently announced an agreement to sell our business there.

The proposed sale of your lossmaking Turkish subsidiary ElectroWorld has upped your share price. But isn’t Turkey one of the great future markets?
It is certainly a big one, and there are as many Turks as Germans, but with seven, eight or nine chains it’s hugely competitive. So we either had to do a big investment to get towards market leadership or to sell. At the end of the day, it seemed more attractive to sell than take a big risky leap forward.

So that leaves you with two separate businesses in Scandinavia and southern Europe. Isn’t that a bit of a ragbag?
One has to play with the hand of cards one has been dealt although it is certainly not a bad situation to be market leader in all four Nordic countries where Elkjøp a very strong and much loved brand.

We believe on principle that market leadership is very advantageous due to the advantages of scale this brings and therefore strive for it wherever we are.

Isn’t southern Europe one of the worst places to be invested in at the moment?
The businesses we have there are pretty good and not hugely lossmaking, but I know that our management team is continuing to think through various options. We shall see.

At all events you don’t sound particularly bullish about further internationalisation?
One reason why we don’t see geographic expansion as a huge priority is because cross-border synergies are quite modest and most buying is still local. So we are working hard at developing common systems and best practices rather than looking at new markets.

But you could buy Kesa Europe or Fnac?
Our management in Greece has done a really fine job in a really terrible economy, and our management has done well in Italy, but we’ve still got lots to do in both countries. So why should we take on the cultural challenge of trying to do a better job of running a business than incumbent local managements?

Admittedly, one should never say “never” in business, but our purchasing Kesa in France and Belgium is as highly improbable as us attempting to buy Media-Markt.

How about new markets further afield than Europe?
We’ve probably got about three to five years work on our hands to improve our existing businesses. After that, we’ll think again, but the track record of western retailers in the Far East is not encouraging — just think of Media-Saturn in China.

Currently we generate around half of our annual revenues abroad, but, if anything, we are trying to become more modest rather than to grow the number of flags we fly.

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 42, 18.10.2013


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