Analysis: John Roberts on putting spark back into AO, price pledges and third-party deals

Online electricals specialist AO has been through what chief executive and founder John Roberts labels one of the “most challenging operating environments” it has weathered since its conception.

AO’s results, which were delayed due to the complexities of an ongoing strategic review, showed it fell into a pre-tax loss of £37m in the year to March 31, while EBITDA tumbled 87% to £8.5m.

Group revenues slid 6% year on year to £1.5bn.

AO is continuing to streamline its business, cutting costs and focusing on profits rather than overall growth.

But with bold targets to reach, how will founder Roberts spark a new era for the business?

Third-party partnerships

AO exited a shop-in-shop trial with Tesco in July in a bid to “rationalise” the business, but third-party tie-ups are still on the menu.

The retailer disclosed today that it has entered into a five-year, extendable partnership with home and DIY retailer Homebase. AO will provide appliances, installation and recycling services to Homebase customers.

“It’s a case of one plus one equals three,” Roberts tells Retail Week.

“We’ve got an incredible vertically integrated platform and they’re scaling in white goods. 

”We’ve gone through the pandemic and all the supply chain challenges that came with that. They’ve got £30m of buying power. We’ve got a billion pounds worth of buying power and we’ve got all the supply chain and the infrastructure, and everything that goes with it.”

“If you’re a customer going into Homebase to buy a new kitchen, suddenly you’ve got the whole AO range to be able to shop from. This means that it’s even more of a one-stop-shop solution”

John Roberts, AO

AO can give Homebase customers access to a broader range of appliances than previously and help it deal with new regulations coming into force that mean it is responsible for disposing of old products when installing new ones, by using AO’s recycling scheme.

“If you’re a customer going into Homebase to buy a new kitchen, suddenly you’ve got the whole AO range to be able to shop from so you can have whatever you want in your new kitchen, and you’re guaranteed to get it at internet pricing,” Roberts adds.

“This means that it’s an even more of a one-stop-shop solution. If you buy a new kitchen and have it on finance, it means you can put all your appliances on your finance deal as well.

“The customer proposition element of it means that buying a kitchen from Homebase is infinitely more attractive than it was previously, which means that they should sell more kitchens and, from our point of view, it gives us access to their kitchen customers.”

AO is exploring further options with other kitchen retailers as well. The key element to these arrangements is the economic split and the profit generated from such deals – which makes them different to the Tesco partnership. 

Roberts says AO will be cutting off other areas of the business in order to increase profitability.

“It’s just looking at different pockets of the business and saying: ‘We don’t want to do that’,” he says. “Certain areas of the business, such as with some cashback sites for example, where the cost of acquisition of those customers just doesn’t make sense. 

“If our lens is growth and we want to look at the lifetime value of that customer, we might take a slightly different view, but we’ve been very clear that our focus is making sure we get to 5% EBITDA and being a cash-generative business and we know exactly how to do that – it’s not rocket science.”

The strength of online

With stores now fully reopened after the Covid lockdowns of the past couple of years, online retailers including Amazon and Boohoo have recorded sinking sales numbers against strong comparables.

Shopify boss Tobi Lütke even said his business made the wrong bet on exponential online growth arising from the pandemic, forcing the retail platform to lay off 10% of its workforce.

Roberts, on the other hand, believes while volatility in the online space is inevitable as retail balances into the new normal, AO could be a beneficiary because the internet will always offer the best prices available.

“When you’re in a household spending squeeze, my view is that customers will migrate even more to online as a better and cheaper way to buy the category”

John Roberts, AO

He particularly relates this to the cost-of-living crisis, suggesting that shopping online could save the money consumers need right now.

“When you’re in a household spending squeeze, my view is that customers will migrate even more to online as a better and cheaper way to buy the category,” he explains.

“Even down to, frankly, why would you want to spend £10 on fuel driving to a retail park and wasting your Saturday morning walking around a big-box retailer? Time is the most valuable commodity that you’ve got.”

When asked whether online retail will continue to grow, Roberts is more bullish than some of his peers.

“There’s been volatility as we’ve gone through Covid when stores are open and stores are closed, but I think we’re pretty much through all that now,” he says.

“Fifty-four per cent of the category of major domestic appliances is transacted online, and if you look at something like gaming that’s over 70% transacted online. 

“We’ve added 4 million customers over the last two years, who have shopped with us for the first time. Once you’ve experienced a better way to do something, you don’t tend to go back.

“I think there are these tipping points in life – moment-in-time opportunities – and it’s just a continuation of a trend and direction of travel.”

“John Lewis do more than half their business online and yet they won’t even match online retail. ‘Never knowingly undersold’ – I’ve said for 20 years that it’s a load of shit”

John Roberts, AO

Roberts also blasted some electricals retailers such as John Lewis for what he claimed were “bullshit” price promises amid the cost-of-living crisis.

He maintains: “John Lewis do more than half their business online and yet they won’t even match online retail. I mean, ‘never knowingly undersold’ – I’ve said for 20 years that it’s a load of shit, so it’s nice that they’ve finally come out and admitted it.”

“Our strategy on that is – and I know it sounds a bit boring – to be the best price every day,” he adds.

“I think it’s the most simple, Boltonese price-match where we will match anyone, anywhere, anytime on anything if they’ve got the stock available to deliver – no asterisk where it excludes this, that, only on a Tuesday with both grandparents in attendance, etc.”

Profit-centric outlook

For the past few years, particularly during the pandemic, AO has focused on growth and set itself up to be a bigger business. 

The sales now, however, don’t match up to the cost base and a new profit-centric mindset is how Roberts plans to bring the business back on track.

The retailer forecasts that sales will be down year on year, in the range of £1bn to £1.25bn, but he caveats that by saying AO won’t “be losing any sales we don’t want to lose”.

“We also have more costs in our business because through Covid the supply chain was a nightmare, so we increased our footprint to protect customers,” he says.

“We increased our vehicles and we increased our stockholding, so it’s about normalising that.

“The only way that we can deliver and continue to deliver being absolutely and always the best price for customers is to have a super-efficient, high-quality, lean machine.”

Roberts’ plans have proven popular in the city. Brokers Numis and Jefferies, for instance, have reacted positively.

Jefferies analyst Andrew Wade said in a note that he was ”encouraged by the strategic direction that is prioritising value creation over growth-at-all-costs”, while Numis analyst Simon Bowler said that “execution through this phase of right-sizing is critical as AO retrenches to its profitable core”.

While the future of online across other categories remains in question, Roberts is confident he can bring AO back into the black as he pulls the plug on the deadweights in the business and powers up a new profit-led strategy.

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