DSGi and Kesa powering up for the electricals battle with Best Buy

There was nothing electric about last week’s full-year results from electricals rivals DSGi and Kesa.

Any sign that the fuse could be relit in the depressed sector was blown out when the pair, Europe’s second and third-largest electricals retailers respectively, reported plunging profits and tumbling like-for-likes.

Both have struggled to keep up with their peers in the low-priced internet arena and the higher-end service-focused market. Competitors from Argos and the supermarkets to John Lewis have also been contributing to the powering down of sales levels at the groups.

Combine that with the drop off in customer demand as the housing market stagnates and the threat posed by the UK debut next year of US electricals giant Best Buy, and the two retailers face a turbulent time.

Within a day of each other Kesa and DSGi last week laid out grim full-year figures and forecast another tough year to come. Pre-tax losses at DSGi, owner of PC World and Currys in the UK, were £140.4m for the year ending May 2 after £190m one-off charges. Underlying profits slumped 78 per cent to £50.5m, down from £225.6m. Total sales fell 1 per cent to £8.3bn, a like-for-like drop of 9 per cent.

Comet-owner Kesa posted a 6.2 per cent like-for-like fall in sales in the year to April 30, forcing the group into the red. Kesa’s pre-tax losses were £81.8m compared with profits of £128.8m the year before. Total sales jumped 9.8 per cent to £4.95bn. However, at constant exchange rates the European group reported sales down 1.2 per cent.

At Kesa, new chief executive Thierry Falque-Pierrotin – in his first appearance before the media and the City – said that he did not foresee a market upturn in the immediate term and was factoring in a like-for-like decline of 5 or 6 per cent to budgets for the year.

Falque-Pierrotin said: “We have adapted our operations because as managers we can’t expect recovery – we don’t known when it will come.”

Echoing Falque-Pierrotin’s comments DSGi chief executive John Browett said there would be “no uptick” before the second half of next year. “There are people out there who have got more optimistic views, including the Chancellor,” he said. “I hope he’s right.”

Too little too late?

So, just how hard is it to operate in the electricals market and are the retailers’ turnaround strategies too little too late?

“Electricals is one of the big-ticket markets that has been more affected by the downturn because consumers are spending on food and to an extent clothing,” said Pali analyst Nick Bubb. “Both Comet and Currys have got to get customer service right.”

Falque-Pierrotin highlighted customer service and the leveraging of best practice across the group as a key strand to his plans for the retailer, which also operates Darty in France and has operations in Spain, the Netherlands and Turkey. “Kesa has built a service-led model and will keep on working across the line to enforce its service offer and develop its customer offer,” he said.

Falque-Pierrotin, who was head of PPR-owned home shopping group Redcats for seven years, is a strong advocate of online, which he sees as a key driver of growth for Kesa. Over at DSGi, annual e-commerce profits doubled to £15m.

“There is a strong pressure on them to exploit online sales as much as Argos has done,” said Bubb.

Singer Capital Markets analyst Matthew McEachran said: “If you are serving a customer through the online channel it is cheaper. If you are not gaining any customers, then the channel is more efficient, hopefully there is incremental growth.”

He added: “If you talk to Best Buy, it is in their minds that it is multichannel.”

The advent of Best Buy and its big-box format in spring next year creates another challenge for the established European electricals retailers, with the focus on improving store environments becoming more urgent.

As part of John Browett’s renewal and transformation turnaround plan, DSGi has begun the overhaul of its store portfolio, including the unveiling of a Currys Megastore in Birmingham.

DSGi will give a further 100 stores a makeover this year after overhauling 63 last year. Revamped stores lifted gross profit by between 11 and 65 per cent compared with the rest of the chain.

Its new megastore concept is expected to deliver £30m sales per year and it hit the 65 per cent profit uptick figure. It will open another four this year and will close 60 high street Currys.digital stores when their leases run out.

“The new Currys are impressive, but there are not enough of them,” said Bubb. “But there are more appearing all the time.”

The roll-out of the new-look stores, many housing products from both PC World – where like-for-likes fell 13 per cent – and Currys –which recorded a 10 per cent like-for-like fall – throws up the question of whether DSGi needs two fascias.

The jury is out said Bubb. “DSGi says that they have two different customer segments. One is family focused and one more specialist. However, PC World is selling TVs – that is not so specialist. PC World’s business model is delivering good margins through their accessories.”

Of its circa 250 stores, Comet, which recorded a 7.7 per cent like-for-like decline in the year, has undergone a cost restructuring, including the loss of 300 jobs – 100 in stores and the remainder in head office. Comet boss Hugh Harvey said that the cost cutting has not been at the expense of customer service and that he does not expect another restructure. The changes will save £14m in future annualised savings.

Comet has also put its mezzanine opening programme on hold. Harvey said: “We will slow our investment in stores over the next 12 months but then we will ramp it back up.”

The move could be counterproductive said Bubb, given the impending launch of Best Buy and the uplifts recorded by DSGi in its new stores. “Comet may as well invest in stores now and establish something,” said Bubb.

Browett said the acceleration of its store revamp programme – aided by a £311m cash call in April – had hit DSGi’s bottom line but maintained: “We will emerge from the recession with a compelling offer for customers.”

He plans – like Falque-Pierrotin – to cut costs, including slashing £50m of overheads a year for the next four years.

Harvey said that present trading is “volatile and fragile” and that he is working for the retailer to come out of the downturn “ahead of expectations”.

While volumes are robust in the TV market, prices remain under pressure from volatile sourcing costs and currency fluctuation, added Falque-Pierrotin. A price war, like the one implemented at the end of last year, with Currys slashing prices on TVs, would not help the sector, said Bubb.

“Comet would like Currys to be less aggressive on pricing. It won’t be unhappy to see Currys move upmarket,” said Bubb. “Currys has got to move upmarket and improve service.”

McEachran added that Currys is playing catch up with Comet in its attempts to move upmarket. “Comet is trying to become a top-quartile business, that is to have market share in the upper price segment.”

As for DSGi, he said: “Improving customer experience will take a long time.” But John Browett’s renewal and transformation programme took “a leap rather than small steps” said McEachran. “It wants to get up into the John Lewis part of the world”.

Over the worst?

Overall, the City was surprised to see such downbeat comment from the electricals retailers.

Bubb said: “Given the John Lewis trend that has been seen over the past few weeks I was surprised that they weren’t inclined to talk things up. Maybe the truth of the state of the market lies somewhere in between.”

McEachran saw some upside in the market. “It has been pretty tough, but it feels like it is not as tough as it was.
It sounds like things are better than the last quarter of last year. At that point we had Currys, which was altering pricing in the TV market, and there was a lot of uncertainty around. Now, new technology is showing more volume dynamics,” he said, referring to new TV products – such as high-definition DVD – and the strong performance of netbooks and laptops.

“Signs are that consumer confidence is stabilising and that we have been through the worst part,” he said.

Whenever the upturn comes, both Kesa and DSGi need to ensure they have fired up all the necessary elements at their disposal to power onwards.