Following full-year results of strong revenue growth and a record profit before tax performance, AO’s chief executive and founder John Roberts talks to Retail Week about its recent performance and the steps it has been taking to cement itself as a trusted, growing retailer.
This morning saw online electricals retailer AO report a 32% increase in like-for-like adjusted profit before tax to £45m, while group revenue rose 7% to £1.11bn in the year to March 31.
Roberts was happy with the group’s performance, hailing its 25th year in business as the “best yet”.
“Most businesses don’t make it through the first year, so this is a milestone,” he said.
The past financial year also saw AO snap up the struggling Music Magpie back in December, with the aim of boosting capabilities and improving affordability in the consumer technology space to “further differentiate” its proposition.
In a chat with Retail Week post-results, Roberts discusses the membership scheme driving growth, how it plans to revive its struggling mobile business, and how it is combating millions of extra costs from the Budget.
Five-star membership scheme
AO’s Five Star membership programme was a key driver for sales and gives customers more incentive to keep shopping with the retailer.
“It’s something we’ve built steadily and slowly,” Roberts explains.
“Customers pay £39 (a year) to be a member and receive free delivery, free recycling, and exclusive member discounts. These are the key benefits for now, but we’re going to put more value into that over time for customers. Some of the key metrics for the business are that members spend more with us and they shop across categories and that is our growth engine as a business.”
Global Data retail analyst Oliver Maddison adds that by following the trend of “electrical sales being supplemented by services,” the membership scheme is an important part of AO’s offering.
“It’s paying off for AO, with the share of orders from repeat customers (which it considers more cost-effective) rising to 60% from 54% the year prior.”
Expansion of products
The retailer has also been expanding the breadth of products, adding a further 1,500 in the past financial year.
Roberts is keen to share what the group has rolled out: “We’ve added in new categories that are in their infancy. Things like drones, health and beauty, and fitness products, and there’s a pipeline of things to come through.
“Key categories of major domestic appliances, TVs, small domestic appliances, phones, technology, consumer electronics – those are the key categories and we’re through at least 1% market share in all those. In major domestic appliances, we’re at 16% share, and with TVs we’re at 3% share.”
“It gives you an insight into the scale of the opportunity that we could have when we make all that available to a customer base that already trusts us, and then a customer base that is paying to be a member. It will keep on growing.”
Maddison thinks the expansion into new products and the acquisition of Music Magpie could capture a younger consumer – but adds that AO must focus its marketing efforts across other channels if it really does want to tap into a new demographic.
Dwindling mobile business
Not everything in AO’s business has been performing smoothly. Yes, services have been integral to its recent results, but mobile has been letting it down.
Its mobile business fell 11.2% and is now loss-making, but Roberts is honest in his evaluation of why it is struggling.
“We need to get a better share of the economics from the networks. There’s some self help things that we are doing, but fundamentally we need a different deal. That market of paying £40 a month over two years for your network contract and getting a phone for free, is in constant decline.
“The disaggregation of SIM-only and handset is definitely the future, so it’s about repositioning that business rather than being a drag. We’re going to focus on this over the next few months as it’s the most important category to customers. We need to be at scale and have a proposition that’s market leading, and that’s what we’ll introduce at the end of this year.”
Peel Hunt analysts said AO’s future strategy is based on handsets and its soon to launch virtual network offer a “strategically important” category for the retailer.
“But management is intent on either getting the non-core mobile sites back to profitability this year or shutting them down, with the direction of travel likely to be known by autumn,” they concluded.
Combating costs from the Budget
Like many retailers, AO has to battle with fresh costs piled on from the recent Budget.
Roberts explains: “We’ve got about £8m of extra costs as a direct consequence of the Budget, so technology and productivity, using AI can help. This isn’t about job cuts, and we’ve been trialling whether we can offshore call centers – but you don’t get to be the globally number one company on Trustpilot by not looking at the customer.
“The first thing for us is looking at if we make offshoring as amazing as we do it in the UK, and if it doesn’t pass that test, I won’t take the cost saving. Our biggest cost is people and we are always thinking about how we can do more with less. It’s not about making redundancies, quite the opposite. We have the benefit of being a growth business so you can grow your way out of different problems. Can you do the most amazing service at a lower cost? And if the answer to that question is yes, why wouldn’t you do it? If the answer to that question is no, don’t do it.”
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