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AO World on its ‘ecosystem’ strategy that brings retail, recycling and third-party services together

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AO World today brought investors up-to-date on its strategy to create an “ecosystem of complementary competencies” as it continues to broaden out its business from pureplay retailing. It also said that its Black Friday approach of offering discounts over a longer period in November helped it to smooth out sales and boost profit margins. Its UK business is growing fast – but its European operations remain unprofitable. 

The update came as AO World reported sales of £902.5m in the year to March 31 2019, 13.3% up on the same time last year. Year-on-year UK revenue was 10.1% up at £749.3m. Pre-tax losses widened to £18.9m from £13.5m a year earlier.  Its year-end inventory stood at £76.3m, higher than the £53.2m it was holding a year earlier – as a result of stockpiling ahead of the March 29 expected date of Brexit – which has now been delayed until October 31. 

By year-end, the retailer had nearly 6.5m UK customers and almost 800,000 in Europe, where it sells in Germany and the Netherlands. It said its European performance had been “disappointing”. Despite  a 32.2% rise in European sales to £153.2m (€173.3m), its gross margins were running at a loss of 1.7% – and it reported a gross loss of £2.6m. In the UK, however, margins were at +20.7%, and the operation made a gross profit of £154.9m.

Diversifying into services… 

The electricals retailer, whose UK brand is ranked Leading in IRUK Top500 research, is developing a plastics refining business that it aims to use to make money from waste plastics in its fridge business. When opened during the course of the current financial year, it will operate alongside its fridge recycling business, now in operation for a year. A second fridge recycling facility is scheduled to open by the end of the current financial year. The retailer is offering two-man logistics services to third-party businesses – where it lost a contract from Argos but gained one from The Cotswold Company – and trialling the rental of white goods to housing associations and consumers. Other moves include the December 2018 acquisition of Mobile Phones Direct. 

Revenues from recycling rose by 22% to £14.5m, but those from third-party logistics fell by 4.2% to £15.3m. 

…and across sales channels

AO World has also diversified its sales channels. It believes that it has gained new customers by selling on Amazon and eBay, and it is also focusing on business to business sales. Meanwhile its Europe business This, it says, was a “key driver of growth” in its medium sized domestic appliances category. In November it offered deals over a longer period than previously. That, it said, “was well received by customers, which also allowed for a smoother sales flow and improved margins.”

John Roberts, the AO founder who has returned to the post of chief executive during the last financial year, said: “The AO model is an eco-system of complementary competencies across retail, mobile, recycling and logistics through to financial services and B2B trade. We have huge structural advantages when these capabilities operate in harmony. So, we have enhanced structure with informality and a renewed mindset and are now releasing the immense unrealised value we’ve created. We’ve started to see this in the last few months and it will be an important driver for the year ahead.

“Overall, the AO team deserve praise for their efforts in FY19 but we can do better and I’m pleased with the progress that we are now making in the first few months of this financial year. I’m proud to be back at the helm of the business I founded almost two decades ago and I’m more excited than ever about the future for AO.”

Image courtesy of AO World

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