As AO.com revealed its plans to close its business in the Netherlands following disappointing half-year results in Europe, Retail Week speaks to chief executive John Roberts about how he plans to fix the “mistakes” made in Europe to get the business back on track.

The electrical retailer’s revenue in Europe fell 3.4% to €75.7m for the six months to September 30 as adjusted EBITDA losses widened to €15.9m during the same period.

Its operations in the Netherlands currently make a loss of €6m and Roberts admits AO does not have the “management bandwidth” to fix it over the next year or the £10m it would “burn through” to save it.

Roberts says his approach to the Netherlands business was a mistake. Rather than rolling out the same strategy from the UK, AO followed a trial-and-error process as it went along, which has ultimately backfired.

After handing over too much responsibility “too early” to local teams, Roberts had to make a “tough decision” and will be closing the business in the Netherlands to focus more on the much bigger – albeit also struggling – market in Germany.

The online retailer has given itself a deadline of next summer to turn around its performance in Germany. If it has failed to do so by then, Roberts says AO will shut up shop in the country at a “worst-case scenario” cost of £20m.

What went wrong?

GlobalData analyst Zoe Mills says electricals retailer Media Markt, which is the market leader in the Netherlands and Germany, has made it difficult for AO to cause a spark with local shoppers.

“As a smaller player in both Germany and the Netherlands, AO has spread itself too thinly, unable to place its full focus in either market,” Mills adds.

And Shore Capital analyst Greg Lawless says AO, which he believes is right to pull out of the Netherlands, had not done enough planning before trying to expand into European territories. 

John Roberts

John Roberts has given AO a deadline of next summer to turn around its performance in Germany

Lawless says: “They weren’t ready to go into those markets.

“They did it to talk up the growth prospects and what we’ve seen [this week] is both businesses are losing money but by focusing on Germany – because it’s a much bigger market – they can see a route to profitability.”

Both Germany and the Netherlands are fulfilled from the same distribution centre, something Lawless says AO was not not big enough to handle.

”They should have launched in Germany or the Netherlands or just focused on northern Germany,” he says.

”They’ve tried to do too much too quickly, and they lack scale.”

However, Roberts has attributed AO’s problems in the Netherlands to “devolving too much responsibility too early and developing things differently over there”.

“It was a mistake and there’s no point sugar-coating that,” Roberts says.

“Rather than applying the ‘One AO’ approach where we build something in the UK and roll it out to Germany and the Netherlands, we tried to build and learn as we went,” he explains.

Although both the Netherlands and Germany have been struggling with similar problems, Roberts believes AO’s performance in the latter market can be salvaged.

But Lawless warns: “The German market is very tough. Walmart went into Germany and came out with their tail between their legs. Primark had teething problems and B&M bought the wrong business.

“It’s a very attractive market because it’s a large market but the geography is massive and that doesn’t help AO,” he adds.

But after the errors in the Netherlands, Roberts says AO has learned some valuable lessons to transfer to the German business.

What has AO learned?

As an established retailer on this side of the channel – in the UK, revenue was up 20.3% to £402.7m and adjusted EBITDA rose to £7.8m from £6.9m during the period – Roberts now knows AO must “repeat the playbook” of what it does in the UK to succeed in Germany.

When AO expanded into Europe, Roberts gave a great deal of decision-making responsibility to its country manager, which with hindsight he admits was an error.

“With Germany’s online penetration substantially lower than that in the UK… focusing on driving brand awareness in Germany will be essential”

Zoe Mills, GlobalData

“We spent 20 years learning how to do Google and Facebook in the UK and Google and Facebook in Germany are exactly the same. But we put a country manager in Germany who wanted that to be his responsibility and that was a mistake.

“We’ve corrected that and are re-centralising all of that kind of stuff back to the UK,” Roberts says.

“We’re using the same tech and platforms and the same systems and knowledge and experience that we’ve got in the UK for how we do stuff.”

However, Mills says the retailer should take a different approach if it wants to gain more of the German market share: “With Germany’s online penetration substantially lower than that in the UK, AO must take a different approach to the UK.

“Focusing on driving brand awareness in Germany will be essential as well as focus on fulfilment to ensure more consumers shop online for large electricals purchases,” she says.

Despite the problems, Roberts remains positive about AO’s international growth prospects and has already been applying the “UK lessons and systems to the logistics operations” to turn things around in Germany.

“The work completed so far gives us the confidence to maintain our belief of profitability in the German business at €250m of revenue,” Roberts says.

Is international growth achievable?

But not everyone agrees a rapid turnaround for Germany will be achieved.

“It’s a challenge. They’ve stemmed the loss from the Netherlands because they’re closing it with their tail between their legs, so your international growth story has gone,” says Lawless.

“[It] now needs to build scale in Germany and it’s still a tough market. Germany is still in the A&E department and it could be going to intensive care,” he adds.

“If they did their background enough on this market they would have known some of these issues. Media Markt is a world-class retailer. You are trading against a bricks-and-mortar retailer who is world-class and has access to top-end brands.

“German people drive around in Mercedes and BMWs but shop at Aldi for a reason. Luxury is massive in Germany, but value is also very important, and the German operators are very good at what they do.”

“We continue to be totally committed to the scale of opportunity, the model and strategy in Germany”

John Roberts, AO.com

However, Mills is slightly more optimistic on AO’s European future.

“In previous years, AO’s international business has grown significantly, with [the latest interim results] marking its first decline in sales,” she says.

“The closure of its Netherlands business will mean sales growth will be difficult in the short term. However, if it uses the shuttering of this business to place its focus on revitalising its German arm, it has every opportunity to begin to see growth in this market.

“Becoming profitable will be its greatest challenge as driving awareness through marketing will be costly, but hopefully beneficial in the long run as it becomes a more established player in the electricals market.”

Although optimistic, Roberts is still realistic when it comes to the German business’s future. 

“We continue to be totally committed to the scale of opportunity, the model and strategy in Germany and have real conviction that it will succeed,” Robert says.

AO has a gruelling six months ahead to make good on Roberts’ convictions – but whether shareholders will have the patience to wait for the etailer to tinker with its fixer-upper German division is another question.