When Alex Baldock joined Dixons Carphone as chief executive in April he faced a baptism of fire.
He found a business that had failed to fully realise the benefits of the 2014 merger of Curry PC World owner Dixons and mobile phones specialist Carphone Warehouse.
A month after he joined there was a profit warning and soon afterwards a massive customer data breach was discovered at the retailer.
The scale of the challenge ahead was laid bare when Dixons Carphone unveiled a £440m half-year pre-tax loss yesterday as it absorbed a £490m charge primarily relating to a loss of goodwill in its hard-pressed mobile business.
Baldock’s strategic vision for Dixons Carphone is that it will ‘help everyone enjoy amazing technology’ and he aims to deliver a group EBIT margin of 3.5% over five years versus 3% now.
Success will be built, he maintains, on four pillars: the growth opportunities represented by online; the extension of a credit business, the overhaul of the mobile phone operation amid changing market conditions; and enhancement of customer experience by making their dealings with the retailer as smooth as possible.
Those objectives will be delivered in three main ways – great staff, a genuinely “joined up” business and improved infrastructure.
And, contrary to speculation ahead of today’s interim results, he does not plan more branch closures but sees stores as fulfilling a crucial role.
A bigger online business
Online is responsible for all growth in the electricals market, powered in particular by the rise of mobile, but Dixons Carphone is not punching its weight at present.
“Less than one third of our sales are online versus half of the market,” says Baldock.
He intends to increase the range available tenfold to 40,000 SKUs but to do so “stocklessly” and instead use drop shipping to fulfil orders. While that is lower margin, it is also lower risk and means that popular product can be identified and then bought in.
Online will be built up not just through range expansion, but through technical improvements such as faster website check-out, better search and by the roll-out of staff tablets.
The tablets allow colleagues not only to order on behalf of customers but to build on one of the key attractions of stores – the assisted sale, reliant upon staff expertise and advice.
The continued importance of the assisted sale in electrical and mobile products – often high cost and complex to understand - is why he sees shops as continuing to play a pivotal role.
“We strongly believe in our stores,” Baldock says.
There are 102 store closures scheduled – already disclosed before today and reflective of the three-in-one approach of combining fascias - but “no plans” at present to close any more.
“We’re not backing away from the high street and retail parks,” Baldock says. “We want to make our stores magnets of discovery.” Changes being piloted in-store include the introduction of ‘gaming bunkers’ and lower levels of stock to allow product to “breathe”.
Stores also enable suppliers to showcase the latest technology, and they recognise the advantages a bricks-and-mortar presence brings.
“That’s where our privileged relationships with suppliers matter a great deal, says Baldock. “We are Samsung’s largest customer and it shows.”
Extending credit lines
Many tech products carry big ticket prices, which is partly why Baldock sees big opportunity in Dixons Carphone’s credit operations.
The group already has 700,000 active accounts and this year credit is expected to generate revenues of about £440m.
“This is the largest and fastest growing service in the business,” says Baldock, who emphasises that the retailer is a responsible lender. “We’ve got no intention of lending to people who can’t afford to pay it back,” he says.
Credit brings the opportunity to enable consumers to spend with Dixons Carphone in the first place, and to drive a bigger average basket value.
It is all part of making the shopper’s experience with the retailer “stickier and more valuable”.
Making mobile work
Mobile phones is Dixons Carphone’s most important category but, despite the retailer’s number one position in the market, it is loss-making in the UK and Ireland.
That is because of market shifts such as lower handset sales volumes and a shift towards SIM-only deals.
Dixons Carphone is “resetting relationships” with the mobile networks, making its own network more competitive through a new deal with Three and easing the burden of volume commitments. “We’re making sure our relationships with network partners are on a sustainable footing,” says Baldock.
One business with staff as shareholders
Baldock is determined to make good on the original promise of the merger between Dixons Carphone at operational, infrastructure and cultural levels.
He has already restructured the executive committee and is unifying central teams rather than maintaining distinct teams that were a legacy of Dixons and Carphone Warehouse pre-merger.
An upgrade of infrastructure is underway, and a “joined up business behind the scenes” is being created through changes to IT and supply chains, for instance, which will create £200m of cost savings which can be reinvested or deployed to protect the business if it is buffeted by headwinds amid volatile trading conditions.
But people will be crucial both to the creation of one business and in delivery of Baldock’s strategy.
Both are reflected in the decision to award staff at least £1000 of shares each. “We want to energise all our colleagues and align everyone into truly one business and make all our colleagues think and behave as owners,” he says.
The reaction internally has been “off the chart”, he says, and he is confident that will be mirrored in commitment from staff who, he says, will ultimately make the difference.
He says: “Everyone talks about having great people. We need super-helpful people to do the assisted sale.
“Happy colleagues make for happy customers make for happy shareholders in the long run.”
The City reacts
And what does the City think? Dixons Carphone’s shares fell today, as the retailer also revealed a dividend cut.
Broker Whitman Howard said: “Strategy updates can be value traps despite sounding very plausible at inception. Today’s seemingly reassuring plan delivered with decent figures is likely to be well received, albeit the path over the next two to three years is in our view likely to be a little Kingfisher-esque.”
Citi noted: “The new strategy on mobile is less revolutionary than expected but aims to maximise value from this significant strategic asset. The 40% dividend cut may come as a surprise but a more prudent outlook given the current uncertainty and increased short term investment is understandable.
“The new financial targets of at least 3.5% EBIT margin and £1bn of free cash flow generation over five years look achievable without appearing too aggressive.”
Baldock was confident that his strategy will bear fruit. He said:“We believe that Dixons Carphone is now on the path to sustainable success. We have set a clear long-term direction that will deliver more engaged colleagues, more satisfied customers and a more valuable business for shareholders.”
Alex Baldock is speaking at Retail Week Live 2019, which takes place on 27 and 28 March. Find out more details here.