As Frasers Group snaps up a 19% stake in AO, the two retailers are “looking forward to realising the significant potential” of working more closely in partnership.

Although experiencing a challenging sales period, online electricals retailer AO has been pivoting its strategy to profitable growth and is confident of increasing profitability this year.

The business experienced a pandemic-induced 58% surge in sales in 2020/21 but since then trading has been tougher.

Customers have returned to omnichannel shopping – particularly bricks-and-mortar stores – and the cost-of-living crisis has impacted discretionary spending in electronics. According to the Barclays Consumer Spending Report, spending on electricals was down 2.7% year on year in May.

 

AO’s total sales in 2022/23 are projected to slide by 17%, amounting to £1.2bn.

However, AO first revised its forecast for full-year EBITDA to a range of between £30m and £40m, up from the previous estimate of £20m-£30m.

Then in March, it further increased its profit guidance to a range of £37.5m to £45m.

 

In a trading update in January, AO said: “Actions taken to reduce costs and improve margins are gaining traction and profitability is now running ahead of our previous expectations.”

Here, we highlight five strategies that have got AO into this positive position.

1. Cost-cutting measures 

AO has implemented several cost-cutting initiatives to enhance profitability. These include operational cost cutting as the etailer reduced headcount, particularly in senior and middle management positions, to improve operational efficiency.

The group has also optimised warehouse space, closing 158,000 sq ft to ensure appropriate stock levels that meet demand at a reduced cost while improving inventory turnover.

Large-scale advertising and marketing campaigns were cut, with reduced spending reflecting a shift towards more targeted and cost-effective strategies on social media channels, including digital advertising and brand awareness initiatives.

AO also negotiated a fixed energy price cap until 2024 to mitigate the impact of rising energy costs and provide stability and predictability – safeguarding profitability.

2. Review of product offering and delivery charges

According to AO, its major domestic appliance category has consistently demonstrated greater resilience over time compared to other categories.

In response, the company made a strategic decision to delist unprofitable products and shift its focus towards core items such as televisions, laptops and small domestic appliances.

It also expanded into newer product categories as an opportunity for sales growth.

AO website

The introduction of delivery and return charges was designed to offset rising fuel and energy prices, thus benefiting profit margins.

Competitor Currys implemented a similar measure by introducing delivery charges for major appliances during peak periods and added a fee for large-screen TV delivery in January.

However, according to the PwC Global Consumer Insights Pulse Survey in February, there is a potential threat in this – 40% of consumers who plan to increase in-store shopping and reduce online purchasing cited high delivery costs as the reason.

3. Exit from Europe and physical retail

After announcing its exit from the Netherlands in November 2021, AO decided to close its loss-making business in Germany in June 2022.

AO’s German operation, launched in 2014, achieved revenue growth of 54% during the pandemic period from March 2020 to March 2022.

However, the lifting of Covid-19 restrictions in Germany led to a higher than anticipated return of consumers to bricks-and-mortar shops, resulting in increased marketing costs.

Some traditional retailers and manufacturers also recognised the online opportunity and developed their direct-to-consumer offerings, intensifying competition in the online market.

Following a strategic review, AO made the decision to exit German market. The closure of the business, which was initially estimated to cost £15m, is now expected to have no major impact on AO’s overall financials.

In addition, AO ended an in-store trial with Tesco in July 2022, marking the conclusion of the electrical retailer’s first foray into physical retail.

AO Tesco

In the autumn of 2020, AO opened five concessions in Tesco Extra stores as part of a six-month trial. However, the pilot was disrupted by lockdown regulations.

AO has discontinued all international operations and physical store attempts, shifting its focus solely to the online battleground in the UK.

4. Increasing sales through flexible payment plans

The British Chambers of Commerce forecasts: “The inflation rate to ease to 5% by Q4 2023, but small firms still face significant cost pressures that hinder their ability to invest and grow. Although the producer price inflation rate has decreased to 12.7%, it remains historically high and above consumer price inflation.”

Given the rising cost of living and increasing bills, AO observed a growing number of customers using buy now, pay later (BNPL) services where available.

According to the November 2022 PayPal ecommerce index, 32% of consumers use BNPL for the purchase of electronics and computing products.

 

AO anticipated that more customers would opt to spread the cost of their purchases to make them more affordable.

In response, the company offered various financial promotion offerings and initiatives such as BNPL plans, flexible credit, instalment plans and 0% interest instalment plans.

These initiatives allow customers to purchase goods and repay the cost with greater flexibility and affordability.

5. Maintaining a strong supply chain

AO has implemented vertical integration in its supply chain, providing the company with control over quality, pricing and inventory management.

The firm is well known for its robust and efficient delivery infrastructure, operating its own logistics firm, AO Logistics, which includes a fleet of delivery vehicles and dedicated delivery teams.

AO has kept close and reliable relationships with manufacturers and suppliers to ensure optimal stock levels align with dynamic customer demand.

This enables it to provide reliable and timely delivery services to customers seven days a week, which was particularly valuable during the pandemic and subsequent supply chain disruption in 2022.

Looking ahead, AO will continue its focus on cash and profit generation, simplifying the business to reduce complexity, and enhancing the range of choice and services it provides.

Retail Week analysts predict AO’s sales will grow steadily and reach £1.4bn by 2026/27.