All eyes are on John Browett as next week’s strategic update looms. George MacDonald examines some of the options open to DSGi’s chief executive
Next Thursday will be a red-letter day for electricals market leader DSGi, when chief executive John Browett unveils key findings of his strategic review.
Browett, a former management consultant with Boston Consulting, took the helm at DSGi in December knowing that he would have to provide answers to some very hard questions. But, after two profit warnings so far this year, he may have been surprised at how deep the group’s problems run.
The scale of the task Browett faces is pithily summarised by Investec analyst David Jeary. He says: “In true management consultant style, we assume Mr Browett will espouse the view that there are no such things as problems, just opportunities. Investors will undoubtedly be hoping that not too many of these will be insoluble opportunities.”
Here we survey some of the issues that are likely to loom large in Browett’s considerations.
Generating sales of£621.4 million in 2006/07, DSGi’s 116 UniEuro stores represent a hefty chunk of the group’s revenues of£7.93 billion last year. But the Italian chain has consistently underperformed.
When it issued this year’s second profit warning last month, DSGi reported that UniEuro’s like-for-like sales had slumped 14 per cent in the 25 weeks to April 5. DSGi has since decided that it should close 40 of its Italian shops and the improvement of UniEuro – described by Retail Knowledge Bank senior partner Robert Clark as a “running sore” – is likely to be a priority for Browett.
Credit Suisse analyst Tony Shiret says: “The news that it is proposing to close 40 of the Italian stores indicates that DSGi cannot sell this business and has decided to grind it out.”
Clark says “the problem is they bought a bummer”, but believes that Italy does have potential. The country has a fragmented electricals market, dominated traditionally by independents and buying groups.
In the absence of a buyer, expect Browett to oversee a detailed improvement strategy for UniEuro. The priority would be to develop a coherent, consistent out-of-town chain with the capacity to woo consumers who so far have seen few reasons to prefer UniEuro to a host of rivals.
Improvement would either make UniEuro worth having for DSGi or fatten it up sufficiently for sale – probably to Metro’s Media-Saturn electricals division.
An effective international group?
DSGi’s Italian problems may be the highest-profile thorn in Browett’s side, but there are signs that the retailer’s wider international push has not proceeded as planned.
DSGi’s decision to push into foreign markets was widely applauded and its first deal, the acquisition of Scandinavian retailer Elkjøp at the turn of the millennium, was seen as very smart.
Since then, however, progress has been mixed. DSGi developed the PC City store type for continental Europe to replicate its PC World chain in the UK. But the decision was taken last year to shut the PC City business in France after it suffered losses.
DSGi said then that its Pixmania e-tail business would continue to cater for the French market, but observers say the PC City experience was symptomatic of group problems.
Clark says: “There should have been scope there, because competition doesn’t seem particularly strong. I suspect one of the problems is management detail and co-ordination.”
One of the challenges retailers face when they expand internationally is maintaining the right balance between a shared business culture and objectives and the need to cater for local consumers.
Browett is likely to concentrate more on getting that balance right and ensuring top-notch execution, so that the international business fires on all cylinders more consistently. “They need to focus on the key areas of development and make them work,” says Clark.
Internet vs stores
DSGi shocked the industry in 2006 when it decided to take the Dixons name – the foundation upon which the group was built – off the high street and into cyberspace only.
The decision looked prescient but, despite such foresight, DSGi now looks over-shopped. It still has almost 700 shops across its Currys and PC World fascias and analysts are convinced closures are likely. In January, Credit Suisse’s Tony Shiret argued that up to 200 shops would be axed eventually. The decision to shut shops in Italy seemed to reinforce that view.
However, Browett has hinted that shops will remain a core component of DSGi’s business. Their function could shift towards services, such as the Tech Guys IT support business and collect-in-store options within the multichannel retail world.
Analysts hope that, next week, Browett will flesh out his vision for DSGi’s store network and the extent to which it will complement or be replaced by online.
What is DSGi’s USP?
Legendary entrepreneur Lord Kalms created DSGi in a retail era very different from today’s.
A value-for-money offer, volume sales, smart trend-spotting and a hard-nosed, hard-selling business approach turned the retailer into one of the most admired companies in modern retailing.
Today, the rapid growth of e-tail and the incursion of the supermarkets into electricals and computing has transformed the retail landscape. But, despite a big effort to establish a reputation for service and woo a wider shopper base, DSGi has not changed sufficiently.
One senior retail figure with experience of competing against DSGi says: “The big issue is what to do with the UK business. John Browett is looking at continued price deflation and cost inflation and he’s got to sort out the market positioning of the various brands – that’s become unclear.
“They’re stuck in the middle and that’s where you’re most at risk, whether it’s from Argos – which is now number two in electricals – or grocers.”
Retail consultant Richard Hyman observes: “If you want a DVD player, you can get one in Asda for£30. DSGi should not be chasing that business. History shows that if you take on the supermarkets on their terms, you lose.”
Within the traditional retail price architecture of good, better, best, DSGi should no longer be focusing on good, argues Hyman. Instead, he maintains, the retailer needs to “strengthen its brand credibility as a retailer of more added-value product”.
Hyman says: “They have to move up the scale – and that involves more than putting premium-price product on the shelf – so that when customers are thinking of trading up, they’ve got the service offer to bring in shoppers and make the sales.”
With initiatives such as the Tech Guys launch and the abandonment of salesforce commission structures that encouraged the hard sell, DSGi has made big efforts to change some of its features least attractive to consumers.
However, judging by anecdotal evidence, the journey is far from over. Clark says: “They have tried hard but when I go into a store the service still isn’t good enough. They have to re-establish their authority.”
The senior retailer cites department store group John Lewis’s strong electricals performance as evidence that established retailers can compete against the supermarkets and e-tailers and hopes Browett will find a similarly successful model.
When a business is going through stormy weather, it is standard practice to ask: what does this company exist to do? Browett will certainly have been doing that since joining DSGi last December and will be expected to outline his vision next week.
If he does not or cannot, then shoppers and investors are likely to continue to favour the supermarkets and the new generation of e-tailers.
The group’s domestic business remains the core – international sales accounted for 41 per cent of last year’s revenues – but this is under pressure.
DSGi was one of retail’s most prestigious academies traditionally. Argos chief executive Terry Duddy, Woolworths leader Trevor Bish-Jones and BT boss Ian Livingston are just three names among the DSGi alumni.
While DSGi’s management reflect the high standards that would be expected at one of the biggest retailers generally, new thinking and external experience will increasingly be sought.
Browett, who has drafted in former employer Boston Consulting to advise on business improvements, is likely to hire more outsiders to fill prominent roles.
He has brought on board former Tesco colleague Roy Perticucci to be operations development director. Perticucci was a key figure in the development of Tesco’s online business and the likelihood is that Browett will seek to replicate at DSGi some of the best practices learned at Tesco.