The old Appliances Online business may have changed its name to the anonymous but that hasn’t changed its appeal to US Internet investors.

The old Appliances Online business may have changed its name to the anonymous but that hasn’t changed its appeal to US Internet investors.

With ‘disruptive’ digital business models all the rage and the likes of Twitter capitalised at over $30bn, US internet investors are riding high.

As the stock market message seems to be to buy ‘anything online’ perhaps it’s not surprising that they’ve been drawn to Ao, a humble online retailer of washing machines and similar.

Conventional wisdom has it that the way to succeed in electricals retailing these days is to be multichannel - or clicks and bricks - as trusted brands such as Argos, John Lewis and Dixons/Currys make much of their ability to showcase products in their shops and offer collect-at-store and returns facilities for consumers.

But, although pure-play has become something of a dirty word in the electrical retail industry of late, given the disaster that befell poor old Dixons with its investment in the France-based website Pixmania, the backers of Ao seem confident that it could be valued at up to £1.2bn - over three times its likely £385m of sales for the year ending March or over 100 times the likely adjusted EBITDA base of £11m, when it is floated.

For some people the heady rating of Ao is reminiscent of the dotcom bubble era of 1998 to 2000. Then, internet service providers were all the rage and Dixons’ offshoot Freeserve was spun off and, briefly, had a higher market cap than its parent.

Another notorious example from that era was the infamous, a fashion website backed by venture capital and run by Swedish management. It was set up in London in 1999 but placed into receivership in May 2000, having burnt rapidly all through its cash.

Yet online access these days is light-years ahead of where it was 15 years ago. Ultra-slow dial-up internet access has been replaced by super-fast broadband for both PCs and mobile devices, and this has revolutionised shopping behaviour and changed the retail landscape.

Online shopping is clearly here to stay and some etailers even make money out of it. So-called white goods are low gross margin products compared, for instance, to fashion.

But Ao is profitable, even with a gross margin below 20%. And thanks to its excellent customer service reputation, Ao is growing so quickly that it claims 24% of the online appliances market in the UK.

However, Dixons in the UK, through Currys and PC World, is still more than 10 times the size of Ao in terms of total sales, even if that is a mixture of white goods, brown goods and PCs etc.

Dixons UK online sales alone will be more than £700m in the year ending in April. If that was given a similar sales multiple to Ao of up to three times then Dixons UK online alone would be worth well over the current £1.7bn market cap of the whole group. Shades of Freeserve here?

Given the value of Dixons’ excellent Scandinavian business, it’s quite easy on this basis to see how people come up with sum-of-the-parts valuations of well over 100p a share for Dixons, compared to its current 47p, despite all the overhead costs of the bricks and mortar stores.

Of course, Dixons and Ao do compete with each other  - just as Tesco and Ocado do - and Dixons has a lot of work to do this year to bring the Currys website up to the standard of Ao’s. But in terms of pricing and the delivery proposition Currys seems just as good as Ao, which is why its sales are also growing quickly.

Whether it is really right to value an online electricals retailer such as Ao on three times its sales remains to be seen. It will be interesting to look back and see how its IPO will be viewed in a few year’s time.

It will also interesting be see whether selling appliances online in Germany turns out well for Ao, because that is the first market it has chosen to start up in outside the UK. Germany is a rich market and they even manufacture some decent washing machines there, but the German consumer is notoriously price sensitive and picky.

It is to be hoped that Ao’s order return rate in Germany is not as high as the 50% return rate suffered by German fashion retailer Zalando.

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.