Charles Dunstone’s £1.1 billion link-up with Best Buy could change the face of European electricals retailing. Amy Shields reports on one of the most dramatic deals since Wal-Mart bought Asda
On a scorching day last week, Carphone Warehouse chief executive Charles Dunstone delivered news that left electricals retailers hot under the collar.
From the top of the Millbank Tower in London’s Westminster, retail entrepreneur Dunstone ended months of speculation by announcing that his affair with US behemoth Best Buy had blossomed into a marriage.
Dunstone is in no doubt about the significance of the deal. “Welcome to our new world,” he says. “This will absolutely transform the face of retail for the electronics consumer.”
Through a joint venture, Best Buy has snapped up a 50 per cent stake in Carphone’s retail arm for£1.1 billion. It will open eponymous, supermarket-size electricals stores in the UK and Europe from next year.
Meanwhile, Carphone Warehouse’s 2,400 stores across Europe will expand their product offer to do for laptops and connectivity products what the business has already done for mobiles.
The tie-up sent shockwaves through an electricals sector plagued by price deflation, the advent of cut-price e-tail sites, low margins and the consumer slowdown.
So, is this a match made in heaven or could it end in tears for the two retail giants?
The courtship between Best Buy and Carphone Warehouse began two years ago when Best Buy exported its Geek Squad service to the UK in partnership with Carphone. In return, the British retailer sold its mobile phones in Best Buy stores in the US.
Now, Best Buy – which has a turnover of US$40 billion (£20.54 billion) and operates 1,314 stores in Canada, Central America and China – has taken the relationship to the next level and wants to follow where others have faltered and some have failed by taking a slice of the£89 billion European electricals market.
Best Buy will use Carphone Warehouse’s knowledge in local markets and back-office resources, while Carphone Warehouse will switch its focus to delivering products that serve customers increasingly focused on wireless connectivity and the internet.
Dunstone says : “I think the laptop is the new mobile phone. We’re in a fantastic position to do with laptops what we did with mobile phones.
“It’s hard for the customer to navigate [connectivity products]. We don’t think anybody today solves the problem for the consumer in the way we can.”
Best Buy vice-chairman and chief executive Brad Anderson agrees. He says: “European consumers are ready for someone to do a better job of retailing electrical products. There are the same issues in Minneapolis as in London – the only difference is the accent.”
News of Dunstone and Anderson’s plans may well have prompted DSGi chief John Browett to choke over his cornflakes. As Retail Week went to press, the former Tescoexecutive was preparing to unveil a new trading strategy, but the landscape has changed.
Pali International analyst Nick Bubb says: “I think this is a devastating blow for DSGi.”
As chains such as DSGi’s Currys and PC World or Kesa’s Comet are being forced to evolve, Best Buy has parked its tanks on the lawn. While Best Buy opens stores in Europe, others – such as DSGi – are closing them.
Investec analyst David Jeary says: “Best Buy could potentially be a major player and threat in the UK, particularly if they get the service element right.”
He says that to differentiate on product alone is not enough when all the retailers have access to the same pool of products. Best Buy is renowned for excellent customer service, in contrast to some of its UK counterparts.
“As a broad group, electricals retailers, with the exception of John Lewis, score poorly when it comes to customer service,” says Jeary. “For someone to come through with a winning customer service proposal will have an impact.” He adds that the highly promotional nature of UK electricals retailing has helped to create a customer that is cynical about the electricals retail market.
Another area in which Best Buy can outperform is likely to be price. “As Brad Anderson suggested, the name above the door makes it difficult not to offer the best prices,” says Jeary.
But, despite the American bonhomie and exuberance that accompanied a short video shown by Best Buy to journalists and analysts when the venture was announced, it will not be all plain sailing. “PC World will be feeling vulnerable,” says one former retail chief. “But success in the UK and Europe is still a difficult challenge.”
He says Dunstone’s comparison of the deal to the purchase of wal-mart/asda” class=”intextlink”>Asda by US giant Wal-Mart almost 10 years ago may prove apt, but not for reasons that Dunstone means. “The arrival of Costco and Wal-Mart here created excitement at the time, but did not prove as dramatic in impact,” he says.
He says that, while PC World will be most vulnerable to changes resulting from Best Buy’s arrival, Comet may not feel so much of the heat because it is not as dependent on the PC market. John Lewis, which holds a top position in electricals, has a distinct brand position and should continue to hold its own, he says.
So is now the time for Best Buy to be dipping its toes this side of the pond? Dunstone insists that it is and says that the venture can take advantage of the glut of retail park space on the market to open Best Buy stores, which could be up to 40,000 sq ft.
The deal also allows for Carphone Warehouse to strengthen its balance sheet and pay down its£840 million of net debt without raising equity. Much of the proceeds are to be invested in its broadband and mobile phone arm, as well as the joint venture and acquisitions.
The latter possibility has created a buzz. One City analyst says he was “flabbergasted” at suggestions that Best Buy would consider buying DSGi. “I can see a degree of sense in buying Kesa or Comet out of Kesa. I think they would be mad to get involved with DSGi. It would be giving them huge problems in the UK,” he says.
“They might prefer to open a handful of stores and get the proposition right before rolling out a huge amount of space. “There is an argument that says they may prefer to bide their time and look at ways to roll out.”
What is clear is that the element of the marriage of the two companies that can work is in their attitude towards the customer.
“Best Buy is much more customer-focused than UK competitors. Charles [Dunstone] also puts a lot of focus on the customer,” says another source.
And Dunstone’s shrewd business acumen will be key to the continued success of the deal. He still owns 33 per cent of the FTSE 100 company. His right-hand man and finance director Roger Taylor becomes chief executive of the new venture on top of his current role, while Best Buy international chief Bob Willett will become chairman.
Whether Best Buy will buy out the remaining 50 per cent of the retail business in future remains to be seen and much has been made of whether an outright takeover had been on the table. One City insider thinks there is “more than an even” chance that Best Buy will gobble up the remaining 50 per cent in future, leaving Dunstone to focus, for instance, on Carphone’s fixed-line operations.
So where does that leave one of retail’s key innovators and the£2.2 billion retail business he created in a basement flat in Marylebone for£6,000 in 1989?
The entrepreneur, who has already transformed the retail sector once, does not look as if he is finished yet. He says retail is “in the blood” of his business. “I don’t know what more we could do that would demonstrate how committed we are to retail,” he says. “I spend my time thinking, what’s next? What’s around the corner? The opportunity is enormous.”
It is unlikely that Dunstone will stop ringing the changes in the sector any time soon.
Founded by Charles Dunstone in London in 1989 with£6,000 savings
Established on the premise of delivering “simple, impartial advice” on mobile phone purchasing
Operates 2,400 stores in nine countries
Floated on the London Stock Exchange in 2000
Launched TalkTalk free broadband and acquired AOL broadband in 2006
Entered the FTSE 100 in 2007 and became the exclusive independent retailer of the iPhone, launched free laptops and brought the Geek Squad to the UK
Carphone Warehouse’s retail arm generated EBITDA of£263 million on sales of£2.9 billion in the year to March 2007
Founded as stereo retail specialist Sound of Music in Minnesota in 1966 by Best Buy chairman Dick Schulze
Renamed Best Buy in 1983 after a tornado destroyed its most profitable store two years earlier
Operates nine brands and 1,314 stores in the US, Canada and China
Best Buy’s IPO in 1985 on the Nasdaq raised US$8 million (£4.1 million)
Holds 21 per cent of the US consumer electronics market.
Ranked 66 on the Fortune 500
Turnover was US$40 billion and operating income was US.2 billion (£1.13 billion) in its 2008 financial year