Online electrical goods retailer AO World plans to close its operations in the Netherlands to focus on improving profitability in Germany and expanding in the UK, sending its share price sharply higher.
Founder and chief executive John Roberts said the group’s operating model could work in the Netherlands but it had chosen to prioritise Germany, a bigger market that it entered earlier and where it had a large logistics footprint.
“There is no point spending another £10m to get to that [in the Netherlands],” he said. Closing down the Dutch business will cost about £3m.
AO has not made a group pre-tax profit in any of the past five years because of the losses it has sustained trying to replicate its UK success in Europe. It was a similar trend in the six months to September; operating profit in the UK of £5.1m was more than cancelled out by £15.5m of losses in Europe.
However, Mr Roberts said that after what he termed “whites of their eyes” conversations with suppliers such as Bosch, Samsung and Whirlpool, he had “real conviction” that the German business could generate £250m of annual revenue and be profitable.
“The blunt truth is that we made mistakes in Germany,” he said. “We recruited a digital marketing team that didn’t leverage learnings from the UK team. It was the same in logistics. We have got back to thinking as one AO.”
The group’s operations in Germany will increasingly be run along the same lines as its UK business, and ultimately its distribution assets there could be used to facilitate expansion into other countries.
If the rehabilitation of Germany is not successful then the operations there would also be closed, with the cost of exit put at no more than £20m.
Caroline Gulliver, an analyst at joint house broker Jefferies, said it was “reassuring” for investors that in both the Netherlands and Germany, the cost of exit was less than the annual operating loss.
By midday on Tuesday, AO’s share price was trading almost 13 per cent higher.
In the UK, first-half revenue rose 20 per cent to £403m, boosted by the acquisition of Mobile Phones Direct. Without that, sales were up 4.5 per cent, with major domestic appliance sales significantly outperforming the broader market.
AO was established by Mr Roberts in 2000 as a result of a bet with a friend in a pub. Over the years its original white goods business has diversified, partly to capitalise on its ability to deliver heavy goods such as appliances and furniture, which require two operatives rather than just a driver.
In addition to broadening its product range to include televisions, laptops and mobile phones, it also recycles domestic appliances, supplies to housebuilders and rents items such as washing machines to lower-income families.
However, AO’s record as a public company has been mixed, with the shares trading at less than a quarter of 2014’s initial public offering price. It raised an extra £50m to fund its European expansion in 2017. Mr Roberts stepped down as chief executive in 2017, handing over to Steve Caunce, but returned to the top job at the start of this year.