A turn-off Electricals retailer DSG, formerly known as Dixons, has been struggling with poor performance but now faces an even more dangerous blow – aggressive competition from a foreign rival. Piers Wehner reports.
On a plot of land near Birmingham, next to junction 9 of the M6, two giants are preparing to do battle.
On one side is DSG International, a once-mighty retailer that bestrode Europe’s electricals market like a colossus on the other is Best Buy, an avaricious invader from the US, come to steal DSG’s market share.
Best Buy, a glitzy cross between PC World and Currys, which started life as Minnesota audio store Sound of Music in 1969, is supremely confident. In May, it claimed that Currys, one of DSG’s brands, wasn’t even competition.
But DSG is set to fight back with a secret weapon: at some point before Christmas, it is to launch a new 50,000 sq ft store concept at junction 9. It will, DSG hopes, reinvigorate the company’s flagging fortunes and help it to fight off the foreign hordes.
The exact format is shrouded in secrecy, although it is widely known that the Birmingham store will be based on the company’s new Elkjøp store outside Oslo, which is arranged over two levels and has an open, American-style design. So far, the Norwegian unit is doing well, and DSG hopes that the Birmingham store will do even better.
And it needs to. Best Buy is being compared to Wal-Mart. The company is thought to want 200 big-box stores across the UK.
DSG International’s relatively new chief executive, John Browett, says that the retailer formerly known as Dixons is having “a challenging year”.
In June, DSG published its annual report for 2007-08. It showed that sales for the Europe-wide electricals and computing group, which has nearly 1,300 stores across Europe from France to the Faroe Islands, are in fact 8% up on last year, at £8.5bn. Sales, though, are nothing without profits, and whereas last year the company made a profit of £114m, this year it declared a colossal loss of £193m.
For anyone familiar with the state of the UK high street, these results are perhaps not too surprising. Indeed, in his chief executive’s report, Browett placed the blame for the company’s flagging fortunes firmly on the impact of the economic downturn and on a failure to address consumer needs. But the decline was not limited to the UK. Across Europe, with the exception of Scandinavia, DSG’s business leaked money in Italy, the cash flow looked more like a haemorrhage.
And that isn’t the end of the company’s woes. The group’s standing in the City is also grim. In the past year, DSG’s share price has tumbled from 166p to 32p per share, before levelling off at around 59p.
Pressure has been put on Browett to find a solution. In July, he promised shareholders that he would make sweeping changes to the business, including “major asset sales”. His announcement helped to rally the share price to just over 65p per share in mid-August. But the analysts remained unimpressed. And their opinion of DSG couldn’t have been helped by the defection of finance director Kevin O’Byrne to rival retailer Kingfisher in July.
In a research note published on 13 August, banker JP Morgan downgraded DSG International from “neutral” to “underweight” and added that any hopes that the company could recover were “unjustified”. Analyst Pali International added that the group was still “very overvalued” – and the share price dropped again.
A challenging year, indeed.
In 2005, when Dixons changed its name to DSG International, the picture was very different.
The company was sitting comfortably in the FTSE 100, with a share price hovering around 150p per share and a market value of £3bn. Profits before tax stood at £343m, and the newly renamed giant was living up to its new international aspirations, aggressively expanding in the UK and Europe, with more than 1,400 stores in 14 countries. The year before, it had snapped up a controlling stake in Kotsovolos, the leading electricals retailer in Greece, and it had opened its first store in Poland. In September, it was looking to move further east by taking an option to buy Eldorado, the leading electricals retailer in Russia and Ukraine, for £1bn.
So, what happened? Browett blames the global economy. As any reader of Economics for Dummies will tell you, people buy fewer electrical and white goods in times of hardship. This year, sales of everything from iPods to irons have dropped by 8-10%.
Indeed, DSG’s main UK rival, Kesa, which owns Comet, has also said that it would have to rein in spending to curb losses.
But while DSG is reeling from its worst results ever, Kesa is doing comparatively well. In June, Kesa said that pretax profit over the year to 30 April was £128.8m, up from £126.5m the previous year, while like-for-like sales rose by 3.1%.
Browett admits that DSG’s failure to focus on what the customers actually want is also to blame for the company’s woes. According to analysts, this has been especially true in Italy.
The Italian market has proven a nightmare for the company since Dixons paid £80.7m for a 24% stake in UniEuro in 2001. The following year, it increased its stake to 96%, paying a further £288m. But this year, Browett was obliged to close 43 of its Italian stores and to completely restructure the management of the Southern European business, folding Italy’s business into the Spanish operation. The changes, coupled with low sales, cost DSG almost as much as it paid for the business, resulting in a £341.2m write-off.
Announcing the company’s results, Browett said: “Italy, as you know, was very disappointing. As we’ve got into the business, we’ve found that a lot of the retail basics were not right. There’s a new management team in place and we’re working through a very detailed transformation plan. The business was absolutely focused on entry price points and competitive products, and that is the wrong place to be. Italians are aspirational we were not selling things to people that they really wanted to buy.”
The appointment of Citigroup to review operations in Italy and Spain galvanised shareholders briefly, with rumours that DSG might sell the underperforming businesses and inject the cash into other areas that were doing comparatively well. After all, Kingfisher, the DIY retail group, recently sold its underperforming Italian business for £447m.
“There was much excitement about selling the operations in Spain and Italy,” says Nick Bubb, analyst at Pali International. But the excitement was short-lived.
In August, DSG appointed Deloitte to put a “for sale” sign over the Italian, Spanish and Eastern European business. But JP Morgan pointed out that DSG’s Spanish and Italian operations were less valuable than Kingfisher’s business, “as they are leasehold, loss-making, and operate in markets that are likely to remain challenging for some time”.
As Bubb says: “They can’t sell Italy because there is no one to sell it to.” He adds that the company would probably have to pay a buyer £300m to take UniEuro off its hands.
Major setback
But the same has been true of other areas of the business. “Italy has been a disaster for DSG,” says Bubb, “but PC World’s slide has also been a major setback. It was DSG’s best performing brand in 2005, but now it has slipped a long way.”
This year’s results show like-for-like sales for PC World, DSG’s UK computing division, down by 5% and profit down from £128m to £63m.
“DSG completely failed to predict what was happening in the market, and was too slow to respond,” says Bubb. “It didn’t stock enough Vista [the new Microsoft operating system], and it completely missed out on the demand for Wii.” PC World was also lumbered with a large surplus of laptops after competitors began giving them away.
Although it is up to Browett to tackle these problems and, inevitably, to swing the axe, the rot had set in at DSG before he left Tesco to take over from long-time CEO John Clare. “The warning signs were there last year,” says Bubb. “DSG wasn’t moving with the times – it was too slow to evolve formats, too slow to see online coming. All of these problems were caused by poor judgment at the end of the John Clare era.”
Even then, DSG was showing signs of cold feet about further expansion. The plan to move into Russia was abandoned in 2007 at a cost of £100m, with Clare blaming the political situation in the country. “The expansion into Europe steered by Clare may well be the thing that his successor spends most of his time undoing,” said one analyst.
Despite the annus horribilis, some parts of DSG are weathering the storm. Bucking the trend in southern Europe, Greece is doing well. Kotsovolos is still the market leader, with total sales up by 13% to £354m, with like-for-like sales up by 4%. And in Scandinavia, Elkjøp sales increased by 5% to £1.6bn, with like-for-like sales up by 2%. But in spite of that, operating profits went down by 3% to £88.7m. Profit, DSG said, “was held back primarily by a poor performance in Markantalo [DSG’s Finnish operation] and to some extent by weakening consumer demand across the Nordic market”.
The flagging profitability of the Nordic arm is a particular cause for concern for DSG.
“It relies on the Scandinavian business to get it out of trouble,” says Bubb. “Signs of a slowdown in Scandinavia are worrying.”
DSG is banking everything on the survival and strengthening of its UK, Greece and Nordic businesses. On 15 May, Browett announced that he would refocus the UK business, and appointed CB Richard Ellis to advise on the disposal of at least 77 of the 177 high street Currys.digital stores when their leases expire. PC World is being revamped and is, so far, claiming good results. Further changes at head office level, he said, would save £50m.
New store
But the opening of the new store near Birmingham marks not only a further move away from the high street to the big-box format, it also shows that DSG is trying to head off an even greater disaster.
In May, US-based electricals retailer Best Buy announced that it was looking at the UK with avaricious eyes. Best Buy has teamed up with Carphone Warehouse to open at least five big-box stores in the UK this year and, while it has quashed rumours that it will open 200 stores, it says its plans are “very ambitious”. On 14 October, those plans will be revealed, although it is understood that the first stores are likely to be at the Bath Road Retail Park in Slough, Two Rivers Retail Park in Staines, Thurrock Retail Park and Enfield Retail Park – where DSG’s ew-format PC World is trading.
And, ominously, in Birmingham.
“It is a direct challenge to DSG,” says Bubb. “In May, Best Buy said Currys didn’t come up to the mark.”
The Best Buy threat has caused the rumour-mill to go into overdrive. One favourite is that DSG will merge with Comet owner Kesa to face the US giant, although analysts have found it hard to see why this would be attractive to either party.
The alternative, some say, is that DSG will continue to wither and the remains will be bought by Best Buy.
Whatever happens, the next year will be a critical time for the retailer formerly known as Dixons. The most positive result would be a withdrawal from Italy and Spain, consolidation in the UK, Greece and Scandinavia, and a glowing success for the revamped, customer-focused big-box stores.
“If DSG could get out of Italy at no loss, that would be a good result,” says Bubb. “But the likely scenario is that Italy will continue to be a drain, Scandinavia will weaken and the UK will be dragged down. Armageddon, basically.”
For a company riding so high just three years ago, such a decline is horrifying. But if it doesn’t find some fighting spirit soon, DSG may end up a victim of the American aggressor.
DSG TIMELINE
1937 Dixons founded by Charles Kalms and Michael Mindel in Southend the name was randomly taken from a telephone directory
1962 Listed on the LSE as Dixons Photographic
1984 Buys Currys
1993 Buys PC World
1994 Opens first Dixons Tax Free store at Heathrow airport moves into Ireland
1999 Acquires Norway’s Elkjøp
2002 Buys UniEuro in Italy and opens store in Hungary
2005 Acquires interest in Eldorado Group, the largest electrical retailer in Russia and Ukraine, with an option to buy it by 2011 for £1bn changes name from Dixons to Dixons Stores Group International
2006 Awarded Queen’s Award for Enterprise
2007 Abandons Russian deal long-time CEO John Clare retires John Browett takes the helm
2008 May DSG announces closure of 77 of the 177 Currys.digital shops as part of a cost-cutting drive to save £50m US rival Best Buy announces its intention to move into the UK
June DSG publishes worst-ever results, revealing a £343m write-off in Italy and a loss of £193m
The rise and fall of DSG
