Saturday 20 January 2018

Will the smartphone be our new remote control?

'Click to enlarge'
'Click to enlarge'

John Lynch

Regular readers of this column may have spotted my tendency to bemoan the absence of old virtues when discussing the challenges of modern business.

It's hard to get your head around the fact that businesses that once were traditional and reliable now seem to have no future. Every day tells the story of the shutters being pulled down on another revered name.

This is true in Ireland but even more so in Britain. Some of the scary stuff that went on recently in the UK, especially with BHS stores, is the cause of deep head-scratching.

But one would have thought that some sectors, like the electrical retailers, would have acted promptly to avert a crisis. There was a time when you couldn't throw a stone without hitting at least six electrical retail outlets. They were a sitter for consolidation and they got it.

Big names like Dixons and Carphone Warehouse took evasive action and joined together in what was billed as a 'merger of equals'. Clearly the merger was a defensive move. Electrical retailers were in danger of following record stores into oblivion.

Amazon was squeezing Dixons' margins and its white goods business was being challenged by other online operators. Similarly Carphone Warehouse was finding business challenging as network operators like BT and Vodafone wanted to sell through their own outlets paying less commission to the middlemen.

The merger created Europe's leading electrical/telecom retailer with 40,000 employees in nine countries and valued at almost £4bn.

It also brought the concept of a three-in-one shop, Currys electrical, PCWorld and Carphone all under one roof. The new entity hopes to provide end-to-end services from sales to set-up advice, insurance, repairs, and recycling.

Since the merger the company has offloaded most of its operations in France, Germany and Portugal. It now concentrates its firepower in UK, Ireland, Sweden, Finland, Denmark, Norway, Spain and Greece.

While most are performing well, the company admits that Spain is tough and Greece uncertain. Following a successful trial with the US operator Sprint, the company is in the process of rolling out new stores in parts of the US. The new entity is betting on the internet changing more lives in the next ten years. It thinks the smartphone is set to become the remote control of our lives, controlling our TVs and music systems, switching on our heating and switching off our lighting and even alerting us if the house is flooded.

Dixons Carphone wants to sell us the phone, TV, the broadband, backup support, the heating, lighting and security systems.

The company's share price was negatively impacted by Brexit. While revenue for the merged entity last year was a satisfactory £10bn with pre-tax profits of £447m, its share price still tanked.

Last year they were at a high of £5, today they trade at £3.30, with a modest price earnings of 12.

Investors are concerned as to the lack of cash generation and worried as to the possibility of a recession in the UK. Its recent rating would seem a bit harsh given its strong trading. As for investing in its shares, it would be wise to wait and see.

It is hoped that the merger has a longer lifespan than Carphone's last effort of bringing together out-of-town electrical operations with high street mobile shops. Eight years ago it concluded a deal with the US giant Best Buy to bring its expertise of electrical goods to the UK.

However, within three years Best Buy was heading back to the US licking its wounds and a significant loss. Will the Dixon Carphone merger create a retailer for the digital age, with its soaring number of devices? Who knows?

There are plenty of reasons to view mergers in a positive light, but history is littered with corpses of failed liaisons. While the logic of the merger might be compelling, it runs the risk of not addressing key issues for UK retailers - namely, too many stores milling around and chasing a limited amount of cash.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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