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Why the Dixons / Carphone Warehouse strategy is flawed

 

Can the merger of two 20th century retailers really create a high street colossus for the digital age? Chris Middleton believes that the claimed ‘Internet of Things’ dimension of the deal is a red herring, but if it is genuine, then that part of the strategy has been badly conceived.

ORGANISATIONS SHORTRumours had been circulating for months that Dixons Retail and Carphone Warehouse were in merger talks. However, when confirmation came in May 2014 that the two planned to form a single retail giant, Dixons Carphone, shares in both firms tumbled on the London Stock Exchange.

So what is the real strategy behind the move, and why aren’t investors convinced?

Carphone Warehouse has around 2,000 stores, including more than 800 in the UK. Dixons has 943 stores in seven countries, including more than 500 in the UK, where its brands include Currys Digital and PC World. As a merged entity, Dixons Carphone – surely a name that harks back to the 20th Century – would have annual sales of more than £12 billion and employ more than 43,000 people across Europe, on current figures.

Sebastian James

Sebastian James, Dixons Retail CEO, whose brands include Currys Digital and PC World.

The merger would create cost savings of £80 million by 2018, say the companies, with almost half of that figure achieved by 2016. However, the firms’ leaders claim that the motive behind the £3.8 billion merger isn’t slashing their annual costs, but a shared belief in the need to create a high street retailer for the digital age.

The Internet of Things

According to the companies, they plan to exploit emerging demand for the Internet of Things – the plethora of devices that can be connected to the internet via IPv6, including smart TVs and fridges.

Dixons and Carphone Warehouse believe that, in an interconnected age, their core strengths complement each other and will enable them to deliver the Internet of Things to consumers’ homes more quickly, and with better service and support, than rival retailers.

“The ability to take what we have built in electrical retailing and add the profound expertise of Carphone Warehouse in connectivity would make us a leading force in retailing for a connected world,” says Sebastian James, CEO of Dixons Retail Group, who becomes CEO of the new company.

“In 2013, the number of connected electrical devices overtook the number of people on the planet for the first time. The number of connected devices in each home will move from four to 20 over the next two or three years. Globally, 75 billion connected devices will be sold over the next three to four years.

“Those are remarkable numbers. What’s clear is that the notion of an unconnected device is becoming irrelevant and the notion of a device without connectivity is also becoming more and more irrelevant.”

The theme is picked up by Sir Charles Dunstone, Chairman of Carphone Warehouse and of the new company. “Connectivity is at the heart of everything we do,” he says. “Twenty-five years ago, Carphone Warehouse and Dixons really were in completely different worlds. Now everything is driven by connectivity.

Currys PC World

The Currys / PC World brand(s) is on the high street and in out-of-town centres.

“Connectivity is like electricity. When people first put electricity into a house you maybe had a light and a fridge and that’s all that people could think of for using electricity.

“Now the innovation of the people who build devices that rely on connectivity is extraordinary. Soon, everything we have will be talking to other things. We are going to live in a completely connected world. Someone needs to solve the problem of how to sell and support these devices.”

Smoke and mirrors

However, the figures quoted by Dixons’ CEO suggest that there is no “problem” in high-tech retail at all, beyond an unsustainable cost base on the high street as consumers use their devices to shop online. Consumers are already buying connected gadgets in vast numbers – or getting them free with contracts – while companies such as Apple have cracked the challenge of in-store service and support far better than most retailers.

There is another flaw in the companies’ logic. While the Internet of Things may be upon us, many of its most useful applications lie outside the home in smart city centres, connecting street furniture, transport and interactive media in new, data-driven ways that are designed to improve public services, increase energy efficiency, and reduce waste.

However, the future home may not be as packed with connected devices as the two companies believe – at least, not with devices that offer a good enough profit margin to sustain a bricks-and-mortar business.

While the average consumer has accepted the idea of high-value, interconnected, standalone devices, such as TVs, laptops, desktops, tablets, games stations, music systems, phones and cameras, that acceptance is a sign of something other than a long-term desire to own dozens of expensive gadgets.

In reality, it is evidence of the slow dismantling of packaged and/or broadcast content that has taken place this century, and of the convergence of on-demand digital streams around social media platforms. It is not evidence that consumers will continue to buy dozens of separate devices in perpetuity, nor that they will spend big money if they do.

Many of the devices that consumers currently own were originally designed for the consumption of a single form of discrete content, such as a TV show or a movie. However, the distinctions between platforms such as TVs, computers, games stations, phones and other devices are fast disappearing. Economics alone suggest that consumers are unlikely to continue buying dozens of separate devices when many of the same functions will be shared between them.

Everything bar the kitchen sink?

Carphone Warehouse

Carphone Warehouse was founded in 1989.

In fact, the belief that consumers will maintain their decades-old shopping habits smacks of a 20th-Century approach to retail, and the idea of a superstore that sells everything from white goods to TVs and digital watches had its heyday in the 1970s.

In the long term, the likelihood is that the distinction between digital devices will be less about their different functions and more about whether they are fixed in the home – like an HD 3D cinema-style screen, for example – or mobile. In that environment, peripherals will rule, hence Apple’s reported desire to purchase Beats Electronics, maker of high-price-tag audio gear.

Away from communications and entertainment, the long-promised world of online household devices – from internet-connected light bulbs and light switches to vacuum cleaners and microwaves – remains unproven in terms of some of these objects’ real-world applications. Their data-gathering potential is undoubted, however, as are their rising price tags in the medium term.

Clearly, there are environmental and cost-saving advantages to be gained from smart lighting and heating in the home, for example, while home security systems are another promising (if hackable) area. Apps are already available to control all of these from phones and tablets. But common sense suggests that web-enabled freezers and microwaves may simply be hazards in waiting once their superficial benefits have been exhausted.

Beyond that, a world in which utilities, finance companies, insurers, and private health companies are able to monitor people’s spending, consumption and health in the home – with the government acting as data broker – may be close at hand, but whether it is desirable is another matter.

It is little surprise, then, that most industry commentators are doubtful about the digital spin being put on the merger. Speaking on the BBC, analyst Louise Cooper expressed her scepticism about whether the deal would produce better long-term growth for the companies. “Two past-their-sell-by-date retailers merging does not an Amazon make,” she said.

Indeed, this isn’t the first time that Carphone Warehouse has declared a retail revolution and then failed to deliver it. In 2008, it launched a joint venture with US electronics retailer Best Buy, of which Dunstone boasted: “It’s unlike any retailing of consumer electronics that anyone here has seen before.” By 2011, Best Buy had pulled back to the US.

Cost-cutting imperatives

Patrick O’Brien, lead retail analyst at Verdict Research, suggests that the merger is more about the need for two bricks-and-mortar businesses to slash their costs by pooling resources. “Despite both retailers being keen to point to the ‘connected world’ being one step closer thanks to the merger, in reality, this is a simple and relatively boring cost-cutting exercise, to which they are attempting to give a futuristic sheen.

“However, this doesn’t mean that it’s a bad idea. Lower costs mean more flexibility to react to changes in the business environment, and most importantly, more clout to fight the likes of Amazon on pricing,” he says. “Merging the two companies into Dixons Carphone will not result in any significant differences to shoppers.”

But O’Brien sees some digital potential in the deal: “The one undeniable advantage, apart from cost cutting, will be more choice and locality for picking up ‘click and collect’ orders. It could be argued that a mutual agreement could have been drawn up without the need to merge, but at the very least it’s a tangible side benefit, and is a relatively cheap competitive advantage over online pure-play retailers.”

Mark Skilton, Professor of Practice at Warwick Business School, adds his voice to the debate: “The increasing commoditisation of this end of the consumer market in electronics, lifestyle and home appliances is rapidly changing the nature of these products and services,” he says. “Both Dixons and Carphone Warehouse are facing diminishing demand that this merger is aiming to fix.

“Buyers and consumers are shifting more and more to online for their product offerings. The old world intermediaries like Dixons and Carphone are offering less value in this digital ecosystem, with manufacturers being served increasingly by online marketplaces and branded online stores. That’s where they are seeking to build their market share and reach more consumers, not at places like Dixons and Carphone Warehouse.

“There is much to do in the connected world of the Internet of Things if Dixons and Carphone are seriously going to be able to sell this new, aggregated value proposition. They are moving up the value chain as their old consumer product base is disappearing. The connected home, living room, bedroom or kitchen will depend on Dixons and Carphone’s product vendors being able to offer connected bundles that work for consumers.

“Dixons and Carphone Warehouse are thinking ahead and are right to pursue this strategy, but it will require some deft management skills and product-partner strategies to make it a reality.” TS With acknowledgements to Stuart Lauchlan.

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The Strategist says

As more and more high street giants struggle to find a convincing answer to online retailers for commodity and mass-market digital goods, Dixons and Carphone Warehouse are pooling resources to slash costs: a sensible strategy and a viable reason to merge. But in a world of plug-and-play devices, social platforms and app stores, their claims to be leading the digital revolution from the front seem implausible. But if they do constitute a genuine ambition, then that element of the strategy has been badly conceived and looks no further ahead than four or five years at most.

 

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