Strategy & Operations » Leadership & Management » AO World CFO on meeting challenges of fast growth

AO World CFO on meeting challenges of fast growth

Running finance in an entrepreneurial organisation requires the ability to not only support a fast-growing business but also manage market expectations, says the retailer's finance chief Mark Higgins

Online electrical goods retailer AO World’s CFO Mark Higgins is at the sharp end of explaining to the market how the FTSE 250 company will pass the £1 billion a year turnover mark while returning to profit.

At the moment, AO World is on steady growth to deliver that revenue target by 2021. Sales of fridges, washing machines and a wide range of other electrical goods are expected to reach £800m this year, from £701m in 2017 but the group is running a loss as its foray into Europe, especially Germany, has proved more costly than predicted.

In 2017, UK operating profit was £15.6m, up from £12.4m the previous year but doemestic profit was offset by operating losses for Europe increasing in the period to £27.6m from £23m the previous year.

For Higgins, talking through AO World’s strategy to analysts and shareholders has been a tough call as the share price has halved since the group listed on the London stock market in 2014.

Entrepreneurially thinking

Higgins joined the Bolton-based company that became AO World in 2011 as finance director. “The reason they brought me in was to build up the finance function for some type of transaction, but not necessarily an IPO,” he says.

His experience working in an entrepreneurial environment- most significantly at 2020Mobile, part of the group of companies owned by Phones4U tycoon John Caudwell- was a big reason for his hiring.

Originally he’d cut his teeth at Isle of Man-based kettle components maker Strix and then training group Protocol Skills after studying maths and accounting at University of Newcastle. It was a former Caudwell employee that recommended Higgins to the team that would develop AO World- that he joined after rising to finance manager at facilities services group Enterprise.

Originally founded in 2000 as Appliances Online by John Roberts, the company was rebranded in August 2013 -to diversify into new product areas and overseas markets- 6 months before the IPO.

Higgins was drawn by the personalities of Roberts, who became chairman last year, and Steve Caunce, now CEO,  and “the buzz I felt the moment I walked through the door”, he says. “It reminded me very much of some of the best bits of the culture of the Caudwell Group. Steve and John were two very inspiring guys, from whom I thought I could learn more.”

Promoted to CFO in August 2015, Higgins says running AO World’s planning function and helping the business gain relevant insights, “to make sure we make the right decisions”, are key elements of his role.

Facing the music

One of the big challenges for the group came when it immediately dropped to page 2 on search engine Googles ‘natural searches’ after the rebrand. “Then we dropped to about page 90, and if you’re not on page 1 you become irrelevant,” he says. “It took us 2 years to build back that Google position,” he says, without an explanation as to why it plummeted, despite putting the question to the tech giant.

To compensate, the group turned to TV advertising, using up some of its cash reserves. In 2017 a second fund raise brought in £50m to make the balance sheet more robust, and ensure it against a post-Brexit consumer downturn.

The next stage of the plan was for the profitable UK business to finance a further European roll-out, having launched in Germany in 2014 and the Netherlands in 2016. Now on the board, supporting Caunce who had become CEO after Roberts stepped up to chairman, Higgins takes the lead on investor relations- facing analysts and shareholders.

Higgins has had to explain why the profit margin in Europe has been hammered by higher than expected manufacturer’s costs. “When we went to Germany we expected manufacturers to sell to us at the prices they sell to us in the UK, but that wasn’t the case.

“Over time we’re building that product margin, but we’ve still got a way to go- so we’ve set out a plan for profitability at a run rate level by 2021,” he adds.

Higgins says having to be the market facing presence of the company to a wide set of investors since the IPO has been the single most challenging part of his role. “We went from being a hugely entrepreneurial, privately owned business where all of our shareholders sat on the board- if the board agreed that was what we were doing to a very different model.”

He says now there has to be brinkmanship on dealing with City analysts and external shareholders. “We have a management team that has huge ambitions for the business, and the market which has certain expectations. If we say we‘re shooting for the stars and we get to the moon the market sees it as a massive failure. So a real challenge for me is to set people’s expectations,” he says.

Higgins says that the group’s successes must be seen in context- referring to a tripling in revenues since the 2014 IPO, a broadening of its product range and opening of businesses in Germany and the Netherlands.

He says that the halving of the share price is partly a function of the “hot IPO market of the time” but insists that the group is still progressing toward a leadership position in the £90 billion market for electrical goods across northern Europe.

Part of the problem, says Higgins, is that to capture enough of the European market required more investment than originally expected, because of higher manufacturers’ costs. As a result, a big learning process for himself has been to square a long-termist perspective with a short term City view.

He says there’s a challenge pegging the company’s stock to other growth companies in the same position. “There aren’t that many growth stocks on the FTSE that make materially zero EBITDA, so if you’re a City analyst covering 25 stocks and the other 24 behave in a certain way, you struggle with the one that behaves differently,” he adds. “That is a difficult journey.”

But Higgins says a number of AO World’s larger shareholders quite often hold similar stocks in different locations around the world. “So they understand that journey, understand there will be volatility,” he adds.

Raising the bar

One of the key aspects of AO World’s business model is its quality offering, reflected in high customer ratings, and recognition for being a good employer. “It all links together, “says Higgins. “We think it’s the best way of doing what we do. We believe great customer experience is the most economically sensible approach.

“What makes bad customer experience: failed deliveries, missed time slots, not resolving issues in a timely manner- these things end up costing you more in the long term,” says Higgins, “We make tens of thousands of deliveries a day- not every one of them goes perfectly.

“When it doesn’t go perfectly and the customer calls us to tell us it hasn’t, very infrequently do we find the longer we make that customer wait and the morel levels of management we have to put them through, does the problem become any less expensive to resolve,” he notes.

But is AO World caught in ‘a no-man’s land’ between the levels of service of retailer John Lewis and the economies of scale achieved by Amazon? “We think we’re giving both, a pricing strategy of matching the cheapest in the market but with the perceived John Lewis level of service,” says Higgins.

“If you look at us on [online review service] Trustpilot as to our service compared to John Lewis we’re loads better. We achieve this by having great systems and processes that mean you get that service but in a very efficient way,” he adds. “That’s how we’ve built our business.”

What about the challenges of disruption? “In our main markets such as white goods we are the disrupter, as Amazon don’t really play in that market,” says Higgins.

He says the Amazon challenge is mentioned in every investor meeting. But he says the level of customer experience required for higher cost goods isn’t one that Amazon currently offers, so a direct threat from that quarter isn’t a current concern. “There are lower hanging fruit for them to tackle,” he insists.

“We’re incredibly wary about where the next disruption might come from- a company we’re not expecting such as one of the Chinese operators like Tencent. We have people keeping an eye on what our competitors are doing, what’s going on in the market and what manufacturers are doing,” he informs.

“We’re continually looking at how can we fundamentally change the experience for the customer,” says Higgins. He says barriers to entry come in the need for scale when it comes to negotiating with manufacturers, as well as building the logistics required.

Next up in the plan is a roll-out in other European countries such as Belgium, Switzerland, Austria as the group seeks to realise its target of £1 billion a year turnover and a return to profit.


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