Multiples: Market update Hard times
Tom Cole reviews recent events in the multiples sector and the prospects for 2012.
cole.tom@
virgin.net W herever you look there is no
shortage of gloomy news, but whilst the general outlook is clearly bleak for many retail sectors, the shake-out in electrics, with Best Buy closing down and Comet soon to be under new management, will be welcomed by others in the trade. The latest analysis from the Institute for Fiscal Studies think-tank makes particularly grim reading. The report, issued the day after the chancellor’s autumn statement, suggests that the spending power of the average family will plummet over the next five years, as high inflation, government spending cuts, and wage stagnation increasingly impact. Consumer confidence levels remain
depressed, only lower in recent times, according to GfK, during the banking crisis of 2008/09 and the downturn in the early 1990s. The index measuring consumers’ propensity to spend on major purchases remains well below last year’s rating, not helped by the weak housing market. Fears of even higher levels of unemployment, the UK returning to recession and the fall out from the euro zone crisis mean confidence levels are unlikely to rise significantly any time soon.
Opting out
Against such a background, it was no surprise that Best Buy decided to end its costly ‘big box’ flirtation with the UK electrical market, just eighteen months after opening the first of eleven stores. By the time it shuts the lot, along with its website, the joint venture with Carphone Warehouse will have racked up losses of around £200 million. That includes a half year deficit (to 30 September) of £47
million, plus a further £30 million until the operations close. An expensive foray indeed.
The joint venture will now focus on its
Wireless World high street stores and online. Many of Best Buy’s 1,100 staff will join that enterprise, with 141 shops already converted and up to 400 planned by April.
Best Buy arrived with big ambitions – to shake up the market, create up to 8,000 jobs, open up to two hundred stores, and bring US-style customer service to an eager public. But it took too long to get going. Having researched the market for years and pondered over a major acquisition, it gave competitors due warning of its plans, and then procrastinated over store openings. That gave Dixons in particular time to react and up its game – both in store and in service. What Best Buy was offering no longer seemed new and fresh. Shopping habits were changing too. An
increasing amount of spending moved online. As fuel costs rocketed, fewer customers were journeying to edge of town stores. And the technology world changed substantially with smartphones and tablets taking a larger slice of spend, so specialist non-traditional retailers prospered.
The announcement of Best Buy’s retreat was followed later the same week by news of the sale of Comet to a private equity firm advised by turnaround specialists OpCapita. The price was a nominal £2. In addition parent company Kesa paid a dowry of £50 million into the new holding company and Comet will keep a £62 million fund that covers
warranties and servicing. Kesa will also retain liability for the Comet employees' final salary pension scheme. Kesa will benefit from any subsequent onward sale of the chain, but only if the price exceeds £70 million.
The deal is scheduled to be completed next month and the buyers have promised to keep Comet as a going concern for at least eighteen months. But seventeen stores were already earmarked for closure, and more are likely to follow.
Round up Best Buy’s closing down sale, with significant discounting across the board, and Comet’s stock clearance activity will have hit margins generally over the key season. That clearly is not good news for the other major multiples who have struggled over the past year in such challenging market conditions. Dixons fared better than most, managing to limit half-year losses (to 15 October) in the UK and Ireland to £3.9 million, against £10.7 million last time. Total sales fell by 5% to £1,530 million with like-for-likes down by 8%. The focus on cost reduction
programmes, further improvements in stock management, and operational efficiencies delivered significant savings and a slight improvement in gross margins. White goods held up, mainly due to replacement business. Computers did well too, with laptops and tablets selling strongly, but televisions remained particularly weak. There was also a £4 million bill to restock and repair the PC World and Currys stores looted during the summer riots.
January 2012 The Independent Electrical Retailer 41
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