Disrupters Disrupted

Revenge of the Retail Dinosaur

The remarkable resilience of AO and Ocado's bricks and mortar competitors.
Photographer: MICHAEL GOTTSCHALK/AFP/Getty Images
At Closing, April 20th
537.20 GBp

Disrupters are supposed to disrupt. But as AO World Plc and Ocado Group Plc -- two upstarts in the world of British retail -- are demonstrating, that's not always the case.

On Tuesday, AO warned growth in the U.K. will slow significantly in its fiscal first quarter after the web retailer posted a loss for the 12 months through March. That's a big worry, because the company has been relying on the U.K. for growth while it builds out its fledgling operation in Europe.

A day earlier, online grocer Ocado announced its first international contract. The deal with a regional European retailer disappointed investors hoping for a blockbuster deal with a big international grocer.

Rollercoaster Ride

Shares in AO World remain well below their 2014 debut

Source: Bloomberg

It's easier to disrupt when your competition are dinosaurs. But both AO and Ocado have powerful adversaries: the traditional supermarkets and, in the case of AO, Dixons Carphone Plc. It would be easy to write off the bricks-and-mortar chain. But it has been doing all of the right things.

The combination of Dixons and Carphone Warehouse was a rare example of a merger that actually worked. Dixons has also been proactive in shrinking its store estate, recently announced a tie-up with Tesco, and has been working on its often maligned customer service.

Steve Caunce, AO's CEO, warned that the market for electrical goods had been hit by "unprecedented" price increases by manufacturers, while declining house prices are adding to consumers' uncertainty. The British Retail Consortium on Tuesday also highlighted the weakening trend in electrical sales.

Dixons won't be immune from the factors that have weighed on AO. But it's in a fundamentally better position. It has other businesses it can rely on, including its mobile phone operation, as well as its arm offering services to corporate customers such as Sprint in the U.S. Unlike AO, it's generating cash, and is expected to be profitable when it reports full-year earnings on June 28: UBS analysts estimate pretax profit before one-time charges will be 485 million pounds in the year through April.

AO has been on a rollercoaster ride since its initial public offering in March 2014, and the shares are now well below their debut price. Tuesday's 7 percent drop brings the stock's fall over the past year to more than 20 percent. Dixons Carphone shares are down by 27 percent over the past year.

Still Flying

Despite the worsening outlook AO still trades at a significant premium

Source: Bloomberg

Yet, AO's enterprise value is still 0.7 times forecast sales, compared with 0.4 times for Dixons. That elevated rating looks vulnerable given the slowdown in the U.K. and the prospect of losses from the European business for the next three years.

Both Ocado and AO have demonstrated that disruption is good for the customer, but isn't always so great for investors. All the more so when the dinosaurs bite back.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Edward Evans at eevans3@bloomberg.net

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