WORLD TELEVISION
DSGi
Webcast 19th March 2010
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John Browett: Well welcome it's great to see you all. You'll really enjoy the store which we've laid on here today. It's a fantastic place to shop, it's been very successful and we - I think there's some nice things here. Make sure you have a good look at the 3D TV, of course you can't miss it; but it's had a tremendous reaction from customers in the store. We've had to actually change the layout because there are such big crowds at the weekend. But you'll get a good sense of what this store is all about.
So just in terms of what we're actually going to go through here today; I'll go through a quick introduction, explain to you some of the work we've done to actually make this a customer focused business. We'll then go through the store transformation update and we'll also talk about how we're improving service support for customers and this is after sales and then how we are starting to do the work to win on the internet. You'll probably all have seen that we've actually relaunch our websites. There's not a big customer change yet, because the main thing was to get the platform in. But you'll see more development of that as we go through the year.
Nick will take you through the financials and Jeremy Fennell, who is our Category Director for Computing is going to talk to you about technology and why we all should be excited about the prospect for technology and how it's going to impact our business over the next few years, and then we'll quickly obviously summarise all of that.
Well I mean you know this, so this is being completely invariant from the time we started. So in May 2008 we laid out this for you in terms of what we were actually going to do. And we're absolutely on track with that and we're going to make our target returns.
Obviously I didn't quite on fix on having the worst recession since the 1930s in order to do this in, but we're absolutely on track; were not blown off course by any of that.
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You also know a lot about this which is that, you know we operate across Europe; today we're going to focus a lot on what we're doing in the UK. I'll say some brief things about some of the UK business, but obviously it's the UK today.
Just to remind everybody and it's sometimes odd for me when I see the reactions, especially by the traders in the market - of course just over half of our turnover is outside the UK and a little bit more of our profit at the moment. So that's just a bit of background, obviously the Nordic business had a fantastic run; it is now a quarter of our turnover and a bit more of our profit of course.
The Nordic business really has had a tremendous run through the recession. And it is a customer service driven business, what Elkjøp is famous for is what the - you know the selling process in store. It's at place which you go in order to get help advice and it really is leading the market in that way.
I mean you've all got estimated sales here, this is a not a sales prediction, this is what the consensus is for the Elkjøp business; total sales of 2 billion. It's a very low cost operating model. They've managed to combine fantastic customer service, which then of course has driven very high sales density within the stores with a very lean operating cost structure. And in fact this is the model which we're using throughout the whole business. We're also benchmarking back to the Nordics and they're actually continuing to improve what they're doing.
You're in a megastore; this is what we're rolling out across the Nordics as well. We are getting - and we're a clear market leaders in the Nordics so it's probably in a sense a bit harder in that marketplace than us to get the uplifts, we're getting the same uplifts in megastores which we're getting here adjusted for size and sales density, etc. But it's a really good impact in the overall business. So you know, sort of circa 25% on average with all the other things going on.
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As I said the business has incredibly high sales density, market leading, in fact world leading in the way it works. And we've only just started to get the full offer going. So multi channel has grown very strongly this year in Nordics, in fact the pure players are actually reduced in sales last year, and we've been growing that business very fast. Again, on a consensus basis we're not making a forecast here, between 4 and 5% EBIT return and we think there's a lot of potential in that business.
The double digit sales growth I think was even a surprise to them this year. But of course historically when we looked back at the Elkjøp numbers in a recession they've always taken a lot of market share. It's a relatively premium market they operate in all of their four markets and it tends to be when the economies are going well they actually lose a little bit out to people who do convenience shopping; but in a recession people get more focused on price and rush to their stores. And that's why the growth has been very good; so they've a good run in terms of gaining market share.
Italy, which was - obviously when I started the business a huge problem for us, because we had increasing losses and no real sense of actually how you're going to get through that. We now are down to an estate of 97 stores which are largely out of time. We have fantastic brand recognition in Italy. It's a really well known brand because of course it was the first broad based electrical out of town retailer.
We've considerably improved the execution and our turn around plan is going very well. We're now in a set of stores which we want to have. The PC City implementation where we've actually made them two in one stores in Italy is going very well. The stock is now under control and there's more to do on stock turn there but it's doing very well and we've reduced the costs in the business dramatically.
We're now going through and refurbishing the estate, this is a picture on the right hand side of the Muratella store in Rome, it's a megastore, it is
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performing in the same way as the rest of the estate. It has really been a fantastic success and really built our position. We'd love to have many more of those in Italy, it will take a little bit of time before we can get those, real estate is a bit slow to go there but we think we've got a fantastic opportunity to really get back into a strong position in Italy. It's okay now, but we need to get stronger.
You know our other international businesses, just a quick couple of comments around those. Greece, we are the clear market leader and profitable. It's a very difficult one; the lawyers are always sort of worried about what I say on this, because it's quite a private market. But as far as we can tell we are the only people making money out of selling electrical products in Greece and that goes for everybody.
It is an incredibly strong brand name, if you've got Greek friends ask them about Kotsovolos and you would say they're absolutely the best brand you could possibly have in that marketplace.
We've been doing some really good work in terms of our learnings around computing in the other markets, say in Italy and we've been put that into the Kotsovolos stores and it's going very, very well indeed.
We also operate Electro World there, those of have been slightly larger stores. We obviously had a market entry from Media Mart and they came in with two brands, Media Mart and Saturn so we had to respond to that; but that's going well as well.
So we think this is a great business and irrespective of the problems with the capital markets around Greece we think it's a great business and will be in the long terms a fantastic place. Again, we are using the lessons across the group, the stuff we've done in the Nordics and Italy and the UK. We're using the same store refurbishment programme and we're opening megastores in Greece and they're going really well.
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If I had one criticism of our Greek business - was the estate was a little bit tired and old and every time we've upgraded the stores we've had a fantastic response from customers.
The Czech Republic and Slovakia, we're in a strong position there, we've got very good quality out of town stores. Central Europe has been very difficult for all retailers, but that's coming back really well. We've reset the cost base, we're now opening new stores again; you'll see some of that coming through and refurbishing the estate. We're expecting to get back to a good profitable business in that. Czech actually was a profitable business before the recession. It was a bit obscured by what was going on in Hungary and Poland we expect to get back onto a good profit growth there in the future.
And then last of all and not least at all, PC City in Spain, what again was profitable before the recession. We had over expanded a bit into some stores which weren't actually as good as we'd hoped. Therefore we've rationalised that, we've closed 11 stores, we've reduced the cost; it's enough to weather the storm and we're actually now starting to see at last some recovery in the Spanish market and we expect that to come back to profitability over time.
And the Turkey which is a business we've not really spoken to the market about because we've only got 11 stores. Only open megastores in the Turkish market. We've had a very successful launch; we've hit all of our planned numbers in Turkey. It's still at a very early stage, 'cos obviously we need to grow up to a reasonable scale position, it looks like we can open five or so stores a year there and it's a great opportunity. It looks like the Turkish consumers are responding extremely well to these new stores. So that gives you a bit on the international.
Now, this is a very short description of what we're doing across the group; because as I said we're only addressing today mainly the half of the turnover which is in the UK. But the same lessons which we're seeing in
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the UK and Nordic, etc, are actually being applied across the whole group.
So in terms of making this a business which is focused on the customer, what are the kind of things that I can use to demonstrate that this is just not talk? Because it's become almost a mantra nowadays that everybody is a customer focused business. But the key thing is whether or not actually it's really in the heart of everything you do and it actually drives your decision making, it drives that decisions around what the customer offer is, etc. So that's what I'm going to try and do is just give you some demonstrations on that.
Now the way in which we do this and you'll see on the headlines of some of these slides are the values which we've used within the business. So obviously our core purpose which is bringing life to technology then has a set of things which we do for the customer which is actually how that becomes manifest for them. Those are our values; those are the things which we use to drive the business. And in fact we measure them every week to see how we're going.
And one of the reasons why we can start to measure that and it's something which is probably not well known in the group is because we actually have service agreement relationships with our customers and because we collect good data when people buy electrical and computing items; sometimes because of regulatory reasons, so if you buy a TV you have to collect people's data because it's a legal requirement so that they can make sure you're paying your licence fee, etc; we actually have an extremely good database.
And in fact using the normal CRM techniques which you can, we now actually have probably - and we've got 33 million customers on the database; we think we've got over 90% of customers we actually know something about the households in the UK. And we often have an ongoing relationship with these households.
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So this covers circa 90% of our spend which is again sort of high, it's much higher than you would have with a loyalty card database, etc. Typically loyalty schemes you're at 70, 80%. So we actually know quite a lot about our customers and that's true for all the channels. And we've now got to a single customer view across the whole business.
So when we talk about the customers, not only is it that we're actually improving the offer, we can actually measure whether or not we're making a good impact on the business. And therefore you'll see a whole series of things which we do in terms of focus groups, ex interviews, colleague feedbacks, research, all the standard set of things which you have.
Now none of this was really being used in the business before, because the view was always it's about price and promotion and people only come to our stores once every three years. And of course none of that is true, it's just how the business behaved and now we've moved it now to this much more modern approach where we can really start to engage with customers.
The other nice thing about our business and again this is something which people don't really appreciate is that it actually is always skewed to the higher demographic groups in the UK. And the data on the right hand side is an index of actually our customer base against the UK market.
Now of course it's not a surprise when you think about it, because in a sense if you're a food retailer, everybody eats about the same amount of money, it's plus or minus, you know 10% depending on the premium level which you buy food. But in our business all the money is made in the top half of the market, 'cos those are the people who can actually afford to replace, etc. And that's why it's a relatively affluent customer base which we operate; these are all relative numbers of course.
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So what do they want? Well there are a number of things which they told us; and the first thing which customers - and this is how we express, so the title here is How We Express The Value In The Business, they're interested in working out what's right for me.
And the first thing we had to get people in the business to understand is the selling process is described by the customers, when you go through the focus groups and go through analysis, it's about service. The selling process is service. The selling process is not about ripping people off and getting them to buy something else it is actually what customers come to our store for. And we had quite a big cultural shift in the business to get people to understand that standing in front of the shelves and explaining why you would buy a particular product is absolutely the reason why they come to the store.
And that is of course why we have FIVES which you're all familiar with and we have this continuous training programme which we put circa 20,000 people through. And now we've actually got them through the programme, two sometimes even three times. And that really starts to improve the service.
We of course train all our managers. They get - they're the people who actually have to live this service environment every day and we're seeing some great results from that.
Now okay, so that's the process of actually how we train people now. Now the results of it. So what we've got here is we have external benchmarking and we ask generic questions of all our competitors. And this is now how our mystery scores compare with the market against our five part process. And you'll see here that as we've done the training we've now started to move well ahead of the market in terms of the way in which people score. The only area here of course is engagement. This is I think a little bit of reticence on our side, because if we're slightly differed and reticent people are a bit worried - you know people are worried about
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can I help you, you know all that stuff and that is why we don't use those words.
But it's the one area where we've still got more to do and that is about confidence; it's about the change in culture. But we're very, very confident in our own right that we're on a good track with this and we're making good results. And in fact you can start to see that in the way that the business works.
The next thing to say is that it's not just about the training; it is actually how you set the store up. Now a number of you have been through this with me and we'll go through it in the store. So we're actually doing some specialised training in certain categories where for example in TVs we actually talk about a customer journey.
And so this graphic on the right hand side, this is actually the journey we take customers through and I'll show you this on the shop floor where we demonstrate why you would want to be HDMI cable and why you'd want to buy a good quality one versus a poor quality on.
The same approach within computing, we actually run you through all the things which you need to get to a total solution for your products. And again customers see this as fantastic service. This is not about attachment rates or anything else, this is about actually make sure that people can get the full value out of the product when they buy it and we're doing that across the store. And we'll show some of that as we walk around the business.
All of our product learning training is now online and we have methods by which people can update themselves all the time. And I hope that as you shop our stores around the country you'll always be surprised by how much the staff in the stores know; rather than disappointed by how little they know in some of the other of our competitors.
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We're seeing this now come through in our customer satisfaction measures. You've seen this graph progressively over time. At Christmas we had the best results we've had since we started. We're now at 80% of customers are likely or very likely to recommend. And as I've always said to you, you know we're aiming to get to over 50% saying very likely, because that's when you really start to see the net promoter scores scoot away. That's when you really start to change the fundamentals of how the business is working. So we've still got more to do on this but this is a fundamental transformation in the way in which people think about our business.
Now of course you will still find people who aren't happy with the service in our stores. The point about this is the average has moved very much to the right and we're having good success with that.
And I think you know again this is an endless journey, as I said when we started on this journey it would take us years to get where we are. We're now sort of circa 18 months through this programme and there's years more to do. This is something which I will always work on; it's a bit like if you're in other retailers their key measures. This is a key measure for us in terms of satisfaction and we're actually going to crank up the pressure again this year because we're starting to really make an impact on the way the stores work.
And the other thing just to say and everybody in the business - this actually, this measure is being used to determine pay. It's not something which is just in the background. It's an absolute measure which actually impacts that way in which people are paid in the store, it impacts the way the store managers are paid, it impacts that way we're paid in the centre. And we're going to do more and more of that actually as we really bring the customer service to the heart of what we're doing.
Just some other things which we're doing as well. It's an easy to shop and an exciting place to do so, so how does that manifest in the store?
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You'll see it as you walk around; you've all walked round the stores before. The stores are much easier to navigate it's much easier to find things; I know it sounds bananas and straightforward. There was a view in the business that you actually had to manipulate customers therefore you had to dump bins in the way, you have to have all sort of skewed so that people are forced to browse a shop to find things.
All the customer feedback was exactly not that, nobody wanted any of that; they wanted to be able to come in, find the thing they were looking for and then they might be able to walk around. We've powered up the products, that's what the play table is about; it's all about demonstration - again as you walk round the store the whole point of this is you should have a series of fairground rides which people actually want to go around and look at.
You'll see the 3D demonstration there are lots of things, like you'll see what we're doing in the sound rooms, you'll see the - cinema room, etc. They're all fantastic things, which really make a difference to customers and give you that excitement. What we want people to say after they've been to one of these stores is I felt so excited, I felt I had to buy something, it really wanted me to get my wallet out to spend because it was such an exciting place to be.
And that is why we're actually embracing the supplier areas for the stores and you'll see Apple, but you'll see loads of examples of that. And a lot of these are new things to the UK market, we've seen them around the world, they've not been used in the UK and we're trying to bring the best of that and give the feedback to the manufactures, so that they can really start to do the best job for our customers.
The next thing which we also so is I can get what I want. Now this example has been anonymised, it doesn't really matter which the category is here; this is what we do now in every single range review. So this is a standard piece of analysis and I go to these range reviews and
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see them. And what we do here is we lay out for the competitors how their range is structured across the marketplace and then how our range compares to that. And then we show as we go through the ranges how we're changing ranges.
Now for us a good quality range for us is something - because we are the market leader is where we span the whole marketplace and ideally we have something which is cheaper than everybody else and we also have a set of premium products which is above the competitors.
We also should have a nicely spaced out range of products so you get nice price breaks as you go up through the range. And the size of the bubble is the number of products which you have in any particularly one way.
When we started this work what we found was the whole business was absolutely stuck in the middle. We had huge blobs of product here, we weren't selling the premium and we were missing out on entry price point. And as you go round our business now you'll see progressively the ranges have been improved as we use this analysis. Of course it goes without saying we need to improve the availability of this product, etc, but that's the approach which we're using. And often for most of the things which we sell now we out range out competitors.
One of the other things which we're looking at is actually some measures of whether or not that's actually working, that particular part of the ranging, 'cos you know it sort of all sounds very nice in theory, great for the customers and everything else, what's is it doing for us as a retailer? What we're doing here is as we've got the whole format in we're seeing big increases in average transaction values. And when we first did the numbers for you we actually gave you some sort of pen portraits of some key customer segments or how we categorise the customer base.
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And I have to say the lovely thing, which we're seeing from the new ranges, is a phenomenal increase in average transaction value. There was a little bit of a fear if you put entry price point into the business you would pull down the average transaction value. But what we've found is customer focused ranging actually increases the amount of money which people spend.
So just - it's all right for me to go on and talk about this, we're actually now going to play a bit of customer feedback so you can hear what the customers think of our stores.
Video
John Browett: There are two obvious comments I can make - I love the comparison with Harrods, I'm sure Harrods people would be delighted. But two things about that, we obviously take the tough feedback as well; this is obviously something we'll use to inspire our colleagues with. The guy, they were a bit coy about the guy who came in and bought the thing I thing is spend [gap in audio] pounds on a camera, he spent £1500 on a laptop and I think it was - from memory it was something like a couple of grand on the TV as well. And that was why they recounted it, that's why they remembered it.
Now it's difficult to think that in the old store we would have actually managed to achieve that and that shows that types of customers we've got. That's actually all in the Fulham store, Paul here is the store manager in Fulham and it's a very difficult store to get to this level of service. Central London is always very hard and I think we've really done something very special there and it's going very well.
Just now to move on to the store transformation update which of course I'm sure is the real reason why you're all here. I think just to start on that before we get into the detail of it. It would have been craven for us not to
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take the learnings from the winning new revenue stores and put them into the base estate.
So you don't just do the ranges for the winning new revenue stores you do it for every store. So the ranges are better, particularly on laptops where in Currys we were massively under ranges and we've been improving the ranges there.
We've of course used the FIVES training now across the whole company. It's a bit more intensive when we go through winning new revenues because we actually are able to take the store staff out for some time to give them a very intensive training period and then we put them back in the new store and hope to get another boost in service level. But it's something, which we've rolled out to the whole estate.
The merchandising processes which we use in winning new revenues we use in the base estate, availability is better, an enhanced offer, etc.
Now one of the reasons why we traded well at Christmas is that we stopped doing everything else and we just focused on trading the business and using all of these things in the base estate. Now our estimate and it's very difficult to do these numbers because there are lots of strange things. But as we reflect on what happened over peak, we think the market was down maybe as much as still minus 3% like for like, that would be a number which we would be able to sort of stand.
We think we had about a 3 to 5% improvement in the base estate versus that market and then on top of that we have another 3% or so from the impact of the new stores and that gets us to the plus 5 which you saw in the Christmas period. So that's just to give you a sort of base on that.
And one of the reasons why it's now difficult for us to give you a clear update on our transformation is the base is moving. Which is great news
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for me; I mean that's a relief because it's always hard if you think the base is slipping away.
Now of course they'll be ups and downs the market's tough we've had the VAT changes and everything else. But it's just that background so you know in the context of what we're looking at here.
Having said all of that the average gross profit uplifts in the total estate are still circa 20%. As I said to you in order to justify the capital expenditure programme we needed to be above 15%, we've seen no fade from that; we're still seeing very good numbers.
We've done about one third of the UK stores now in terms of the reformatting, etc, and as I said that benefited our UK like for likes over peak by about 3%. You can actually directly attribute that to that.
Now we've got very limited experience of our second year performance. And as I said the base estate is moving at the same time. So it's really hard to get to the look through which is what's actually going on here. And as I said this is the number of stores which we can now look. And we have only had five months of it. But the early indications are that we're actually sustaining the uplift in sales and that is a very important thing for us to be able to measure. Because what normally happens with electrical retailing is you have a very good first year, as everybody gets excited about the store and then you see a sustainable fall off in sales. In fact the two-year like for like often goes back to almost where the base estate is. And that's not what we're seeing; we're seeing the sustaining of that.
Now as I said that's in the context of the base estate moving in the overall market.
In terms of what we've completed so far, so as we speak today we've done 139 stores in the UK. And our plan for financial year '10/'11 is to do another hundred. Now that is less than we said we were going to do
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earlier on. But let's just explain that that has no impact on the square footage or the sales impact it's going to have. So we're still going to do by Christmas of next year we'll still have two thirds of our sales going through the new formatted stores; so we're still going very fast. And the reason for that is you can see there's been a fundamental shift in the stores we're doing and I'm going to talk about why that shift is in a minute.
But we are going to focus on doing the megastores and the two in one stores. And the reason for that is the sales uplift we're getting there is much higher than we were getting the superstores, either for PC World or for Currys. We are really, really doing very well with those stores and therefore we've shifted to that. And a number of those are actually where we are re-siting or we're doing a two in one store where we're taking the wall down between the two stores.
Now I know a number of you will say, I told you so, I told you John when you came in you should have done two in one stores straight away. The reason why we didn't go that fast is we were very worried when we did the initial customer research that we would alienate both customer bases. So we would have a one plus one store equalled one and a half and that would have been catastrophic, we would not have been able to survive that. So we had to do the trialing and the testing and the measurement of how customers responded to the two in one stores to make sure that it actually is better. And I have to say we have been very, pleasantly surprised by what's gone on there.
And when we talked to the customers about it we think what's going on, it's very difficult to do this research but what we think is happening is the PC World customers are thrilled that we've refurbished their store and it's a better store and everything else and they are tempted to buy the electrical items from Currys. And they think that Currys is the best place to go and buy a TV and that's actually building our sales from that customer base. And the Currys customers still think they're within Currys
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but they're reassured it's PC World. And so therefore we're getting both sides to cross shop in the stores and that is a wonderful thing.
And it's been true where we've relocated stores; it's been true where we've actually taken the wall down, etc. Now clearly when you take the wall down between the two stores we are not going to get a 50% uplift that would be too magic. But on average we're seeing really good results from that. And you'll see a number of stores where we've done it. And of the eight megastores six of them are actually two in one stores. And that was quite a risky thing to do and so that's why we've always been very reticent and it's great that you're all correct, about - or a lot of you in the audience were correct about doing this; but it's a very difficult thing for us to go.
And what does that look like, so this actually now is - don't worry about the branding, we're still working on the branding now we've got to do a lot of stores like this. But we think that the two in one format actually is going to become our standard format. That is the most common format you will see in the estate. And we think there are a lot of locations in which that works.
There is actually only an 18% overlap between the Currys and the PC World customer base. If we are right that this means that people will cross shop the categories, which we're famous for in these stores then, we will do really very nicely.
There is huge operating efficiency for this, because you can imagine that we don't have then two TV displays, we have one TV display, which of course is a bigger range, it's a better range and we're getting the stock - the turn goes up, etc.
We clearly have to brand the stores differently, so you will still see purple shirts for PC World and you will see blue shirts for Currys. No issues about that, the customers absolutely understand that and they've got no
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problems with that whatsoever, in fact they see that as a good thing, not a bad thing.
The Tech Guys service is absolutely central to this; it means that we can of course rollout to the whole country. And it enables us to consolidate stores in the smaller catchment areas; because when we looked through the PC World stores what we were finding was the place where we really had difficulty in making - sustaining the computer specialists was actually in the small locations. That's why in this location we have a massive PC World just down the way, because in fact in these locations the megastore and the PC World once they're refurbished both grow. And we've done it in Junction 9 and I think a number of you went to the Junction 9 store. We've refurbished the PC World and the aggregate sales growth out of both of those stores has been fantastic. So in a very large PC World you can sustain it on it's own and that change is quite a big thing.
These stores will be a minimum of 15,000 square feet and go up to 35,000 square feet. So to all intents and purposes, some markets they will feel like a Megastore because they will be absolutely dominant in their local catchment area. And the average rents are very, very competitive because a lot of these will be mezzanines, etc, in the way in which we do the stores. So this is a very big change in the way in which we would rollout the business in the long run.
Similarly the megastores again have performed much better than we could have possibly hoped. I'm hoping today when you walk around it you will see it. We've now opened eight and the great thing about the megastores is that we've not had a single one which has failed. They are all ahead of the plans which we had for them. And that says that we've got something quite special. And it's the same with the two in ones. So we've been extremely fortunate in the way that we're developing the business. We think we've stumbled across a new way of retailing
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electricals and computing for the UK market. And that's the big piece for the way in which we're doing it.
These are obviously in bigger catchments they are going to start at 35,000 square feet and go right up to the size of store which you'll see here, which is about 55,000. They are supposed to be range dominant in this. They've got many more supplier areas in them, they are absolutely a destination store and they work in the way.
We have store directors in these stores so it's actually a higher level of calibre and expertise. We have a higher calibre and expertise of management in this and we're using that to drive the specialism and expertise in this business. The whole point of this store and as you walk round I hope you'll see it is that it out specialises even the niche operators. So this is the best camera display, it's the best computing display, it's the best TVs, it's the best sound room, it's the best display of integrated white goods, etc. That's the whole point of it and that's why it's such a fantastic store.
Some people are worried about stock management. There are 8000 hardware lines in this store; it's a lot to manage. But we've been doing a huge amount of work on the supply chain and the way that works and that has meant that we can manage this business and the stock turn is in line with our normal stock turn in the superstores. Again that's been quite a breakthrough, it's taken us quite a lot of time and effort to learn how to do it.
But of course we've been doing megastores now for five years, because we actually started this work in the Nordics even before I joined the business. And so we've taken that learning and we've still got more to do on that.
We think there are 70 locations in the UK where we can build megastores and they are - you know they're pretty much identified and we've got
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solutions for most of those; most of which are actually in the estate. So this is actually within our power. We are not starting from scratch. If you were starting from scratch this is almost hopeless to be able to do this on good quality real estate. It's a very, very difficult market the UK. But fortunately for us for historical reasons we have the stores with which we can do this or we've got the bargaining chip on the popular retail parks where we can actually move around get what we want.
So I've gone on here to give you some examples of how that portfolio will work in the future, because it's important for you to understand that this is a wholesale change in the way in which we will go to market. And we've taken here four different market sizes in terms of actually how we would work the portfolio. And we're going through obviously and doing this for the whole estate. In fact we've done the work and we know exactly what we're doing and we're now off and doing it.
And so for example in a town like Newbury, market size estimated for computing and electricals, about 35 million. We've got a Currys, which is 12,750 square feet; we've got no PC World. So if you're in Newbury, what you have to do is drive to another town to go to PC World because we've only got 160. And guess what, they don't.
So what we do here is we're actually putting a mezzanine into Newbury and the store will become 18,000 square feet, this is exactly what we did in Weybridge. It'll have a two in one feel to it and we know these are absolutely slam dunks, this is about bringing PC World to affluent customers bases across the UK and we make a lot of money out of these stores. And we've got loads of opportunities for going that across the estate.
In Halifax a slightly different situation, a £66 million market, we've got a Currys and a PC World on two separate retail parks. In fact one of the stores is not working the way in which we're want it to work; so what we're
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actually going to do is combine into one two in one store in the Currys and we actually have leased - I think we've leased the PC World.
Now the great thing about this is we're not finding a huge cost to make this transition. But there was a sort of horror; my God you'll never get rid of the real estate, especially in this market. We are extremely fortunate that the people who did the work on the real estate over the years in DGS knew what they were doing. And we've got good quality out of town retailing which we can re-let. Always, we've got some problems, every retailer has some problems - but even in this market we've been able to actually shuffle round and get what we want. And this is the case in a number of these markets. Of course we'll always have void periods and everything else, but on the whole this is not costing us a fortune to do.
In Guildford which is £180 million market, a very good marketplace for us; we do actually quite well there. We would love to actually have probably a megastore; we actually get a megastore because of the way the market is structured. But we've got a store which is - two stores which are next door to one another. We've got 12,000 quarter feet in Currys, 15,000 square foot in PC World, you take down the wall; it allows us to re-space both units and we expect good uplift there.
And then Thurrock the market which you're in here. A very large market there are only a few of these around the country. We estimate probably about 30 catchments where we'll actually have a megastore like this and a PC World. And that's because we know we can take more money out of two units and we've proved that now because we've done stores like this and in Bristol we did a two in one. And I have to say in Bristol Cribbs Causeway if I could get a PC World and if you know anybody who's got one - if I could get a 20,000 square foot PC World I'd open it tomorrow, because I know that in that marketplace it's such a big catchment I would actually be able to take more money out of two stores.
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So that gives you a sense of what we're doing, we've now got solutions for every single store in the estate.
So I think just to summarise that, we're getting - continuing to get good results from the refits, it is absolutely the base of the work we're doing; but don't forget it is about the ranging, the customer service and all the other things which we're doing. We're going to focus on the very high return two in ones and megastores and that will bring PC World to many more markets. You can imagine over time that we might have 400 locations rather than 160 locations where you can shop the PC World offer and have the Tech Guys, etc, and that's a good thing for the overall business.
And as it says here there are a hundred location which we could actually bring PC world where it just doesn't exist. And that is a straightforward lift in sales, 'cos we can see what our computing penetration is in that market.
We're taking a completely pragmatic approach in smaller catchment areas, in some of these catchments we actually don't need to make the change, we know what our long run position is, but actually rent is relatively cheap, etc, so we're not in a hurry. So you'll see some different things in different parts of the country just driven around the real estate. Don't worry about that, that's not a huge cost it's just actually where we are in the market and whether or not the returns are worth it.
And in the long term, today as we speak in the UK we've got - the UK and Ireland we've got 664 locations and we will end up at about 500. Many of that is consolidating stores, doing knock through. We've already announced that we're going to take circa 65 stores off the high street as the leases expire, etc. But that will be quite a good position. And of the 164 locations we already have a solution for 127, either leases expiring or we're doing a knock through, or we're doing something else. So this is not a huge great drag on our earnings in terms of property profits, etc.
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So the next point really is in terms of improving service support for customers. It's again a huge opportunity for us; again it has always been a bit of a Cinderella within the company. Service agreements because of the heritage of extended warranty this was all seen and people are a bit nervous about service agreements. Customers don't see it that way at all. They haven't got time, they want people to get things sorted out, there isn't the independent repair mechanisms out there and therefore people want help from us.
So in terms of that we've actually been significantly improving. As you know we now have three hour time slots from seven in the morning until ten at night. We actually now do 60,000 deliveries, this is a substantial increase year on year, it's the largest home delivery network in the UK and we actually now have a free delivery option.
In this store this is a follow you home service, you'll see there's a sort of like - we can get you delivered and installed with four hours and we do free recycling. It's a great offer and it's an unbeatable, unmatchable offer in the UK market.
We have done a lot of work to improve the quality of that service. We're now running at over 95% right first time and more importantly we're running at 98% second time. 'Cos always there's some issue around, couldn't find it, or somebody was out. But we've now substantially improved because our problem when we first started doing this data and we were able to get to over 90 and then over 95% right first time. Then we looked at right second time and it was 60%. So of course you're then actually disappointing a lot of customers. You can get away with one mistakes, but two mistakes no good. And that was starting to damage - well it had been damaging our brand and that's one big fix we put through.
We have a single national network and it is the lowest cost in the UK by a long way. We benchmark our competitors, it's a relatively straightforward exercise to do because you look at the number of trucks, the number of
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people they've got with deliveries, etc, and you can work out what their costs are and we're in good shape.
We do delivery and installation at the same time. Again that is unique, there is nobody else who can do that nation wide and that's a big thing. And part of that is that we've done a huge amount of training of our delivery people. So 4200 training days in the last three months. We've improved the process, we're simplifying things, shortly our delivery drivers will dispense with the paperwork and go to handheld devices which means that we'll get very much better control over what's going on and we'll be able to tell the customer where the driver is, etc.
So it's a really fantastic success story and we're very pleased about the progress we're making there and we still think there's more to come out of improving this delivery service.
The other thing, which we've been doing of course, is launching new ranges of services. We relaunched the Tech Guys last autumn. That's been very successful and has given us growth in that area. We've been improving repair times. This is an index number in terms of the time it take us to repair a TV and a laptop; we still think we have more to do here, etc.
We've in-sourced our contact centre, now when you ring there are only three options rather than zillions of options going through. We've rationalised the numbers, these are all sort of fairly straightforward things to do. They're hard to do given some of the tangled mess we have in the systems but we've actually managed to get that to work. So again we're making big improvements and this is a major, major thing for customers, there is what people want out of us. And there's a huge amount of dissatisfaction in the market with some of our competitors.
In terms of the next stage, we are as I said improving the number of offers which we've got here. We have the widest range of services in the UK
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market. And again a lot of these have been very, very successful, especially things like super charging our PCs, netbook set up and a number of other areas. Again all things which work well for our customer base.
So just on the next one in terms of winning on the internet. The internet for us is absolutely central to what we do and you'll see that in terms of some of the numbers here. We have still got a long way to get to the level of interaction which I want online. So you will see progressively over the next six months even more.
But just a few pointers on that; customer actually favour online retailers when you actually - sorry favour multi channel retailers when they're shopping online. The standard customer trip now and this is the most frequent customer trip in the marketplace is that before you go to the store you research online, you then go to the store, look at all their products and then you may transact in the store or you may transact online; but you're doing it within that multi channel world. That's the most frequent way in which people shop in the UK. And it's entirely logical and it's the best way to do it.
And people do that because it's convenient, it's easy, it gets them confident before they come to the store and you'll all be confident about buying technology, for a lot of people they are not confident about it, it's fantastic for us. But they want the reassurance and service in store, they want to be able to actually close the sale often in store, because they want to just check that they've got all of their research right. This is the standard across the whole marketplace. And they also want a well known brand. Brands are really important online and that's what we're finding with all the stuff we've done.
For the suppliers, the suppliers actually understand why multi channel is actually their favoured way of going to market. Because in the end for them a company like Amazon is purely parasitic; it actually doesn't direct
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sales, it doesn't actually give you any description of why you'd want to buy that, why is that product right for you? It's a very difficult shopping experience for the vast majority of customers. Clearly if you're tech savvy and you know what you're talking about you don't need all of that, but that is a very small proportion of the overall market and people are not confident enough to do that and that will always been the same because technology is moving faster not slower.
The suppliers also want the in store experience, they want people to be able to actually show what the real features and benefits are and a lot of this can't be done online. So again multi channel is where people want to be and it makes a huge difference. And there are lots of other things which people want out of that process.
And the other thing of course is that online where it really fails and it's very, very difficult to do this, it never tells you what you need to get the best out of a product. People try and bundle, they try and do accessories and everything else, we do that on Pixmania. But it's not the same as somebody actually saying in store, you know why do you need X, Y and Z to go with your product and you see that. That is what the customer journey is all about. It's actually making sure that people get all the right stuff at that time. And it's a real fiddle because quite often you don't realise you need something until you've got it home. And then you think, oh no I've got to go back to the store, I've got to go and order it online or whatever. Our service is all about getting that complete solution in the store and the suppliers know that.
So we actually have a very strong internet presence compared to most electrical retailers. We're now running at circa £1.4 billion of sales online; so that's you know just over 15%. It's a very big important part of it. Clearly that's also driven by Pixmania, but what we've also got here for you is the growth rates in the chains over the last year. And we are growing much faster than the market online at the moment across the whole of our business.
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And that again is a testament to the fact that multi channel is actually where people really want to be.
We're using the Pixmania technology, we're relaunched the websites in the UK on that and the reason for that is it is the market leading technology. In fact not only are Pixmania putting out the merchant platform into our business they are also going to other retailers. And we in fact have a number of people for example Buoy Telecom sits on the e-merchant platform and we've got a number of other retails both on today and in the future.
It has a number of groundbreaking bits of technology, the way in which it does bundling, navigation; optimisation and you'll see later in this year the way it sells online is market leading. Because we do electricals and computing only we've actually got the websites tuned up to do that service and it makes a material difference when you get that piece.
We also have in France something called Pixplace which enables us to do a brilliant extended range as well and that often uses our infrastructure to actually deliver the product. And we'll do a bit of work on that and see how we can make that relevant for the UK market.
As I said the UK sites have all been relaunched on the Pixmania platform. You'll see that it's a fairly standardised approach. There was a press thing which went out, we didn't actually know it was being done where you can see the usability of these sites have actually gone from being bottom ranked to be top 10% or so in the marketplace.
And that's before we've actually tuned up the website. The big thing, the big difference on this website is that all of the services which actually produce the website, the transaction engine, the actual underlying functionality is now all in web services or in XML, etc, and the website is all done in style sheets. So our ability to actually change the look and feel
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of these stores and to actually add in new functionality is more, much better.
The problem with the old websites in the UK was that they were hard wired into our systems and there was no objects which you could go in and develop. And now you'll see that we can actually use this platform to fundamentally change the customer offer and that will happen over the next six to 12 months and you'll see some big changes.
So for example today online you can't do three hour time slots, in a minute we'll offer you at the end of the thing - when do you want your product? And it will be actually price dynamically depending on demand. This is something which you could not have done in our old platform and it will be market leading when it comes to the marketplace, nobody else will be able to get that because they can't do the three delivery slots anyway.
And just a few things in terms of what we've managed to do so far. So we cleaned up the navigation, it's much easier to navigate, we've changed the way in which we merchandise key deals, the deals by categories and we've also brought in a lot of things in terms of making it easier to shop the stores.
The benefit for us those thought with the e-merchant platform is that we can actually generate multiple packages with multiple deals to actually start to get some of the solution selling which we do in store, online. And I think Pixmania have done this is a much better way than any other website I've looked at in the world.
So from our perspective the internet is a huge growth opportunity. We don't see this as a threat, we see it absolutely threaded through the way in which people shop with us. We think this will actually increase our sales rather than actually cannibalise sales over time. The pure play we have compliments what we're doing because there is essentially a discount element online for people who are very confident about what they want,
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that's the heartland of the pure players and we have to address the marketplace as well.
But in essence a large multi challenge operator like ourselves has got substantially lower costs to go to market. We've got huge buying and sourcing benefits, we can do the solution selling, we can do the value added services which the pure players can't do and we actually end up with much higher basket and ATVs out of the pure play business. And we run a pure play so we can see the benefit of being multi channel in all of those things.
I think it's very difficult for me to quantify this for you in terms of what it means in terms of cost of operation. But we make money selling online all the time. And it's profitable from the day you start, because it's very easy to plug into what we do. We're reconfiguring our distribution warehouses so that they actually have the same level of automation and speed picking for singles, etc, but all coming off one amount of stock. It's a shared supply chain. And you'll see that the manufactures are all in their terms discriminating in favour of the people who have stores. So we're in a much better place to sell online than anybody else and that's quite different from a number of other categories, etc.
We will expect internet sales to grow as a proportion of the mix. We are pretty close now to being the same proportion as the online is for the market but we think we can actually grow. So I think it's a big opportunity and we would expect to see the same share of online as offline and therefore as the market grows we'll grow with it.
I think just one other thing to see, this Christmas you probably saw some of the overall data. The growth in the internet has slowed, even in a recession when people are very, very price sensitive across the overall market the growth is now coming right down and we expect that to moderate over time as people hit the natural limit for people who actually just want to buy online and don't want the interaction with a store.
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So Nick is now going to take us through some numbers and then we'll move onto the technology with Jeremy.
Nicholas Cadbury: Thanks, John. I’m afraid I’m here not to give you an outlook on what our profit is going to be in the next five weeks or what our debt is going to be this year or next year. But I thought I would take the opportunity to really talk. We’ve talk quite a lot about the cost saving plan and the stock efficiency that we’ve had. I was just going to take you through a little bit about how we work internally to get to those figures and drive that efficiency through the business.
We’ve stated that we’re going to make our business simpler, and by doing that it’s better for our customers, it’s easier for our colleagues, but it’s also cheaper for the company overall. We’re on target for the £50 million saving that we stated at the beginning of the year, and we’ve identified the £150 million target that we’re going to get over the next three years as well.
I’m also pleased to say that we said in January that stock turn was turning at 10% and it’s continuing to do that so far. We’ve identified - and it's a continuous improvement. So historically in this business when I was here 5-10 years ago, every January we’d get the marker pen out and put lines through people’s names and say that’s how we’re reducing costs. Whereas this time it’s much more continuously process of looking for process and looking for organisation designs to get improvements.
So these are the two fundamental ways that we look at costs at the moment. We look at it in two ways. One is what is the organisation design of the company, and secondly what are the processes there that need simplifying and re-engineering. And the real advantage of the organisation divide is really kind of aligning the structure of the company with our objectives, but also with our customers' needs as well. What that
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does is really identify who is accountable and responsible for things as well.
So just a couple of examples of doing that. We used to have two commercial teams, one for PC World and one for Currys. The Currys team used to buy TVs for PC World, and the PC World team used to buy computers for Currys, and of course you can always imagine where the availability went, and where the shortages of stock went. By putting them together now we’ve got one team who are really focusing on getting the best range for the customer in both of our brands out there.
The second thing that we did just before Christmas was integrating our service and retail team. We had the core retail team and service somewhere out on the left field, but by putting the two together we’re actually really making sure that one team under Sebastian James is owning the customer from the minute they walk into the store right through to the post sales service and also through the returns process as well, to make sure that the customer is looked after through for the whole of the life of their product. And by doing that you’re stopping all the questions being passed from the retail team and back to the service team, so real responsibility for that customer.
The last example here is one marketing team. Again we had a PC World team and a Currys team who over time really focused on making sure that the other brand didn’t get the customer, rather than looking at the UK customer and saying - right, how do we really maximise the customer offering for both of our brands through there? And by doing that it’s much simpler and we’ve been able to simplify the structures as a result of that.
The second thing we’ve done is going through and looking at each individual process, a very detailed process. We use a method called Lean Six Sigma which was identified back in the ‘80s. I think it was identified by Motorola. It’s really about getting in and defining what the problems are, identifying how you’re going to measure them, and then
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analysing the individual processes in them, putting the improvements in and then going round and controlling those processes afterwards.
So it’s really going all the way through and making sure that the processes once you put them in are then controlled at the end of it as well. We’ve been through and said all the senior executives are trained and all the team leaders have now been through a training course of Six Sigma to make sure we can get these processes right through the company.
Just a few examples of that is call handling, all the executives had to sit in a call centre and work out how you listen to some of the call handling. And actually the call handlers there were dealing with about - between four and nine screens every time they were dealing with a call. And actually by going through this process we’ve been able to merge those together so in the future they’ll be looking at one screen when a customer calls. That of course will make them much more efficient.
Delivery and installation, we’ve already talked about how you put the two teams together, delivery team and the installation team, and you get much more efficiency. So you get one person coming to your house, one person going down your road, rather than two.
Stock processing in store, we’re already looking at how the product comes in from the supplier into the warehouse, and the real advantage is the stock is in a much more ready state when it comes in to be put straight onto the shop floor. Therefore we can reduce the amount of stock that we have in our warehouses, and reduce the amount of admin that needs to be done in our warehouses as well.
We're also - by doing this process we’re also looking through the business and seeing where are the inefficient and the low skills admin parts of the group, and we’ve placed them offshore. So in Brno in the Czech Republic we have a shared service centre which has now got 200 people who are covering parts of the Nordics, part of Photo Vista, and
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they also cover the UK. And they’re really looking at accounts payable, accounts receivable, they’re looking at claims handling, and they’re also looking at call centre management as well. And we’ll see that grow as we go forward and we’ll continue to look for those processes that we can put overseas, get best of practice by doing that, and of course lower costs.
The last area here has really been looking at advertising efficiency and going through and looking at the process by which we decide where we’re going to place our advertising, and what products do we put in that advertising. And going back and not just kind of - it used to be gut feel, but actually looking at the return on investment that we get on each of our adverts and promotions.
So by simplifying that, not only is it cheaper but it’s also better and easier. Here are four examples of some things we’re doing. One of the big things in retail, particularly with electrical products, is how much stock you can lose. We’ve put a real emphasis this year on making sure that we reduce our stock loss in the business by looking at the way we protect our products, looking at the security we have in our stores, and give the people better tools to manage it. And that’s made it a lot easier.
Of course it’s made it better for our customers as well, because we’ve been able to introduce play tables which we wouldn’t have been able to do before, and have more products out there on live stock. By doing that as well we’ve been able to save £6 million by reducing that stock loss at the same time.
The second example here is bringing the contact centre in-house and really going through and doing the root cause analysis of why are the customers calling the call centre? And by pulling the retail and the service centre together and really making sure we answer that, making sure we solve the problems in the store in the first place.
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So of course that’s better for the customers and of course it’s easier for our colleagues as well because they’re not always having to pass issues between themselves as well because they’re absolutely sure that they’re the one who’s responsible for doing it. Again by doing that we’ve actually been able to reduce the costs in our call centres by about £12 million over the next 24 months.
We’ve already touched on combining the service field for the distribution and installation. And of course what it’s given us is a much better choice for our customers. They’ve got much more flexibility, time slots for next day deliveries within three hours, and weekend and late night delivery as well. So much more flexible, but actually it’s also being able to reduce the amount of drive time that we’ve had people sitting in vans delivering and doing the installations separately. It’s actually a much more rewarding job for everyone because they’re now multi-skilled as well, and by doing that we’ve actually been able to save £18 million overall.
The last one is improvements to distribution. Just in terms of how we’re working with our suppliers, cutting down lead times from the point at which it’s manufactured into our stores, and therefore we can get much more frequent deliveries and much better booking of delivery slots, and therefore it’s a much more efficient process. So it’s better for our customers because you get better availability, but also much more efficient handling in our stores. We’ve put £1 million plus because we think this is a very big saving over the time and we’re just going through the process to quantify that at the moment.
We’re also working on our stock as well, and as I said earlier we’ve had a 10% stock improvement. We do it on a moving annual total so that’s over the last 12 months. So historically we used to try and dip for the line and try and hit a stock figure at the end of the year, when this time now we actually manage it from day to day, week to week. And in fact myself I sit with Ed Leigh, our UK finance director, on a Monday evening we spend an hour going over the UK stock, making sure it’s in the right place.
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By doing this we’ve been able to reduce our age stock significantly and we’ve reduced it by 35% in the last year. There are several benefits for that. One of course, it frees up shelves so that you can actually spend more of your time making sure you get your promotional and your core products on, so your availability comes up. But also it has a big margin effect as well as you’re reducing the amount of stuff you’re having to discount all the time.
The second thing we’ve been able to do is get our availability up. We’ve quoted at Christmas that we’re at record availability. I’ve been here 15 years and it’s the highest availability that we’ve achieved since I’ve been in this company. And we’ve done that through a number of things. Firstly it's really by cleaning the stock and having less age stock, so you can get the more core range out onto the shop floor.
The second thing has been developing our systems and letting the systems do the work. We had a very large team of merchandise planners who were there, and they felt it was their job to manually intervene all the time. But what we’ve done now is really make the systems do the work and make sure it’s automatic allocation into our stores.
We’ve also centralised some of the stock back into the warehouse as well, so the mix from the store into the warehouse. So it means there’s more stock always in the warehouse, so if a store runs out there’s always something they can pull on. Historically as soon as the stock came in we pushed it out all into the stores and therefore you got mal-distribution across the portfolio.
We’re one year into this journey. We’ve got 10%. We think there’s another 10% stock turn to come out. It probably won’t be straight away in the next year, but over the next two years. And there’s a lot more opportunities right the way back from the suppliers, how they’re working
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in their factories, right the way through to delivering into the customer’s home.
Lastly, turning to our group capital spend, we’re spending between £170 and £180 million as we said in January this year. About £50 million is underlying so that’s really on systems and on maintaining our portfolio. And then £120 million of that is on redefining and reformatting our stores, not just in the UK but also abroad as well.
In 2010-2011 it’s going to go up to £215 million. That’s a little bit higher than we said previously, and the principle reason for that is really the underlying because we’re taking the opportunity to do some investment back in our systems in the UK and build a system that is much better for stock management but also re-investing in our service distribution platform again, which again will give us further efficiencies and cost savings going forward.
Then we’ve got the new format of £150 million. Again we’ve got 100 stores in the UK and approximately 40 to 50 stores overseas. As John said already, more weighted to the two in ones and the megastores. So it’s slightly fewer stores than we said we were going to do, but they’re bigger stores and because they’ve got mezzanines and the two in ones they are more expensive per store.
I’m pleased to say that because of the uplifts we’re still on track to give the three to four year payback that we said that we would do last year.
The bottom bit is a point that John has talked about already. There’s been a lot about the stock turn in the megastores. But actually we’ve got neutral working capital in the megastores overall in terms of you’ve been able to turn your stock a lot faster. And on an extended range we’ve worked very hard on making sure with frequent deliveries that we’re actually getting exactly the same stock turn in these stores as you would do in a normal store overall.
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I’m now going to hand on to Jeremy who is going to make sure that you’re ready with your wallets by the end of the day.
Jeremy Fennell: Good morning everybody. My name is Jeremy Fennell. I’m our category director for computing which means that I look after the computing business in the UK across PC World and Currys. Today my job is to talk to you a little bit about technology and what’s been happening with the products that we sell and what we foresee happening with the products that we sell and the way customers use them over the coming year or eighteen months.
So to start, a little bit of information about what’s been driving our business in the last twelve months. I’ll start with computing because that’s what I look after. Computing is still a growth market and is still high growth within our business. It’s growth in the mobile sector in particular. Laptops and computing have always been driven by technology. Now we see computers again getting thinner, lighter, faster, with longer battery lives making them more mobile.
More mobile is interesting because now computers have become more portable actually people are more interested in what they look like and what they look like with them. They’re becoming a fashion accessory. Have a look downstairs. I went to range review yesterday where my team showed me what we’ve got coming for the second half of the year. More and more of this market is about colour and design and what the product looks like and brand, as well as thinner, faster, lighter and the way that computing has always been.
And for us in the last twelve months, that has spawned a new category in netbooks. Netbooks is a smaller, ten inch laptop style product that is used more for viewing content and consuming content on the move rather than doing. And that’s been an incremental market or an incremental business for us this year that’s driven our competing sales even harder.
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Because people are using technology out and about more, so networking becomes more ubiquitous. And we see networks now not only in the home and the office but also in cafes, in bars, in restaurants. So new technologies of networking are enabling more content to come through to devices, enabling customers to get more content through to their devices. More Wi-Fi available means more devices are now being embedded with Wi-Fi. So it’s not just my computer that I use out and about on Wi-Fi now. It’s increasingly my mobile phone, my games console, and in the home my TV and other products are also becoming wirelessly connected.
The TV market has made a spectacular shift from big boxes to flat boxes. In the last five years we’ve been a major part of making people transition to flat screens. Now about 60 or 70% of households in the UK have got flat panel television. And where we thought that perhaps that market might then stabilise, actually we’re now going flatter. When you walk around downstairs you’ll see a large range of LED televisions even flatter, even brighter, even better pictures, that’s driving that market on now even further. At the same time as customers are then upgrading smaller sets because prices of smaller second and third set TVs has come down, so people are upgrading other sets around the house.
You’re also downstairs going to see the first 3D TV in the UK today. Very, very exciting technology, and as I think I heard Nicholas say earlier on if you’re a sceptic about 3D TV have a go downstairs and see what you think today. We’ve got two sets, an active and a passive set. I think you’ll be impressed with what you see, and you’ll probably agree with us that a big product launch for this year and certainly very exciting for next year.
TVs are almost run by computers now, and computer technology, which means that screen quality is going to get better, brighter, faster. So there’s a lot more scope for growth in this market and in our business. And also better design. When we’re out and about now in the Far East looking at these products and sourcing these products, we tend to talk as
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much about what they look like when they’re off as what they look like when they’re on. And an increasing part of the customer purchase decision is what it actually looks like in my home.
And In white good, digital controls are also getting into white goods as well. This is all about energy efficiency and the way the product uses energy. Customers are increasingly worried about saving energy and making their products cost efficient. There’s a Bosch tumble dryer outside that will save you round about £200 a year in electricity because of the way it controls the energy that it’s using in order to do its job. So some exciting stuff that’s happened in the hardware market that continues to drive the business.
But it’s interesting to look at what the customer is actually using these products for. I find this kind of slide fascinating. I’ll take you through some facts. The spiral in the middle is the way that I try to convey that the way products are used drives more product development, drives the way products are used, drives more product development. It’s hardware, content, hardware, content.
And if you look at the way customers are using our products now, consuming video on computers as well as TV. There are 100 million videos uploaded onto YouTube, so customers are clearly using computers to consume video as well. There are 135,000 applications available to the 58 million users of the Apple application store.
I love this one 400 million users of Facebook makes it the third biggest - if it in the country - country in the world, 7% of Internet traffic. You’ll have seen that in the US last week, Facebook overtook Google as the number one website that people visit. 200 million people visit Facebook every single day, so 50% of those people are using that product every single day. And if you think it’s just kids doing it, the fastest growing segment of that 400 million users is middle aged females. So everybody is doing it.
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And it’s very, very personal. What they’re using it for is to upload personal information about themselves and search personal information about other people. There are 3 billion photos uploaded to Facebook every single month, which shows that people are using this stuff all the time.
When it comes to consuming TV, BBC’s iPlayer received requests for 120 million views in December 2009. Fascinating then that people are using the computer and other devices to watch TV now as well as the television. 12% of that 120 million views was made on a games console, 12%.
And the launch of Windows has really spurred DLNA. DLNA is a network alliance of multiple consumer electronics and computing manufacturers, all of whom are using a common standard that enables people to share computer data and computer content across multiple devices. In other words, if I’m watching iPlayer on my laptop I can beam it to my TV so I can watch it on my TV as well.
So the point of this slide is to show that usage is becoming more personal and more frequent out and about. The usage habits mean that the devices I’m using know me. My phone and my computer or my TV now know who I am, they know what I like. Because of what I’m using, they know who I’m connected with, who my friends are.
Increasingly with GPS technology my devices know where I am, and they know where my friends are and where you are as well. And that means that the way that I’m using them is dictating sometimes what I’m doing with my life. In other words, David’s outside having a coffee in Starbucks. I’m near to Starbucks, I like coffee, so I can go and join David for a coffee before we go shopping in Currys.
So you see that technology is consuming everybody everywhere they go. And what that means is that this is a connected world where I have multiple devices that are fit for purpose to consume that data and that content.
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We used to hear that one day there would be one spectacular device that did everything for us. That’s definitely not the case now. What we see now is that customers are buying hardware that are fit for purpose wherever they are, whatever they’re doing. That could be watching TV in the living room, it could be watching TV on a net book on the train, or it could be using my telephone to make a phone call. These are all different devices.
That’s great news for us as a consumer electronics retailer, because it drives new products, it drives new sales, and it also drives more frequent updates of existing technologies. I’ve put some examples down here of new products driving new sales. I mentioned net books earlier on. An incremental product category of computers that people are using out and about, we believe it to have been 70 or 80% incremental to our computing business.
Shortly you’ll have seen in the US Apple are going to launch the iPad. After that it will come to Europe and it will come to the UK and it will spur the birth of a new category in tablets. These are computers without keyboards that people are going to use to read books, surf content, and communicate whilst out and about on the move. Consume content on the move and in the home. eReaders have already exploded through the Kindle in the US and there’s already a road map of many devices to create a new category for 2010.
Existing technology is being updated more frequently as well. TV life cycles or TV replacement rates are around about five or six years now where it used to be ten as they get better and thinner, better designs. Networking is being upgraded because people want to get more information to their devices and therefore are going for faster and broader networks.
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Laptops because of functionality and also increasingly because of design now have a replacement year of about two years where it used to be four. And the desktop market has received an injection of life from all in one products, which is where we no longer have a box and a monitor. It’s all built into the monitor with touch screen, which means it’s a better designed product for the home but also able to be used in different rooms without getting in the way too much. It’s no longer a product just for the office.
So they are all opportunities for us in the next 12 to 18 months. And also because all of these devices are connected and the way that customers use them is changing, there are many commercial opportunities for us in connections and the way that products are used as well. So it’s very exciting.
When it comes to connectivity, it’s clear everything will be connected, if it’s not already. But it won’t necessarily be connected by subscription. 12 or 18 months ago there was a view that all consumer electronics would be connected to a subscription, and therefore you would pay a monthly fee and everything would be free. We never really subscribed to that, and it’s clear that that’s not going to be the case.
I’ve tried to articulate here that this splits into two ways of working. My mobile phone or my smart phone is a subscription device. The reason for that is because I need it to always be on, I need to always be available, I want you to be able to call me or contact me, and I want to be able to contact you.
This is subscription that I’m prepared to pay to make that happen, and the business model there is that I’ll pay a subscription. The more I use, the more it costs, and therefore the business model is profitable enough to allow the person I’m paying the subscription to give me a free phone or give me a subsidised phone. So that business model works.
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At home I’m also permanently connected, but I’m permanently connected by fixed subscription, a lower cost subscription that is a pipe into the house to which multiple people and multiple devices are connected. Not all of the time, but when I want it to be on, and when someone else wants it to be on, it works. For that reason and because it’s multiple devices, I’ll pay that subscription, that low cost subscription, and then I will buy independently the devices, the multiple devices that are connected to it.
Then out and about with other computing devices and other consumer electronics devices, there doesn’t necessarily need to be a connection all of the time. I’m consuming data and I’m consuming content that I’ve already put onto my device, and therefore I’m paying cash for that device. There will be the possibility to connect though, either by prepaid 3G, or mobile broadband, or by WiFi when I’m out and about in WiFi locations. And then I will dip in and dip out and get content as and when I want to get it.
So that’s how the connected world is going to work. When you need a subscription and the business model allows you to actually have a device for free or subsidised, but the majority of these devices are connected as and when I want them to be. Therefore consumers are not going to subscribe and have multiple subscriptions. They’re going to buy devices and then they’re going to dip in and dip out on a pre-pay basis.
The suppliers agree with us, actually. This is a little bit about what is happening in the hardware market where we see PC and telecom manufacturers merging into each other’s markets. So the likes of Nokia, Samsung coming up through the telecoms market from phones and now starting to produce net books and laptops and getting to the computing business; at the same time as the traditional computer manufacturers are coming down into the phone space. So the likes of HP and of course Apple with the iPhone starting to get into the communications space as well.
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The fifth screen, the tablet we see very much in the computing space on the right hand side where customers are going to use that to use data out and about and dip in, dip out of content. The customer’s primary consideration to the right of this line here is the hardware choice. They’ll buy the hardware and then decide what they want to do with it afterwards.
For that reason, the market sits clearly with us. As the leading retailer of computing and consumer electronics products we have very high shares in the market, and very broad ranges of laptops, of net books, of PCs. A high share in the UK of the TV market as well, and we believe that we’ll have very strong sales of this new tablet category.
At the same time we’ve got - through transformation, great service and Tech Guys to be able to sell and service and help customers choose the right product for them, but then also connect that product through broadband or through home broadband or to the TV networks to the right product of their choice. We actually look after or sell about 20% of mobile broadband connections in the UK through that model.
So in summary, the technology cycle is stronger than ever. Hardware is still driving content provision; content provision is driving better hardware, and so on and so on. We see that continuing to happen. Technology is increasingly a part of people’s lives, not only at home; not only at the office, but everywhere you go. Multiple devices for multiple uses. That’s breeding new products, wider ranges and faster replacement cycles of existing technologies.
And our supplier relationships and the transformation programme that we’ve got going on, whether it be through our colleagues, through the stores, or through the service cycles that we’ve got, puts us in the best place to exploit these trends.
Thank you very much.
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John Browett: Thank you for that, Jeremy. I just want to summarise what we’ve been through today. We are delivering on the renewal transformation plan. It’s working. Everything we’re doing is delivering for us, and I think that’s an unusual thing. Often when you set out these plans you have to make quite big adjustments. We haven’t had to do that. It’s been right first time.
The new format stores are performing very well. It is a different way of going to the market and we’re very proud of our stores now. They are something quite special, and I hope you’ll agree that when you go round this store. We continue to make incremental improvements on that core set of insights which we have.
The big news in terms of the UK is that we are going to focus primarily on the two in one and the megastores. That is a big change to the portfolio over time. It’s nothing which we’re going to rush at; we can do it in a way which is consistent with adjusting our real estate over time. The portfolio of stores we have fits very nicely with that strategy.
The in-store and after-sales service is improving. We’ve got absolutely benchmark data now that we’re actually leading the market rather than lagging. That is something which we can continue to work on over time.
For us multi channel is all opportunity. We don’t see it as a fundamental threat to what we’re doing. It is actually making our business more effective and efficient over time, and we see that as driving growth. Because it’s only a business of our size, scale and scope which can actually get the big benefits out of the Internet.
I hope you can see that we’re actually working very hard on the cost structure. Our costs are down, stock turn is up, we still think there’s a lot to go there. It’s hard, painful work, but we think we can make a big difference to the way the structure of the business is over time.
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And the great thing for us, taking out the impact of the recession, the short term impact, the technology cycle is probably the most exciting it’s ever been. It’s going to lead to big improvements in the replacement cycles, etc. The point on televisions is absolutely dramatic. If you are a high consumer of TV content, TVs are going to force another upgrade. I hope you’ll see that with 3D, but there are a number of other things which are actually making them much more useful to customer. Therefore as a consequence of all this, we’re absolutely on track to do 3 to 4% return on sales which we laid out when we started.
I think we’ve got time for some questions. We’re going to take some questions, and then we’ll break into groups to look round the store. Do you want to start?
Geoff Lowery, Redburn Partners: [No microphone] I have a couple of questions if I may. Firstly, could you clarify your comments about year two importance when you say, I think you used the word sustained, does that mean they are going to be growing in the second year or they're flat on a like for like basis?
John Browett: As I said, you’ve got three things which are going on, the base estate is coming up, so everybody’s catching up. We’ve got an issue which is we've got a very small sample set, so we’ve got stores which are above, stores which are below, etc. And the third issue is comparability, because of the other changes we’re making in the portfolio, etc. So it’s a very difficult thing for us to say.
The key thing we wanted was the sustaining of the two year like for like. That’s what we’re seeing. It’s very hard for me to make detailed comments around that, because there is so much else going on. And that’s just where we are.
Geoff Lowery,
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Redburn Partners: So sustained, so we should think about sustained rather than strong growth in year two?
John Browett: Yes, that’s what we’ve said, sustained rather than another jump up. Now having said all of that, there’s one thing we have not done yet, which is we have not marketed to the customers what we have done to the real estate. So we are still getting customers coming in to our stores and they look round - because this is the frequency of electrical retail – and they’re like what have you done here?
We haven’t run any marketing campaigns; we’ve done no advertising. We do almost nothing at the opening. It’s just actually getting the customers in. We do a bit for megastores because they’re destination stores so you need to pull people in, but generally we don’t do any of that.
So we think there’s another round to go when we can start to advertise that, and it’s a choice. For all retail businesses you have the choice. Typically you wait till you’ve got half the estate before you start to go, because otherwise you disappoint too many customers.
Geoff Lowery, Redburn Partners: Just a follow up on working capital as well if I may, I think Nick, I think you talked about the neutrality. Was that just a reference to megastores?
Nicholas Cadbury: It was megastores, yes.
Geoff Lowery, Redburn Partners: So you’re not saying that there won’t be a cash inflow from working capital over the next two to three years?
Nicholas Cadbury: I’m not saying that. That’s right. So megastores are basically moving inline with everyone else, so the stock improvements are coming here as well as everywhere else.
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Geoff Lowery, Redburn Partners: And just a third one. You talked about the Nordics margin at 4 to 5% for a high sales density business. Can you remind us what the rent per sales ratio is in the Nordics versus the UK right now?
Nicholas Cadbury: That’s a good question. I don’t think we’ve ever disclosed that.
John Browett: No, I don’t think we do.
Geoff Lowery, Redburn Partners: But it would be more than two points lower, I guess?
Nicholas Cadbury: It is lower.
John Browett: The UK is the most expensive real estate market in the world. So it’s in line with other normal markets.
Nicholas Cadbury: And not just for rent but for rates as well.
Geoff Ruddell, Morgan Stanley: Just to go back to the 500 store target for the medium term. Firstly could you give us some idea of how long it’s likely to take you to get there, and then secondly could you also give us some view of how that would split in terms of how many two in ones, how many megastores, and in particular how many standalone PC Worlds?
John Browett: Well, I thought a good way to express it - it’s three Octobers. Basically it's three Octobers, so we’ll have done 100 by October in terms of that piece. And then if you imagine the portfolio change we’re going to do is three Octobers. So in three peak trading’s time, we’ll be ready pretty much with the portfolio as we want. That’s what we’re pushing for.
Geoff Ruddell,
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Morgan Stanley: And in terms of how it would split, how many standalone PC Worlds you would have at that time?
John Browett: Stand alone PC Worlds …
Nicholas Cadbury: What you’ll end up with is about 100 Currys Digital stores, about 70 megastores, and about 330 super stores, the majority of which will be two in one. I’m going to take a pragmatic view as we go.
John Browett: We haven’t quite decided on this, but it’s maybe only 30 to 50 standalone PC Worlds.
Nicholas Cadbury: And how you get from the 664 down to the 500, you talk about 66 Currys Digital closures over time, you’ve got 40 knock-throughs, and the rest will be closures of either PC World or Currys. So about 58 closures. Looking at this year ideally we’d close about 30 stores, out of town stores. But definitely we’ll be closing 21 and we’ve already got four expiries and we’ve got 17 that we’ve already assigned. So actually that’s just an example of how we’re managing that estate in a very practical way. And the other nine, we’ll take a pragmatic view as we get to them.
Geoff Ruddell, Morgan Stanley: And then just quickly, on sales densities is there a substantial difference between the sales densities at the megastores and the two in one stores?
John Browett: No. The answer is no. We’ve been incredibly fortunate, because the big problem with UK real estate is that you don't get - because in every other place in the world the more space you get, the lower your rent to sales ratio is. That’s the way it goes. And that’s because essentially your rent per square foot goes down. The UK is the only market where it’s flat to going up, and that’s because there’s a massive shortage of big space.
The way in which retail parks work in the UK is that the optimum way to actually make the money out of a retail park is to have 10 to 15,000
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square foot units. That’s how the UK market works. It is absolutely unique in the world on that basis, and therefore that is why people have not tried to do big space. It’s the same for hypermarkets. When I was a strategy director for Tesco, one of the biggest issues - which was would we ever get to the sales density? The very fortunate thing was in that case they did, and we are getting the sales density here as well. So that has been a bit of a stroke of luck.
Bethany, do you want to go next?
Eithne O’Leary: You said in the earlier presentation that the suppliers tended to favour those retailers with bricks and mortar stores and the multi channel side. Is that in terms of intake margin terms, or is it to do with the terms that they’re prepared to give you?
John Browett: It’s everything. It’s every dimension. The way in which you make money out of electricals and computing is actually quite often to have a hot product in stock. So if you’re a manufacturer, why would you give your hot product to a pure online player? You just don’t. Why would you do that? Because the whole point of having a hot product is it enables you to drag people in so they can see the full range of what else you sell. So that’s on the stock part of it.
The second thing is in terms of the way in which you promote and work. So we run the advertising campaigns, the work, the point of sale. Again, you want to work with somebody who has a store environment, because if you’re launching a new product the Internet is almost useless, unless it’s something which has managed to get some hype behind it and then it’s okay. But most things which are launched in the market are not that way.
Then the third thing is that the actual cost of doing business with us is often much lower because of the way in which we can handle intake, the way in which we handle returns, etc. So that becomes a big opportunity, and that’s what you’re seeing generally across the whole of Europe.
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Eithne O’Leary: So the term are back to where they were pre-credit crisis in terms of payment?
Nicholas Cadbury: Yes. We haven’t had any issues on that. We didn’t really have a change in terms as we went through all that either way.
Male: Just a couple of questions. Thinking about the reduction in stores from 664 to 500, I was just wondering if you can clarify how much square footage you think is actually going to come out over that period. And secondly whether the theoretical reduction in rent is actually included in the cost savings that you’ve been outlining?
John Browett: I think Nick can answer both those questions.
Nicholas Cadbury: In terms of the square footage, we’ve got 66 Currys Digital which are coming out, and the average square metres is about 3 to 4,000 square foot. And then you’ve got probably in the range of about 58 out of town, and they’re 17 to 18,000.
Male: And you’ll be adding some mezzanines.
Nicholas Cadbury: And then adding mezzanines on top. So overall actually it’s probably pretty flat.
John Browett: Do you want to quantify what we think the reduction in rent might be? By the way it’s not in the £50 million.
Nicholas Cadbury: So over time we’re going to be able to reduce the rent we’re paying. Excluding rent inflation we’ll get £10 to £20 million saving in the UK on rent.
Male: And just on the CAPEX, I think at the time of the rights issue there was a restriction on the level of transformation CAPEX that you could use?
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Nicholas Cadbury: That was right, but it was a fairly nice restriction. It was allowing you to spend as much as you wanted that was in your plan as fast as you wanted. So you basically had a five year plan and you could spend it all in year one if you wanted to. So it wasn’t really a restriction.
John Browett: The only restriction we had, the only thing which we said to the banks is that we’ll spend it on transformation. We won’t go and do something daft with it like acquisitions, buy a mobile phone company or something like that.
Nicholas Cadbury: It doesn’t restrict us in what we do.
Male: So it doesn’t restrict you going in to next year?
John Browett: No. It’s for five years and they said you can spend that whenever you want in terms of you can spend that all in one year, two years, three years if you want, and that’s so it.
Male: This seems to be a big focus on multi channel. I was just wondering we have never really disclosed the proportion of customers ordering online but actually picking up in store if we exclude Pixmania – has that moved quite materially upwards in the last year?
John Browett: Actually, no. When I gave you the data around the number of 1.4 billion that is home delivered, so that does not include Reserve and Collect in that number. And we haven’t disclosed what is going on with Reserve and Collect but it’s an important part of our business.
Male: What’s the difference in ATV between a Reserve and Collect order and pure order?
John Browett: Again we haven’t ever disclosed any of those things. It is higher naturally because a lot of the things that people collect are things which are small -
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I can just pop down to the shop and get it, and for pure play or for pure delivery or pure play people often favour the stuff which is televisions, etc. stuff which they want delivered anyway, washing machines, etc. It will just naturally by the style of the business be different.
John Baker MSG (?): Just a couple of numbers you have touched on. I wonder if you could give us some help on the average transaction values you will see coming through and secondly just on labour costs in the megastores in terms as a ratio given the push on service?
John Browett: Again we haven’t disclosed any of this and we don’t disclose average transaction values in the business at all so I think that is very difficult for us to start doing that.
I think the thing which gives us real confidence about the transformation and refit programme is that our conversion rates on our average transaction value is what is driving our sales increase. And that is exactly what you want to see from a store refurbishment programme because it means that in addition if you are doing a great job for customers, you can then start to get a foot flow improvement as well.
Now in the very big stores and in two in one you clearly get a foot flow thing that is driving it. But in terms of our core uplifts that is what we are seeing and again when I think we are in the position to start marketing the business or start promoting business that is when we will get the benefits from people actually coming into the store.
Nicholas Cadbury: And on the payroll cost the megastores is the same as the rest of the rest.
John Baker MSG (?): They've got the same …
Nicholas Cadbury: The ratio, yes.
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John Guy, RBS: Just a few questions, please. With regards to old stock, you mentioned that you cleared around 35% away. My understanding is that you have got quite roughly a £100 million worth of Vista related old stock?
John Browett: Wow, who told you that? That’s very naughty because we manage Vista very carefully. We had the cleanest stock in the UK. So somebody has obviously been pushing you for that.
We were absolutely squeaky clean when Vista - Windows 7 was launched. I mean, Jeremy, if you want to comment on that.
It was one of the real advantages that we had over Christmas. We were absolutely hit at Christmas with a new range and in fact what was happening in the rest of the market, the rest of the market was overstocked and they were discounting heavily.
There was a massive overstock of Vista in the market place.
Nicholas Cadbury: I think £100 million may have been a market - was that a number market?
Jeremy Fennell: The market number through in distribution. What we had done was managed ourselves out of stock about three months before the launch, other than about half a dozen lines which kept us going but there was a slump in the market as you would expect before Windows 7 launched.
We had learnt a lot from previous operating system changes that had cost the business quite a lot of money. And as a consequence of having low stocks the biggest advantage that we had was putting people at the point of manufacture and the point of distribution to make sure that we got the majority of stock and all of the stock we had ordered from Windows 7 at the beginning which gave us a very fast, hard start which drove our computing business actually last year.
Nicholas Cadbury: The stock clearance that we showed hasn’t come from computing.
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John Browett: Computing is always run clean in this business, it always has been. You get murdered - if we had that level of computing stock we would have had to put a profit warning out.
All talking together
John Browett: Very straightforward that one.
John Guy, RBS: Must push back on that then.
Nicholas Cadbury: I hope the next question is as easy?
John Guy, RBS: In terms of your component costs just looking at glass and memory and things coming through, could you just make a comment on that - how you see that progressing?
John Browett: Yeah - I mean it is no secret there is a world wide shortage of components and everything else. People were extremely surprised by the strength of the market in the second half. People believed what they read in the newspapers worldwide and so therefore they have been very cautious.
There are price increases coming through but the reality is in this marketplace there is so much going on in terms of other factor costs in terms of improvements and supply chain and everything else that for most of what we sell it is fairly neutral so the most you would see in any one category would be say five per cent movement up, etc.
So, again as I have always said what we are seeing here is not big deflation but we are not seeing huge inflation as well. People talk about it because it is so different from where it was before - so the delta between what they expect and what they are experiencing is different. But it has made very little difference to average transaction prices, etc.
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The only exception to that and this has been slightly helpful to us has been an entry price point so what you have seen in a number of sectors is entry price points have come up so it is pretty much impossible at the moment to buy a laptop for £299, not that you should have ever bought one for that price. But that seems to have pretty much disappeared from the market and now the starting point is probably £329 and maybe even £349 really when you get there, but that is a very small overall thing, part of the market.
Same for TVs we have seen quite big changes at the bottom end of the market.
John Guy, RBS: Just one final question with regards to landlord contributions on new stores - the cost of a megastore is 1 to 1.5 million I think. Is that roughly right?
John Browett: Well, it depends on the size. They could be up to 2.5 million depending. If it is something like this, it could be that level.
John Guy, RBS: Can you comment on how big the landlord plus supplier contribution on that would be?
John Browett: We generally don’t because the problem with all that is that it is a deal isn’t it? So sometimes we take the contribution because the landlord is happy to give the contribution but then there is a quid pro quo on the rent. So in a sense if I give you numbers for any particular deal it depends on what we took for rent.
So for example, a relatively new competitor to the market will be telling you about the great rent deals they have done. We know how much they have spent in order to open the stores. So in fact when you actually work through their numbers they are very expensive stores. So I am always loathe to go down that route and the key thing for us is can we do the best deal? So if somebody wants to give us a lot of cash and we look at the rent and we are happy with the rent, it is not massively out of line, we will
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take the cash. If somebody wants to give us a great rent deal but is not going to give us any cash, we will do that.
So there is a mixture of things that we do depending on the circumstances of the store. This store is a good example of something which was really not wanted by a number of people and therefore we got cash and a great rent deal, but that is a different scenario.
Andy Hughes, UBS: I have got a question on slide 21. I don't know if it would be easy for you to put slide 21 up, unfortunately it's the dreaded small print. Just your definition there the last four words adjusted for transformation improvement - can you just explain that? Because isn’t that what you are trying to work out and you are adjusting for in the definition?
John Browett: The issue here is again as with all of this stuff as I said to you right at the start, originally when we give you all the numbers we gave you a control group where we haven’t done anything to the store. So when we very first started - the first store, we had the base estate, we hadn’t changed the ranges, we hadn’t done the service training, we didn’t have fixed stock availability, you know nor everything else.
In the stores we go through and do all the things because we always said the transformation was not just about reformatting, not about the pretty new store with the clean navigation and the play tables and everything else. We essentially had done everything and therefore we got very big uplifts, etc.
As I said, we would be absolutely daft not to take the learnings from those things and actually put them into the estate. For example in some stores you can even actually put play tables into them because we knew that we would get immediate uplift because it is a large store, large Currys store which had a problem with ranging, and we re-spaced the store, etc.
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So again when I am making comparisons now I have now lost my controlled control group, because I haven’t left everything at the start. So I have now started pushing in all of the changes which I am making in the transformation stores into the base estate. And that includes, navigation, it includes ticketing - I mean we re-ticketed the whole business so now if you go into a store you will see the winning new revenues tickets in every single store we are in. And we knew that gave an uplift to sales and it was a relatively straightforward thing. It was a platform change. We didn’t want to have to make different tickets to different stores, therefore you know.
So when we are now working out what has actually happened to the relative out performance of the new stores, we have got to think about those things.
Andy Hughes, UBS: Can you strip out that gain …?
John Browett: Well how can you? It is really difficult to do and that is why we have said to everybody, we have got to stop giving you the data because at the moment it is very, very difficult for us to actually scientifically say what has been the change in the base estate versus the new stores, etc.?
And now we have got to return back to the like for like performance of the new stores? What is the like for like performance of the base estate? And so therefore we are going to go back to a more normal process for describing how the overall business is performing, because in the end it is about the sales growth and the like for like growth. So we have now got to reconcile back to those numbers rather than anything else we are doing.
Andy Hughes, UBS: If we look at the figures you've given today … ?
Nicholas Cadbury: The 20% is just how - is exactly how we calculate it, we've showed you them before through it's just against the control group.
Andy Hughes, UBS: That's what I was going to say is it the same consistent …
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John Browett: It's the same consistent definition as the first half, yeah.
Andy Hughes, UBS: And compared to the first half you're very happy with the two in ones, but it's where - if there is any deterioration it's - the fault of the Currys superstores?
John Browett: As far as we can tell there has been no deterioration. So whichever way we look at it, it is working absolutely perfectly; the issue is the base is moving. And that is why we had a good Christmas, that is basically why we got to plus 5% like for like in a market which we knew was still negative like for like.
Nicholas Cadbury: And what we are looking at internally at the moment is looking at - what is the absolute? Is the matrix that this business is giving us in this store - is it giving us a three to four payback, yes it still is and that is what we are looking at, so it's the absolute and somehow we are going to have to move to a way to how we can share that.
John Browett: So what we have now got to give you as a group is we have got to say - here’s what the like for like is in the business and here is what has been contributing to like for like, because it is possible for us to now give you our performance in that sense. And it was a very neat trick to start with because it showed the potential but it has now unfortunately run its course, we just can’t use it.
David L-S (?): [No microphone] Actually I ought to confess actually Andy that footnote was supposed to change and that bit was supposed to come out - we were working out how we could give you that but in the end we gave us and just gave you the number …
Andy Hughes, UBS: Yeah I was going to say …
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Nicholas Cadbury (?): [No microphone] ….. And as it's calculated if you did what John had said then that 20% ….. for only 20%.
John Browett: We have really struggled to think about how to explain what is going on in the business without misleading anybody. Because we are trying to be open and honest because we are giving you more data than anybody has ever given around the transformation programme because we know how important it is. But at the same level there is a point where we just can’t use the same numbers - they don’t mean anything anymore.
Adam Cochrane, UBS: In terms of PC World and Currys now increasingly are they run as a very similar sort of supply chain distribution? Is it only a matter of time before you combine the reporting of those two businesses seeing as you are only going to have thirty or forty stand alone PC World stores left?
Nicholas Cadbury: That is a very good question. I think they will be. You talked about how many two in ones we are going to have and we run them as one business. The way we manage it is you have, you don’t have a PC World and a Currys team; we don’t manage it as two different businesses any more, we manage it as one.
Adam Cochrane, UBS: So should we expect to change our models again?
John Browett: I'm sorry, I'm sorry, I'm sorry but we're transforming a business …
Nicholas Cadbury: So we will be …
John Browett: We have got some horrible things going on. For example the way the business works at the moment all the PC Worlds get added in, when we get a two in one store, we actually, just for convenience not because we are trying to manipulate the numbers; we put them into the Currys number, because you have got to choose. You can’t create another category to report on. And Ed Leigh who is the finance director in the UK is like – well, hang on guys, what do you actually want to report here?
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So we have to make choices like that of but of course it makes - it artificially depresses the computing number because they have got nothing going through in terms of refurbishment because it has all been creamed off into the Currys numbers so again that is slightly misleading. So you know we have got to in the end it is the UK business we are running not individual formats and that is why we will have to make some changes over time.
Adam Cochrane, UBS: You said there was an 18% cross shop from PC World to Currys - that is probably slightly lower than I would have expected. Have you looked since we have done some relocation, etc, where that 18% has moved to and also when did the other 82% of people shop?
John Browett: So we have looked at all that stuff and it is quite confusing and it is quite difficult to do and the reality is that it starts to get into some very, very commercially sensitive analysis. Because if you were competitors you would love the answers to all the questions we have gone through. So in a sense we have just drawn a veil over it.
The reason why we gave you the data today was to say the reason why the two in ones are working is that essentially we are selling consumer electronics to PC World customers and we are selling more computing products to Currys customers and we just need to give you one spot of data which will explain why that was a logical thing, not that there was some other problem with the business, etc, and that is why.
Adam Cochrane, UBS: But that 18% would have increase though if you were to do the same analysis?
John Browett: Yeah.
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Tony Shiret, Credit Suisse: Sorry I wasn't here at the beginning so apologies if you've answered this already. But just simplistically you are talking about no change to space in the UK and a 20% uplift …
Nicholas Cadbury: With mezzanines.
Tony Shiret, Credit Suisse: Okay.
John Browett: With mezzanines.
Tony Shiret, Credit Suisse: Okay, so mezzanines might make a small impact on that I presume. So are you really saying same space, 20% sales uplift in the physical estate roughly? And if you are saying that where are you going to take all that share from? I mean what is the change of demographic going to be that you are taking so much extra share in the physical space?
John Browett: The point about all of this is that we believe we are building great stores that work for customers and that has serious consequences for our competitors. And there is nothing more that I can say than that because we know what the results are. We have got enough market intelligence to know the impact we have had on the people where we have opened these stores. So you can imagine what happened when we have opened these stores.
The trade came from somewhere and you know it is not really for me to make an analysis of which competitor is under pressure here. But the reality is the competitors are in a very difficult position on this because there is not much they can do to respond. It has always been our point and that is why we think this is an opportunity for us to actually grow the business in the UK. We don’t need huge amounts of market growth and it is substantially increasing the competitive pressure on the other places you go and shop.
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Tony Shiret, Credit Suisse: How much fade do you expect to see on your 20% this year as you move to the conclusion? Presumably there is not going to be much increase by the time you get to the end of this?
John Browett: Well I think again that has been the good news really through the estate. I mean we did the sampling analysis - so the thing when you are doing this kind of renewal and transformation plan is you start, you do stores which you don’t expect to get the uplift from.
So as I said to you right at the start, when we were doing the trialing and testing we actually picked stores which we didn’t think would give us a particularly strong uplift. And the thing that has been very nice for us is that we have had a very strong result across the whole thing. So I am relatively confident that you know as we said, we can reproduce the 20% across the whole estate and what we need in order to make the numbers is 15%, so if we have got that slightly wrong then it will be okay.
But we have seen nothing that says that we have got a problem group of stores or problem group of markets where we won’t be able to actually make a substantial difference in our competitive position.
Tony Shiret, Credit Suisse: One last question, have you disclosed any cannibalisation effects on your own estate?
John Browett: Yeah I mean it's - we don't again as I said we have been quite consistent about that as well. We haven’t seen anything dramatic. What can we say about that? So the big worry would be the megastores versus PC World, where we have now refurbished both stores we are seeing substantial growth across both stores. So again we haven’t seen anything which is a major problem with any of that.
Tony Shiret, Credit Suisse: Sorry, John I mean at aggregate level what level of cannibalisation are you currently seeing?
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Nicholas Cadbury: Very low. I mean …
John Browett: I mean it is so low it is not even possible for us to calculate. We haven’t got any data which gets us to a number.
Nicholas Cadbury: Basically you see cannibalisation where you have got two – an example is the Halifax, where you have done one and you haven’t done the other. And that is where we are addressing it and that is where you have seen the cannibalisation where it is more efficient then to have the two in one.
Tony Shiret, Credit Suisse: Are you saying at aggregate level it's immaterial?
Nicholas Cadbury: Yes.
John Browett: Yeah, it's not changing our calculations it's not something …
All talking together
Tony Shiret, Credit Suisse: I just wondered what the number was I think to compare it with the analysis?
Nicholas Cadbury: Yeah, very little.
Tony Shiret, Credit Suisse: Okay thanks.
END