AO World, a Future in Europe

Hugh Schofield

Founded in 2000 due to a £1 bet between the present CEO, John Roberts and one of this good friends, online retailer of white goods, AO World has become one of the most influential players in the UK and a rising star in Europe. However, like all companies with business links with the UK, the vote to leave the EU has had many ramifications on their business plans and strategies. The terms of any future trade agreements between the UK and the EU remain uncertain. Businesses with an exposure to both the EU and the UK are the most at risk should the parties fail to agree on a favourable trade deal. Expansion into Europe now seems like a riskier bet than ever.

To understand how AO World may react to changes in the macroeconomic environment, we must first consider its past. After going public in 2014 at 72 times its projected earnings, its share price rose from 285p per share to 412p on optimism about the company’s prospects. The share price then decreased, as worse-than-expected results of an operating loss of £8.9 million were disclosed in mid-2015. This was due to an aggressive investment strategy in EU countries like Germany. This involved large amounts of capital in order to develop the infrastructure necessary for an national online retailer like AO World to have its own delivery service. CEO John Roberts famously claimed in June 2016 that “In Germany right now, we can deliver a washing machine faster than Deutsche Post can deliver a letter”. This shows that AO World will seek growth almost at any cost. The implications of this could be that Mr. Roberts could seek continued expansion even if the macroeconomic environment does not present ideal trading conditions.

AO World will be hit hard by the depreciation of the pound which will increase costs of expanding in Europe. The value in GBP of a €5 million investment in the EU has now increased from about £3.82 million to a £4.20 million investment. The sensible thing to do would perhaps be to scale back its European ambitions. But given AO World’s past record, this seems unlikely to happen. Raising capital from investors to fund further expansion, promising greater profits in future buttressed by the pound’s weakness is an option. So is diverting capital set aside to fund investments in the UK. This has the added benefit of not raising the debt of the company which already stands at £8 million for 2016. Having slightly gained market share in March of 2016 in the UK, there is an argument for reducing further domestic investment in favour of expansion into less saturated markets. This however comes with the potential pitfall of allowing UK rivals the chance to catch up making it harder to continue to grow in the future.

There are also the potential barriers to trade such as tariffs which could come into force after the UK leaves the EU. This is because many within the UK are demanding a hard Brexit whilst many in the rest of the EU view Brexit as a threat to the project and will attempt to make the negotiations as painful as possible. This implies that there exists a potential situation where UK based companies selling into the EU face increased costs due to not being a member of the single market. Increased cost would cause AO World to become less competitive compared to other companies on the continent resulting in a potential loss of market share. After remarks made by John Roberts stating that Europe is vital for future growth, it would be a huge blow for AO World especially due to the large amounts of capital invested in Europe. It therefore might make sense for AO World to simply invest in a new market that wouldn’t be affected by the EU-UK negotiations. However, with so many unknowns before the final deal and the UK government potentially having to get a bill pass through parliament making a ‘soft’ Brexit more likely, continued investment in the EU may still be the best course of action.

Based on the hardened rhetoric emanating from both EU leaders and Whitehall at the moment, regarding Brexit negotiations, a trade war seems increasingly likely. Analysts have mooted the prospect of the EU imposing regulations necessitating UK-based companies to relocate a certain percentage of their workforce to the EU to continue their operations there. This would likely invite tit-for-tat regulations from Britain, and prove to be a headache for businesses. But the EU may yet be dissuaded from adopting a hardened stance given that it stands to lose much by severing its links with the UK which has been an engine of growth even in a tough economic environment compared to the EU which is weighed down by the woes of the Italian and German banking sector, and will henceforth have to forego considerable contributions into the EU budget from the UK.

Overall, the outlook for AO World looks bright at this current time. Having been able to grab a sizable share of the UK white goods market and now quickly expanding into Europe, they have managed outperform and beat most if not all of their rivals. Changes to the trading relationships between the UK and the rest of the world will come with their own challenges but also their own opportunities. Even if trading relations between the UK and Europe sour, free trade deals could be secured between the UK and other countries. With AO World’s recent experience of expanding into new territories, it is very likely they would be successfully in any new markets that open themselves up.

 

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