Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I'd like to start by understanding how, why, and when you joined AO.

I joined AO in 2010. AO didn't exist when I started, it was DRL Limited. We launched Appliances Online as our own brand instead of working for third-party label sites like Next and Boots. We decided to expand beyond appliances, so we rebranded as AO to start selling TVs and laptops.

You started as an outsourced backend for ecommerce?

We sourced products from manufacturers and set up websites on our platform to take and fulfill orders. Customers thought they were buying from Boots.

It was a website and you were running the backend?

Yes, and to this day, Boots Kitchen Appliances still runs. It's a small operation. We then thought, why are we paying these retailers a large commission? Why don't we build our own? That's when Appliances Online was born, and then AO. I went through all that journey and ended up as the Head of Commercial, then Commercial Director, then E-commerce Director for the group. For the last six years, I was the Managing Director for retail. I looked after everything until it needed to be delivered to a customer. The picking, logistics, and shipping were handled by a different division.

Could you explain how AO is organized internally, particularly in regards to retail logistics?

The organization has evolved over the years. At the top, we have our founder and CEO. The company is then divided into business units. Retail was one such unit, which is what most customers and people are familiar with. Then there's logistics. The retail business pays an intercompany charge to logistics, which operates with its own profit and loss statement. In reality, though, it functions as a cost center.

Why is it structured this way?

It's a legacy arrangement from when we acquired Expert Logistics. We liked the idea of running each unit with its own profit and loss statement, as if it were a separate business.

So, as a customer, I would go to, which has its own P&L. They market online, on Facebook, etc. I buy a fridge from AO, and then logistics takes over. They handle warehousing and charge a fee for delivery.

Yes, that's correct. The logistics unit handles receipt of goods, storage, picking, and delivery to the customer, all at a variable rate.

The logistics unit charges a rate plus a margin for its services?

Yes, although the rate isn't really tied to the market. It's more based on costs. The person in charge of logistics wasn't incentivized based on the unit's P&L performance. We were all incentivized based on the group's performance.

What was the rationale behind that?

The idea was to do what's best for the group as a whole. We were aware of the potential issues with intercompany transactions and didn't want to create incentives for making one's own unit look better at the expense of others. For instance, I would sometimes take a significant hit in my P&L for a promotion, like offering free recycling, because it was the right thing to do for the group. The recycling unit would benefit greatly from such a promotion because they would receive a lot of free fridges.

Recycling is run as a separate division as well?

Yes, recycling is another division.

How many divisions are there in total?

Apart from retail and logistics, we have financial services, which mainly deals with warranties.

And that's separate from retail?

Yes, it's a separate division. Then there's recycling and central services, which includes HR and finance. That's the basic structure of the organization.

How effective do you think the organization's structure is?

We've tried many. It's not bad. There was a B2B division, but that's been collapsed into retail now. That's how it was run. But I must say, there are pros and cons to any business structure.

Your job was to attract customers and get the product in the warehouse.

In effect, I oversaw all marketing and digital aspects, the websites, product range, supplier management, sourcing, and customer services. Essentially, every component of AO, including pricing, was under my purview.

Why is AO's model unique?

It's less unique than it was. In the early days, we had a first-mover advantage. For instance, we were the first to offer next day delivery and had the widest range. Compared to Currys, which was Dixons back then, we had 4,000 products while they only had 500. We charged 4% less on average. We were the first to do next day delivery. We were also the first to launch services for home installation. Our success pre-IPO came from our scale. It's the Jeff Bezos model - availability at a good price, delivered really fast, with excellent service. That's what we offered. We were also very strong digitally, being the first to partner with Google for API integration and the first to put videos live on the website. However, everyone copies you eventually.

Who do you think is the biggest competitive risk today?

Amazon, if they decide to focus on this.

What makes it difficult for Amazon to enter this market?

This is a complicated category. Amazon is really good for items where you know what you want. They have improved a lot, to be fair. AO is the market leader online, while Currys is the overall market leader, mainly due to their stores. I think AO is more at risk from other competitors now.

You mean at risk from online competitors?

Yes, I believe so.

Why is it a difficult category for Amazon?

When we launched on Amazon, which was a two-year debate, we were concerned about moving our business over. However, I can categorically state that an Amazon customer is an Amazon customer and there was no overlap. I was honestly taken aback by this.

How does that work?

We could match the email addresses and postcodes, but they were different. You never know entirely, but it's clear that the Amazon customer generally shops only on Amazon. It's not 100%, but we ran those stats because we were so concerned about it. We were the exclusive partner with Amazon at the start and there was hardly any demand. We were worried that we would sell a lot of products and take away from, and then have to pay Amazon a commission. But the demand was insignificant compared to the scale of AO.

When did you partner with Amazon?

We first partnered with them about four or five years ago.

And there's still AO stock on Amazon now. I thought they pulled that off, didn't they?

We significantly reduced our presence. I ended up having a disagreement with them because they were trying to force us to use their distribution, Amazon Logistics and FBA, which we didn't want to do.

Your original thesis was that Amazon, with its funnel of prime members and being the new Google for e-commerce, would generate great demand. So you partnered with them before anyone else did?

We wanted to handle the category for Amazon across Europe. We believed we could do this well. We had the infrastructure for all the installations and everything. They had the traffic, we had the range and the distribution. So we decided to partner with them.

What do you mean by distribution and installations?

In the UK, we own our own fleet.

But Amazon does too.

They didn't at that time. They couldn't go inside the house. They could only deliver small packages.

What's the difference between your service and Amazon's? You're saying you can go inside the house, but Amazon can only deliver to the doorstep?

Amazon had a policy from Seattle that prohibited entry into the house unless the delivery person had a criminal check. Amazon only ran a one-man fleet, which was a totally different setup. They could only deliver small packages.

But I think they've changed that now because they're starting to deliver furniture as well, like Wayfair.

Five years later, they've really upped their game. They can now do installations in-house. But to answer your original question, remind me. 

You partnered with Amazon and you're saying you connected all your email addresses and their email addresses. How much overlap was there?

Only 1%.

That's incredible.

It's consistent because we were deeply paranoid. I was personally checking this because it's unbelievable.

Is that because, I guess, AO's customers are much older homeowners, like dads and moms buying stuff, and maybe the younger generation is shopping on Amazon?

Honestly, I don't know, but I know what the stats were. We had decided that if it was anything more than 15%, we were pulling out.

Then you ended up pulling out anyway because they wanted to put your product in their warehouses and then ship it. And then you pick it up from FBA warehouse.

Yes. They would only give us a Prime badge if it went in their warehouse. And then they would ship it. They doubled the commission rate from a special discounted rate, which we'd negotiated with them. So we were best friends for a while, and then all of a sudden, they just turned.

Well, because they could only do one-man delivery back then, not two. When you put your product in the warehouse, how would you then pick it up from Amazon?

No, this was later on. They had invested in two-man delivery and wanted us to move our product over. And we were like, no, we're not doing that.

Because then you'd just be an Amazon seller.

No, we're not doing that. So I think AO has a light business on the marketplace, on standard rates now. But one of the biggest risks is Amazon because I've noticed a lot of the suppliers are going direct with Amazon now. We were calling it disintermediation in-house.

How can you deal with that?

You can't. The power is in the brand. You need to make sure you invest and have. So the biggest moat AO has now is its brand.


Its reputation.

But it's not bigger than Amazon’s brand.

It's not, but I guess it is far bigger than Amazon in white goods in the UK.

Yes, but not in Germany or elsewhere it seems?

The market for white goods in Germany was much larger than we anticipated. Amazon, for instance, had a substantial business in white goods in Germany. They had already established a strong presence there.

So, there was no significant e-commerce retailer for white goods then?

For some reason, Amazon was very successful in Germany.

Was there a business similar to AO that started in 2010 and had similar brand equity as AO in UK?

I'm not entirely sure why, but Amazon had a business worth 500 million euros in Germany.

Why did AO decide to enter the German market?

The market was around nine to 10 billion from what I recall. We believed that we were the best in class in e-commerce, so we decided to enter the market. It was a challenging endeavor.

What were the challenges in Germany?

The Germans prefer local brands. For instance, 50% of the product mix was Bosch, whereas in the UK, it was only 10%. Bosch knew this and used it to their advantage in negotiations. We didn't have the same profitable suppliers as we did in the UK. Additionally, we were competing against large German in-store brands like MediaMarkt. We also couldn't sell warranties due to the double opt-in rule, which resulted in a loss of warranty income. The business model we set up in Germany was not as profitable as the one in the UK.

The UK model is based on a low break-even point?

It depends on how you look at it. As you can see in any plc results, the margins are very slim. You could attribute this to the warranties or the service income or the delivery. Either way, it all adds up to very little.

How did you frame it internally?  

The retail P&L was incredibly profitable, as were the warranties. The central overheads, however, were extremely high. This was one of the reasons I left. The overheads were too large, and we weren't addressing it. We were working very hard but wasting money.

Returning to Germany briefly, you mentioned the brands that are lucrative in the UK versus Germany. Why is it different?

Well, Bosch and Miele are the big brands in Germany, but there's no market for them.

They just sell at your breakeven point?

It's terrible. The profit was literally half of what we were getting in the UK.

So, the margin must be around 3%, 4%, 5%?

You end up averaging 25% to 26% in the UK as an average product margin. The product margin for Bosch at the time was 11% to 12% percent.

That's without considering delivery or marketing costs.

You can understand how we were losing a lot of money in the early days.

What was Bosch's market share in Germany versus the UK?

Bosch had about 50% of the market share in Germany, compared to about 10% in the UK.

Who are the biggest brands in the UK? What's their market share?

Beko and Hotpoint are big, but there's no dominating partner like Bosch in the UK. It depends on the year. There are a few big players, each with about 10% market share, but there's no dominating supplier in the UK, which worked to our advantage.

Why couldn't you sell warranties in Germany?

Due to the double opt-in regulation, a customer would have to opt-in twice to be contacted to sell a warranty.

If I buy a fridge on, when do I have to opt-in during the process?

On, you had to opt-in at the checkout, receive an email, and then opt-in again via the email.

What was the opt-in rate?

It was very, very small.

Around 1%?

I can't remember exactly, but it was minimal.

How does the warranty work in the UK?

You offer it on the inbound call and on an outbound call. So, you do a service call saying, just checking in, what room would you like it in? We also have this warranty product if you'd like some coverage with it.

What's the target attach rate for the warranty?

In the UK, it's around 15%.

For a new product, doesn't it come with a manufacturer's warranty?

Yes, it does. The manufacturer's warranty usually lasts for a year. However, we offer a service plan that acts as an insurance. It costs a few pounds a month. If you're spending £1,000 on a couple of appliances, it's a worthwhile investment. Interestingly, it's the less affluent demographic that tends to opt for this, while wealthier customers tend to disregard it, preferring to simply buy a new appliance if the current one breaks.

I assume these appliances should last around 10 to 15 years, like a washing machine or fridge. So, this service plan is essentially an insurance for domestic appliances, correct?

Yes, that's correct. They are the insurance provider.

And the cost is around £20 to £30 a year, or £40 a year for coverage, depending on the value of the appliance. Could you tell me the typical price and plan length for the warranty?

I'm afraid I can't provide specifics as that wasn't my division. The balance sheet for that division is quite complex. However, I do know that we allocated about £100 per warranty to the P&L, and the cash was phased over the years. The retail P&L sold the lead to the warranty division. I earned 4% on every sale, regardless of whether a warranty was sold or not. That's how I incorporated warranty income into my P&L.

You get 4% of every sale, which is tied to the warranty.

If the revenue for the day was £100, then I would get £4 of revenue, regardless of whether a warranty was sold or not. The warranty division then had to ensure they sold enough to cover that.

How can this warranty rate reach 20% or 25%?

Price is a key factor. If it's cheaper, more people will opt for it. They were very good at it and had the pitch down to an absolute tee. It took a long time to reach 15%. You might be able to increase it by another percent or two, but reaching 25% would require a significantly better value or cheaper price.

Let's return to the competitive landscape. You mentioned that AO used to have many first-mover advantages, but Amazon has caught up. In what areas have they caught up? You mentioned delivery and suppliers going direct.

Amazon has caught up because they now have a wider range of direct suppliers. They are offering services, prime delivery, and warranties.

It sounds similar to AO.

Broadly, yes. You can't communicate with anyone at Amazon. It probably won't have the range of AO.

Why not?

Because it won't have every single supplier, like Bosch for example. These suppliers are run by old school management and generally despise Amazon. Keep in mind that my information is a few years out of date.

Looking forward, say five to 10 years, what's the end game with these suppliers? Why won’t they go on Amazon?

They only want to sell their products. They don't generally care that much. They seem to have a problem with Amazon. AO had an advantage because we had very good supply relationships, unlike Currys who were the market leader and took advantage of them. We ended up getting a lot of support and favors. It's not really a customer-facing advantage, it's more a business advantage.

Interesting. I don't know if you can see my screen.


I typed in "Bosch fridge" in Amazon. AO's marketing is at the top. They must have Bosch fridges on Amazon.

Bosch will allow it to sell, but I imagine Bosch wouldn't be doing it directly.

Doesn't seem like it.

It's interesting. There's the Prime badge now. Who's that Amazon Choice? That can't be AO.

So, this is just a distributor I imagine?

I've never heard of them before.

How unique is the range then for AO if there are Bosch items on Amazon with Prime badges from third-party sellers?

It's not unique. We were starting to get a few exclusives, but they were loose like a Beko white washing machine. Currys versus ours. There's hardly anything in it. It was just a different model number and the pricing. Pricing is not unique but the model is. Everyone's quite respectful of the price now it all settled down because we were chasing each other down and now obviously we don't discuss it but literally everyone just matches everyone. So no, people don't generally undercut anymore. People might do promotions of codes on top of that but from a price point of view price is not a differentiator. It was in the early days.

But if you're going to Bosch and Currys is going to Bosch, who gets a better price on their range?


And so how do they price it in their store versus AO?

The store price and the website price will be the same for Currys.

How does that compare to AO?

Our approach was to match the cheapest price in the market with a 95% aggression level. We were willing to accept that 5% of our range might not be competitive, but 95% had to be the cheapest in the market.

By how much?

We aim to match whoever is the cheapest.

Not necessarily the cheapest?

Correct, not the cheapest, but matching the lowest price.

Why can't Currys, with its scale benefits from buying more products cheaper than you, be the cheapest?

They have 500 stores to fund. They can make more margin because they can put the store in the storefront and they have a larger scale. But they also have a lot of store estate they need to fund.

Which model do you think is more effective?

I believe in Currys' model. People will always want to go into a shop and feel the products. By being online-only, you're cutting off half the market. That's why we started going into stores. I really wanted to implement a store model because we're not reaching half of the potential market.

I saw that you tried a store-in-store model in Tesco. What was the idea behind that? How did that go?

That worked fine. But John didn't like it, so we stopped it. We had an opportunity to partner with hundreds of Tesco stores and it was going quite well. But John wanted to simplify the whole thing, which I understand.

Would John ever consider opening stores, do you think?

No, he's very focused on online, which I understand. The future is online. Over the next 20 years, online will only get bigger. But the omnichannel piece is important because at least 50% of the market still shops in store. In this category, you want to feel a range cooker and a fridge. An image on a website does not suffice when you're spending £2,000 pounds on something.

How important is the delivery? Even if you go into the shop, how many customers are putting the fridge in their car versus it getting delivered anyway?

Many people do research in the store then go and shop online.

People go to Currys and then order it on or just order it in the store and get it shipped to them.

Yes, we used to do advertising. We would map all Currys store IP addresses and then serve different ad creative when people were doing that.

This is a broader question about e-commerce, specifically pure online versus omnichannel stores. For instance, Wayfair, an online furniture store, is starting to build mini department stores. What's your strategic view on the winning model in the next 10 years? AO is pure online, as is Amazon, while Currys is omnichannel.

I generally believe in partnerships within existing stores. The goal is to reach the widest audience, and in this category, a physical presence is necessary. That's why I appreciate the Tesco partnership. They are the market leader with unused space. We can build a cost-effective store and share the profits. It's a no-brainer, as it leads to incremental sales. On the other hand, managing an entire estate, like Currys' 500 store estate, is not optimal for today's market.

But you'd have 50 stores?

Yes, I'd have 50.

So why can't you build 50?

Why not partner in some pods or something similar? Like local car parks, for instance. It's also great for brand building because it instills customer trust. If a customer hasn't used AO before and they see something physical, it immediately builds trust.

Couldn't Tesco or other large brick-and-mortar retailers try to buy AO?

They might. I'm not sure what their plan would be. At one point, I thought Amazon would try to buy AO, but I think they've invested the money themselves now.

But what would they be buying exactly? The customer list?

In the early days, they would have bought the two-man infrastructure and all the supply relationships.

Returning to the point on Amazon, what was unique about AO 10 years ago versus Amazon that is not unique now? And what is unique now?

10 years ago, AO was unique for several reasons. We were the cheapest, quickest, and had the largest range. We've just celebrated the 10-year anniversary of our service launch, which includes installations. It's a fantastic service.

Yes, I agree.

Having your gas cooker installed in your built-in kitchen is a great service.


So, it's the functional aspects, but they're not unique. Anyone can copy them. Most electricals came out of nowhere and now offer the same services.

Exactly. So what is actually unique about AO?

Nothing. John often praises the service, particularly the reviews and customer interaction, as superior. However, if you delve deeper into companies like John Lewis and Currys, their service isn't as good. They still offer it, but it's not as good. The repeat business was always a significant advantage, but it's not anymore. From a customer perspective, all the products and prices are the same. Therefore, the differentiator becomes the brand. It's about the emotional connection and where I want to make my purchase. It's now a brand game.

What makes AO's service superior?

We pay great attention to detail in our SLAs. For instance, we aim to answer the phone within 20 seconds, and if a product is broken, we replace it. We have agreements with suppliers for free returns. We were meticulous about measuring our delivery time. We used to call it "deliver to promise". We would ensure that we fulfilled all our promises to the customer. I remember when we first scored it, it was in the low seventies, even though most of the parts were in the nineties.

We then created the DTP plan to achieve best-in-class service. However, you can't really advertise that to a customer. They only care about the service after the fact if they have a bad experience.

People often praise Amazon for their incredible service. The delivery is usually the next day. White goods are different, of course. I've never ordered any white goods. But how unique can installation be in the long run?

None of the functional things. The latest development is membership. That's the latest proposition change, which I never agreed with. So, John and I ended up parting ways on strategy. I wanted to focus on the brand. I believed that was the way to win because our brand is here and Currys is there. Currys can't go any higher. We can just eat into it.

So, you wanted to invest in your brand. Top of the line. But I've never heard of anyone having an AO membership. How did that come about?

It's flawed, in my opinion. John loves it and he talks about all the stats. I don't know the stats because it was launched after I left. I don't know all the stats. John tells me they are great when I see him. But they can't be because the revenue hasn't grown.

That's what I was thinking. I couldn't figure out how. It can't be that big because not many people have it. Otherwise they would explicitly share membership numbers.  

The commission revenue hasn't changed, so it'll be self-fulfilling. The use of videos has doubled the conversion rate compared to those who don't watch videos. This is because they are more engaged shoppers who do more research, hence, they are more likely to make a purchase, not because there is a video.

He essentially eliminated the free delivery proposition and made the delivery quite expensive. Therefore, it's a no-brainer for a customer to opt for the membership because it offers better value to take the membership then and there.

You're essentially moving it from one pocket to the other, right?

Yes, and those who don't want the membership pay the high delivery fee. So, the short-term profit will be good, but the repeat purchase isn't long enough. If you're buying items every week, the Prime model is great. If you're buying something once a year on average, as a customer, you were buying something, then it's not so good.

Is that really true though? People buy products once a year?

As a global statistic for AO, the average repeat rate was once a year. But you could have a tumble dryer, washing machine, or a dishwasher. Obviously, there are people who bought really regularly and some who'd only ever bought once in their lifetime.

But what are they buying regularly? Those items last years. 

Maybe B2B stuff.

But that's different. B2B is a different business, right?

I assume it's still email addresses, so you can't really segment it.

But what percentage of the members do you think would be B2B?

Probably a high amount because you don't pay for B2B. But it was free delivery. He just overinflated it and then he's doing member discount pricing on certain things. The theory behind it, it's all nice, but the repeat, a customer doesn't value it because you don't go to AO to shop regularly.

Yes, I didn't quite understand it. So before they had free delivery, they just rolled the delivery price into the retail price, right?

No, the whole market is free delivery. You charge for next day delivery and standard delivery is free.

So there was no charge previously prior to the membership. And then the big question around membership was, okay, how can we close the gap between us and Currys but also probably try and have some subscription revenue or something. And then you start charging for the delivery now.

Indeed, that would have significantly reduced sales. Companies like Appliances Direct and Marks Electrical, although I haven't checked recently, might have started charging standard delivery. I know Currys followed AO, but smaller players have a significant advantage because, in effect, they'll be £20 or so cheaper on delivery.

On a non-member delivery price.

Yes, it's definitely more expensive now than it used to be.

For instance, when I look at this washing machine on AO, there's a significant difference between an AO member price and a non-member price.

Indeed, there is. If you search for that washing machine on Google, let's see what the market price is.

Currys is 339 versus what? 300 from Hotpoint directly. Is that from Hotpoint?

It's interesting with that example. They probably got a bulk deal from Hotpoint.

Yes, that's likely the case. The difference isn't that big for this one, for example, then Bosch, it's a £15 difference.

Yes, in that case.

It seems they're trying to convert as many customers to buy a membership as possible.

Because John believes that it's going to change the world. I just don't believe it will because people are buying the membership because it's good value at the moment.

So, it's a £40 a year recurring subscription? The idea is that once you subscribe, you'll always come back to AO when you want to buy something else.

Yes, because you've paid £40, you'd come to us rather than going elsewhere because you've already paid for the membership. That's the theory. In reality, I don't have any statistics to back this up. This is all just my theory. 

What's your theory then on what drives customer behavior?

It's simple. Every single piece of customer insight we ever gathered was about price, range, and delivery. That's it. Services weren't even a significant factor, honestly.

So when you say services, you mean installation?

Yes, exactly.

It wasn't important because the customer didn't think about it or because they didn't value it?

In terms of what's important to a customer, price and delivery are the two biggest factors by far. The rest are nice to have. But the initial headline ones, what gets you in there in the first place?

But then they realize, oh, I need to install it now, which I obviously need.

I'm willing to pay you that £60 for that service because I need it, even though it wasn't a factor initially.

To clarify, your strategy was to keep the price simple with standard delivery, free next-day delivery to repay, and then spend all the pounds on above-the-line brand marketing?

Yes, I referred to it as brilliant basics. The idea is to ensure your brilliant basics are always top-notch, even though they're not differentiators, they're hygiene factors. You need to make sure your machine is working really well, then you market it aggressively. If your machine is working well and you have a good product, you can promote it. So, embrace digital marketing and maximize your position on every platform, including Google. The next step is getting your brand known to the UK public.

But isn't that strategy risky? You're effectively competing against Amazon's brand, which could be challenging.

That would only be the case if Amazon starts running white goods campaigns. The goal was to make AO the first choice for about 9% of the UK population when asked where they would buy their washing machine from. I was interested in being the first destination, not just creating awareness or consideration. I wanted to know where they were going first. Awareness and consideration are just the beginning. I wanted to know where they were buying from, that's what we needed to drive.

That seems like a high percentage.

Yes, it was high. We were the market leader online, so it's expected to be high. However, Currys had triple that percentage. If you want to become the market leader, you need to become the destination where people go first, instead of driving down to the retail park.

But as you mentioned, Currys’ 500 stores also serve as marketing material, right? They use their stores for marketing. Do you think you could push your percentage up to 30%, equal to Currys, even without physical stores?

I believe it's possible.

What about the other online retailers that are either emerging to sell online electricals or, like you mentioned, we've just seen someone on Amazon. How do you see these smaller players competing?

I think they'll gradually gain ground based on price, just like we did. They'll continue to chip away, but it's a very stable market. The market size is roughly the same every year and there's not much movement. It's very consistent. There's never going to be a revolutionary change unless someone comes up with a brilliant proposition, which I can't possibly think of, having spent many years trying to come up with one. So, I believe the key to success is a winning brand.

What more could AO do to enhance its brand?

Increase brand activity?

What are they currently doing?

They're doing a bit of advertising, like the AO Arena, and some sports sponsorships.

I noticed they spent around £36 million pounds on advertising, which is about 3% to 4% of their revenue. I assume there are a lot of volume discounts and marketing co-market.

No, it can't be anywhere near that high on brand. That figure must include all of their Google advertising.

That's the total advertising budget? I thought it would have been more than that.

You need to maintain within your margins within 3% to 4% of turnover, otherwise, you'll start losing money. There's only a certain amount you can spend per year on brand because it doesn't pay back within the year. So, you can probably only spend around £10 to £15 million a year on brand.

Because this doesn't provide an immediate return on investment, correct?


What about digital advertising? What were the acquisition costs and payback?

That was fine. We managed it by channel and got it down to a tee. It was probably around 2.5% to 3%.

Of the average first order price? How much did you aim to acquire a customer for, compared to the average order value?


Did you consider the lifetime value of a customer or did you focus on single purchases?

I wanted to invest more because of the potential for repeat business, but cash flow restrictions meant we had to make money in the moment, especially with the public company dynamic.

You're saying that you basically work on a one-year payback where you acquire customers and they place orders?

Yes, because as a public company, you have to report by quarter or half-year. In a way, it would be better if we were a private company. I would have spent five years building the brand, and then in five years, we would have built such a scale that we would have won in the long term. But that's not how it works. You have to report and deliver every quarter or half-year.

But what's the difference in customer acquisition cost for a repeat order versus a new customer order?

Repeat people generally comes directly.

Taking a step back, they're clearly showing a high repeat customer rate, not orders, but customers. They mentioned it's 58%, which seems fairly high. So, how much does it cost to acquire these repeat customers? 

What does the 58% refer to? Customers?

Yes, customers.

It's almost impossible to tell because some repeat customers will come directly, while others will still shop around. Google doesn't provide very accurate data these days due to all the cookie restrictions. You can't really tell with 100% certainty.

I suppose you could tell if you were delivering to the same address or if they had the same email.

You can't be sure because you don't know how they came to the site with 100% certainty. Did they click on six Google Ads before that, for example, if they were looking for a washing machine?

Understood. But one could argue that the membership is increasing the rate of repeat customers.

Yes, in theory, that should be the case. The idea is that customers come directly to us, eliminating the need for digital advertising costs. This should save a significant percentage per order. However, every customer is different.

I still believe customers will extensively research expensive products, especially when they're outfitting an entire kitchen. They won't necessarily come directly to AO, although many do. AO has a high level of direct traffic, which is excellent and has increased over time. This is evident when we run TV ads. However, there are still other channels. It's impossible to accurately determine who is a repeat customer and who clicked on a Google Ad. Some of these people might not even make a purchase, but we still incur advertising costs.

How do you optimize the advertising budget if you can't distinguish between direct and indirect customers?

We don't look at it on a customer level, but rather on a campaign level. For example, with a washing machine campaign, we look at how much we've spent and how much revenue we've generated. We can track orders, but not individual customers. We don't have their email addresses.

We know that a customer clicked on an ad 7,000 times this week. We don't know who they are, but we know that it generated £50,000 worth of washing machine sales. From that perspective, it doesn't matter whether they're repeat customers or not. Our goal is to get as many orders as possible.

But in the long run, you have to care about repeat customers, right?

That's why we focus on building the brand. We want to encourage people to come directly to us. However, we also need to win the Google auctions, as there will always be demand there.

Which channel generated the highest volume of orders or was the most effective? Google, Facebook, and Instagram?

Direct was our most significant channels over time. Ideally, we would want to be 100% direct, but that's not realistic. So, we manage our spending in two different ways. There's no right or wrong way, but I set a brand budget, which I manage on a pound basis. This budget is measured on awareness metrics. For instance, I might decide to spend a hypothetical £10 million a year on brand spread over several months. The performance budget, on the other hand, is a percentage. It's an unlimited pound budget as long as it stays within the percentage of sale. The goal is to spend as much as possible.

Let's say you spend £100 today. How do you measure a certain payback?  

We measure it over the week, like with Google. We manage it on a weekly basis.

So, it's a weekly cycle?

The beauty of online is that it's so reactive. People often talk about long buying cycles, but that's not the case. If you change something, the effect is immediate.

What does that suggest about the purchasing journey then? If it's instant, how long is the research phase?

97% of the people on your site are not buying.


I was always amazed at how a promotion could consistently uplift sales. As soon as you put a promotion on, sales increase instantly. Clearly, people are in the buying cycles. When the sale ends, there's usually a struggle for a couple of days. It seems like we just moved a lot of the business forward. We had to figure out the right frequency of promotions. I remember when we first launched discount codes, it was amazing. But you can't have an offer on every day.

You can't do it forever.

Exactly. I remember when we stopped, we had a couple of bad days. When we averaged it all out, it seemed like we just moved a lot of volume around.

You probably put more stress on operations and logistics.

Absolutely. The impact on operations is significant.

What is the biggest challenge in driving new customer sales?

I believe the biggest challenge is that people already have brand loyalties. For instance, I shop at Ocado online and it would take a lot to convince me to shop elsewhere because I love it. The same applies to this industry. Some people have a strong brand affinity and others don't care and will shop around. Digital marketing aims to capture as many of these people as possible. We had a lot of success in the early days because we were better at it than everyone else. However, many people are loyal to brands. The biggest challenge is persuading them to switch to another brand when the propositions are essentially the same.

Apart from the brand, which is expensive and has a long-term payoff, what else can AO do to differentiate themselves?

I believe AO can differentiate themselves by improving their services. For instance, they could offer 0% interest on all their goods.

What is the current interest rate?

The standard interest rate is 24.9%.

They use NewDay for that, don't they?

Yes, they do use NewDay.

Why don't they handle that themselves, like with the warranty services? I understand it requires more capital, but they're essentially acting as an agent for these services, right? They just earn a lead generation fee for financing warranties.

NewDay is a bespoke partnership. It's a profit-sharing joint P&L.

And the warranty is more lead generation?

Yes, warranties are lead generation and finance is profit-sharing.

Could they not integrate more with the warranty side then?

The warranty side is very specialized. The partnership with D&G was beneficial. However, selling your own warranty business isn't where you're going to win or lose the battle. They had all the infrastructure and engineers.

We considered doing our own repairs, but decided against it.

I understand that tightening up everything and offering 0% finance is a strategy. However, someone will have to bear the cost of that, correct?

Yes, you might have to absorb that cost in your brand. We've tried many different strategies. I believe in the concept of marginal gains, like in 100-meter races or Formula One, where the winner only wins by a fraction of a second. The aim is to be slightly better than everyone else in all aspects, including price and service. There isn't one unique differentiator. John has tried to differentiate with membership, but I'm not sure that's the right approach, although time may prove me wrong.

Could you elaborate on why you think the membership approach might not be the right one?

John's approach offers great value for the customer and exclusive benefits like free next-day delivery and discounts on future products. However, as a consumer of white goods, I've noticed that AO's products are more expensive. The products aren't differentiated, so I don't see the added value. I believe that if AO had its own branded range, that would be an interesting proposition.

Why hasn't AO developed its own branded range?

We considered it, but it would require a significant investment. However, I still believe that if we could offer a high-value range, it would be worthwhile. There are regulatory challenges in producing your own products, but you could label someone else's products. You need to improve in all areas, such as content, web journey, and marketing. I believe our marketing could be significantly improved. We currently don't have a dedicated marketing director.

Who handles the marketing?

A lady named Vicky, who is the acting marketing director. However, she comes from an operations background. When I left, the marketing director also left shortly after.

Why didn't they replace the marketing director?

They appreciate Vicky's work. She's highly competent, but she doesn't have a background in marketing. It's unusual, she wouldn't get a marketing director role in any other large-scale business. It's because she's been with the company for 14 years.

What other strategies could AO adopt? You mentioned a private label range, brand marketing, and financing options.

They could expand into more categories. They haven't fully explored many potential categories.

Which categories are you referring to?

The potential for growth is quite vast when you consider it. Currently, our significant market share is only in whiteboards and a bit in TVs. Mobile phones, for instance, are still a small part of our business.

Why is the mobile phone business unique?

It might not be unique, but it's a potential area for growth.

What about furniture or sofas? Items that require manned delivery?

That's a possibility. I've always considered that we could expand into anything for the home. We could venture into gym equipment and similar items. Our brand doesn't have to be synonymous with just white goods or electronics. We could position ourselves as a marketplace for a variety of items, much like other brands are doing. We could even venture into physical stores. The potential is massive, but if we continue to focus solely on online white goods, our returns will be minimal and require a lot of work. One of the reasons I left was because I felt I had taken the company as far as I could without significant changes. I was excited about the prospect of stores, but then John decided against it. That could have opened up another couple hundred million in business for us.

Why haven't you ventured into furniture or other large, bulky products?

He has chosen to stay focused. I understand the decision, as we previously tried to do a bit of everything and lost focus. I agree with John's decision, although I'm not a fan of membership.

Could there be an argument for running this business for cash flow and not expanding into different categories? The market doesn't change too much. Currys is a big player, and Amazon is encroaching. Does John want to expand into different categories?

Not particularly, in my opinion. He turned 50 last year and may want to retire soon.

Didn't he recently leave and then return?

Not exactly. He claimed to have retired, but he was still attending board meetings. He took a lot of holidays and stepped down, allowing Steve to step in as CEO, but he was still involved.

So he could step away from it again.

Yes, he essentially took a few years off after the company went public. Steve, who was a poor CEO but an excellent COO, stepped in. It was the right decision for Steve to leave and for John to return, to be fair.

What is the biggest risk to this business? In five or six years, if this business's revenue has shrunk to 800 or 900 million, what would be the cause?

I believe it would be due to external factors. We haven't yet experienced a full downturn in spending, particularly in mortgages and housing. That's a significant risk and would be quite alarming. Additionally, competitors could erode our profits by undercutting our prices, which is a common market strategy.

How has the growth of online competitors evolved over the last five years?

The growth was steady, increasing by one or two percentage points per year. However, the Covid-19 pandemic drastically accelerated this trend and it went up to about 90. Before the pandemic, online sales accounted for about 45% of the sector, but this figure increased to 55% post-Covid. I don't foresee it exceeding 60%.

Apart from Amazon, who are the major online competitors in the white goods sector, and do they offer appliances?

Appliances Direct and Marks Electricals are two significant pure-play competitors. Also, John Lewis, Argos, and Currys have online platforms.

Do these smaller online competitors, including Amazon, offer two-man delivery?

Yes, they do.

Do they outsource this service or handle it in-house?

I believe Marks Electricals handles it in-house, while Appliances Direct outsources it. I often see Marks Electricals' vans, but not those of Appliance Direct.

Is there a significant difference in the delivery experience provided by these smaller competitors?

It's hard to say as it depends on the company and how well they manage their service levels. Generally, in-house delivery allows for better control over drivers and service levels. If you outsource, you're mainly dealing with an account manager rather than the drivers themselves.

Lastly, as an investor or shareholder, what would concern you?

I believe AO will do well, although it may not be exciting. John is a smart leader with many ideas. While not all of them succeed, he usually has one that does exceptionally well. I would back John any day. The major risk is Amazon increasing their market share. Additionally, if the economy and housing market slow down, the market could shrink significantly due to everyone's high overheads. If a major player like Argos or Currys were to exit the market, it would have a significant impact. I recall when Comet went bust, our sales increased by 20% overnight.