A Carphone Warehouse store is pictured in central London, on May 15, 2014. British electrical goods retailer Dixons and mobile phone group Carphone Warehouse agreed on Thursday to merge, creating a European leader in consumer electricals, mobile phones and connectivity. The new group, Dixons Carphone, will have a combined stock market value of about ?3.7 billion ($6.2 billion, 4.5 billion euros) and revenues in excess of ?12 billion.  AFP PHOTO / BEN STANSALL        (Photo credit should read BEN STANSALL/AFP/Getty Images)
© AFP

After one profit warning, three boardroom exits and a 40 per cent share price fall in the past year, Dixons Carphone looks as much in need of an upgrade as a customer with an iPhone 4.

The man called in to deliver that upgrade is Alex Baldock, who this month stepped into the chief executive’s office vacated by Sebastian James.

“He took a business that was really struggling and has grown its sales and profits remarkably”, Mr James said of his successor’s record at Shop Direct, the online retailer from which Mr Baldock was poached (and no doubt a hope of what he might accomplish at Dixons Carphone).

Mr James announced in January he was leaving to head pharmacy chain Boots, less than a fortnight after finance director Humphrey Singer said he was quitting for retailer Marks and Spencer.

Then, last week, Katie Bickerstaffe, head of UK and Ireland — Dixons Carphone’s biggest business — said she would take her first chief executive role at the energy supply business being launched by SSE and Innogy.

Andrew Harrison, former deputy chief executive, remains as Carphone chairman but has stepped down from the board.

All three leavers were from the Dixons electronics side of the defensive 2014 merger with Carphone Warehouse, the mobile phone retailer Sir Charles Dunstone founded almost 30 years ago.

Sir Charles, now head of TalkTalk, the broadband operator spun out of Carphone Warehouse, no longer has an official role but holds 10 per cent of the shares.

The departures follow last August’s profit warning — caused by problems in mobile that underlay the 60 per cent fall in pre-tax profits in the first half of 2017. Until then, the business appeared to be performing well and even sceptics of the merger seemed to be won over.

The electrical side is still robust: Dixons — which includes Currys PC World — is the UK’s biggest electrical chain with more than a third of the market and in December reported a 6 per cent increase in like-for-like sales in the first half of 2017.

But as Mr James acknowledged in January: “the performance of the mobile division needs addressing”.

Customers are holding on to their old smartphones for longer, partly because additional features on new models are too incremental to justify sharply higher prices, to which the pound’s weakness has contributed.

Moreover, they are increasingly opting to buy a handset or SIM card rather than a bundled package of the two. But bundles are more profitable for Dixons Carphone, accounting for 80 per cent of the mobile unit’s profits, according to Investec.

Simon Bowler, analyst at Exane BNP Paribas, who predicted the hit to profits before August’s warning, said in a note about changes in consumer behaviour: “The extent to which these are cyclical or structural is now a key part of the investment debate.”

Arguably, the leadership team should have been better prepared in anticipating these changes and the hit to revenues from the EU’s decision to scrap roaming charges — a rip-off for users but good for mobile companies.

But, having succeeded in integrating the businesses and with Dixons doing well, the company “needed a different set of people”, according to one former executive, who added that “those leaving do not have their tails between their legs”. A share incentive scheme also failed to pay out, further weakening the inducement to remain.

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Samuel Johar of Buchanan Harvey, a board advisory firm, said: “Seb James is rightly considered to have done a good job after six years and it was probably time for a change both for Dixons and for Seb.”

Mr Baldock — described by one former executive as “bright, switched on, sleeves rolled up” — is credited at Shop Direct with taking an extremely unpromising catalogue business, Littlewoods, and adding tremendous value by transforming it into a strong online business alongside Very.co.uk.

“The key question remains as to what the future Carphone Warehouse model looks like and how profitable this can be,” said analysts at Liberum.

Dixons Carphone still sells one in every four handsets in the UK but its business model has two main drawbacks: it ties up a lot of expensive capital and, if bundles are in structural decline, hopes of a rebound would be ill-founded.

Mr Baldock’s experience as former managing director of Lombard, Royal Bank of Scotland’s asset finance arm, should come in handy with the first problem.

At the moment, a customer buying a phone under a bundle pays a small upfront amount and then a monthly fee over a number of years. Though the networks also pay Dixons Carphone some money and a share of future revenue, most of the phone’s financing comes from the retailer — at a higher cost of capital than that of a bank.

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Some £1bn is tied up this way on the balance sheet and Mr Baldock’s job will be to unlock it, probably by persuading financial institutions to take on these costs.

If customers persist in buying data-only deals, and sourcing handsets separately from cheaper online providers, Dixons Carphone will need to find ways to sell them more services.

Its big advantage over rivals such as EE, Vodafone and O2, which sell their own networks, is that it offers a range of phones and networks.

Mr Baldock launched a successful loyalty scheme at Shop Direct and could use Dixons Carphone’s delivery and service operations to tie in customers.

It could also move to a model where customers can use it to switch broadband or energy supplier. Dixons Carphone bought comparison platform Simplifydigital in 2016, bolstering its presence in this area.

Its shares have partially recovered from November’s low but are some 40 per cent lower than May’s high of £3.42.

However, Mr Bowler cautioned in a recent note that there could be more pain ahead if Mr Baldock makes big write-offs: “Investors should be mindful of the risk a new management team decides to ‘kitchen-sink’ the profit and loss account.”

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