Carphone Warehouse 2006 Annual Report Download - page 8

Chief Executive’s Review
Iam pleased to report that we have achieved another
year of strong growth. The Group floated over five
years ago now, and has grown at a rate that we could
never have predicted. However, we are absolutely
committed to approaching business as we always
have done: by being entrepreneurial, quick to act
and opportunistic, within a broad strategic framework.
We retain the same flat structure and accountability
that has allowed us to thrive in the dynamic markets
of the last fifteen years.
More importantly perhaps, we maintain a private
company mentality when it comes to investment
and growth opportunities. Our focus is primarily
on long-term value creation. As a result, we will
continue to invest in new business areas where we
are confident of generating incremental growth in
future cash earnings, even if short-term returns are
depressed as a result. Business opportunities do not
conveniently arise in a timely or regular fashion, so it
is an important aspect of our role as a management
team to communicate the scale, timing and impact
of new business initiatives so that investors can make
informed decisions when short-term earnings are
depressed by investment.
Strategic context
Our strategic approach is built on three
primary objectives:
•To continue to grow market share in all our
geographical markets, by investing in new store
openings, generating like-for-like growth from
our existing estate, and developing additional
distribution channels;
•To maximise the lifetime value of our customers,
both by providing a level of service that encourages
repeat business, and by identifying relevant new
products and services where our brand, service
and distribution give us an advantage over other
suppliers; and
•To become the leading alternative provider of fixed
line telecommunications services in the UK.
I wrote last year about the importance of combining
our key assets – stores, people, fixed line infrastructure
and supplier relationships – to provide a range of
services where we believe we have a sustainable
advantage. However, there is a further and crucial
element to this approach which is coming to define
the way we do business.
Whether in retail or telecoms, our goal is to create the
best possible value proposition for our customers. We
do this by aiming to control costs and drive volume
over margin. As scale or investment benefits accrue,
we look to reinvest those benefits in improving the
customer proposition and driving more volume, rather
than increasing margin. This creates a virtuous circle.
This is a familiar strategy in the retail industry, where a
number of companies with this mindset have achieved
very strong positions in their subsectors. At the same
time, there are numerous examples of companies that
have been too profitable for too long, thus becoming
uncompetitive and allowing new entrants to come in
and undercut them.
In the telecoms industry, the prevailing attitude seems
to be to price services according to what customers
are prepared to pay, and margins across the board are
generally high. Our approach, as highlighted in April
2006’s broadband launch, is to charge customers as
little as possible while still making a reasonable return
for the business. Thus our infrastructure investment
over the next 12 months gives us the opportunity to
pass on the bulk of our savings on regulated costs,
rather than improve our customer margins.
Growing our retail presence
At the start of the year we set a target of 250 store
openings across our ten markets, maintaining the
acceleration in roll-out from the previous year. In the
end we significantly exceeded this target, opening
317 stores in the last 12 months. Of these, we
opened 68 stores in the UK and 99 in Spain.
Our distribution strategy has been enhanced over the
last two years by the growth of our Online operations
in the UK, and the development of a franchise store
model in a number of markets. Through organic
growth and acquisition, our Online operations have
achieved compound annual connections growth of
The Carphone Warehouse Group PLC Annual Report 2006
4
HEADLINE OPERATING PROFIT
UP 34.7% (£m)
’06’05’04’03
58.0
81.1
105.2
141.8
REVENUE UP 29.4% (£m)
’06’05’04’03
1,842 1,849
2,355
3,046
We maintain a private
company mentality when
it comes to investment
and growth opportunities