Dixons Carphone's Sebastian James - Mastermind of a merger that worked?

THE MT INTERVIEW: The electricals retailer's sales soared over Christmas. All the signs point to a prosperous marriage, but retail remains a harsh mistress.

by Matthew Gwyther

Published: 26 Jan 2016

Last Updated: 21 Dec 2016

Photography by Julian Dodd

Having just paid a visit to 1 Portal Way, London W3, I can assure any shareholders in Dixons Carphone PLC that very little cash is being wasted on the siting of the company HQ.

MT has been to some charmless, barren places in its time but North Acton, nestling between the A40 and Wormwood Scrubs Park, takes some beating. It could be the setting for a particularly dystopian JG Ballard novel. They used to rehearse Dad’s Army in a BBC shed around here back in the 70s. An Imperial College London student residence in the W3 vicinity was nominated for the Carbuncle Cup, the award for the ugliest building in the UK.

But you cannot argue with the rental numbers. Dixons Carphone pays a cost-effective £23.73 per square foot. Retail is detail but it’s also these days about not wasting cash on trophy HQ frippery. (They even get nine grand a year back by letting EE put a phone mast on the premises.) By contrast Facebook’s new London HQ in swanky Rathbone Square costs £75 a square foot.

Photography by Julian Dodd

But it is here at 1 Portal Way that Sir Charles Dunstone placed his Carphone Warehouse HQ. There was plenty of room after the £3.8bn merger in 2014 to squeeze in all the refugees from Hemel Hempstead where Dixons was based. The workforce is young and most have their heads down over banks of monitors.

Sebastian James, the boss, limps over to shake hands. ‘It’s nothing. Trod on a piece of glass in the kitchen – one of my kids broke something. Had to have a minor operation to get it out.’ He shares a very small corner office with Andrew Harrison, who was the boss at Carphone Warehouse and is now deputy CEO of Dixons Carphone, as the merged entity is known.

It all seems to be going remarkably well. The sceptics appear to have been confounded. We are so used to value destruction in the world of M&A, we have almost forgotten what the reverse looks like. One of the principal aims of the merger, conceived in the dark days of the last recession, was to blow Carphone rival Phones4U out of the water, and this was achieved swiftly when the outfit went bust in September 2014 owing unsecured creditors £168m and the taxpayer £78m. (788 Phones4U staff got jobs at Dixons Carphone.)

The most recent numbers look pretty good – the half yearly profits were up 23% to £121 million and like-for-like revenues were up 5% in the 10 weeks to 9 January. The shares are up around 60% since the merger, and Black Friday 2015 – which didn’t feature any unsightly customer fist fights over 50-inch flat screens – was the busiest trading day ever for the outfit. James’s comms advisers even risked putting him on Channel 4 News, despite his decades-long close friendship with our prime minister. He did good – an authentic, open-necked on-screen natural. A gentle Bojo/Michael McIntyre mash-up.

James seems a mix of pleased and relieved that the union has been so successful. ‘It’s all gone well. We were worried it could all turn a bit Game of Thrones – you know swords through the head type problems. But no. We’ve moved into our boyfriend’s flat, we’re off the honeymoon period now and have decided who puts the bins out and who does the washing up – the tasks are allocated.’

He has said elsewhere that it worked but cost ‘a sod of a lot of money’ once all the investment bankers, lawyers and City PRs had taken their fees. James is breezy, warm and amusing. He’s a big fellow, very casually dressed and probably a good few pounds over his fighting weight.

Nobody saw the deal coming. But after meeting by chance, James (then chief executive of Dixons) and Dunstone got along and over the months of talks, thoughts of a JV were dumped in favour of going the whole hog down the aisle.

The corporate pair seemed like an unlikely, even desperate, couple. The Sunday Times likened them to ‘two drunks propping each other up at a party’. One a 77-year-old long-established high-street electrical empire, ruled by an aggressive baronial family dynasty but suffering after some poor succession decisions following Stanley Kalms’ move into politics. The other a sharp, slick and cocky 25-year-old contender that soared during the 90s but then started to find life a lot tougher in the noughties.

Both had their share of troubles. TalkTalk – launched by Carphone to bloody BT’s nose in 2003 – has had its struggles in a ruthless, cut-throat market and is now a stand-alone entity. Dunstone’s other big wheeze – the big box megastore tie-up with Best Buy to bring the US retailer to the UK between 2010-2012 – was an utter flop. And, always in the background, the existential threat that the mobile phone networks could sell direct to customers through their own channels and cut the independents like Carphone Warehouse out of the deal.

In 2013 Dixons employed 35,500 people, had 1,154 stores and turned over £8.2bn on which it reported a loss of £115m. Carphone Warehouse employed 12,000, had 2,024 stores and turned over £3.69bn, with profits of £136.6m.

Dixons was the far older company. Founded in 1937 in Southend-on-Sea as a camera shop, it was a high-street titan. But when MT last interviewed the bosses of Dixons – the legendary Kalms and John Clare back in 2001 – this is what we said: ‘Dixons may be successful, but it is not loved. Most people visit its shops but few recall it as a memorable retail experience. Stories abound of poor, arrogant or ignorant service. The group is often attacked as monopolist, charging monopoly prices. Companies as diverse as Intel, the chip manufacturer, and John Lewis, the retailer, have cried foul, saying Dixons is stifling the computer market.’

Dixons certainly had a poor reputation. When James arrived in 2008 as development director, with son-of-the-founder Kalms gone it was in all sorts of trouble. ‘It was properly in the shit,’ says James. ‘Terrible case of hubris. A bit like Tesco later.’

Its internet service provider Freeserve, which at its peak was worth nearly £10bn, was sold to France Telecom’s Wanadoo ISP for a knockdown £1.65bn. Worse, then-CEO John Clare had been on a foreign buying spree picking up all sorts of rum odds and ends across Europe. In Italy, Unieuro was a dog of a business: bought in 2003 for £400m from the Farinetti clan, by 2008 it had incurred impairment charges of £450m. It took a further £30m to get shot of it in 2013.

There was a £10m fraud in its French Fotovista business in 2007. (Not all Dixons foreign assets were/are such basket cases. The Nordic chain Elkjøp accounts for more than a quarter of the company’s total sales.) In the seven months following the announcement of Carphone’s venture with Best Buy, the Dixons share price dropped from 51.75p to 6.75p.

The Dixons mess was cleaned up by a combination of James as operations director and CEO John Browett, retail walker-on-water who wowed at Tesco.com before becoming rapidly submerged when he went to Apple. They sold off, rationalised and tried to improve customer service. James told Retail Week that Dixons had become the ‘butt of stand-up comedians’ for its ‘shabby stores… falling sales and internal squabbles’, adding later ‘my team and I have been the… doctors and nurses clustered round the bedside of this great British institution.’

The strategist in James – he spent many years at Bain and BCG as a consultant – saw that while the patient was off life support a union with another retailer was probably the only long-term answer. But weren’t the two outfits pretty different culturally? ‘Well, yes. I think Dixons was more traditional. It had more operational rigour. Maybe it was a bit stodgier. Carphone was more entrepreneurial and had more flair…

‘My terror was that when we combined the two, we’d get that 80s nightmare where they bred African killer bees with European docile honeybees. You hoped for loads of honey with a nice temperament but you could have wound up with a load of angry bees and not much [of the runny stuff] to show for it.’

The retail world seems a very uncomfortable place to be at the moment. It was always brutally competitive but the pace of change and creative destruction is now very scary. The ruinous costs of online delivery mean multi-channel – while the only answer – is painful.

Who’d be a retailer in the UK in 2016? ‘Look – food is a disaster at the moment for all kinds of reasons. Fashion is OK. If you own your own product and control distribution you’re fine.’

He’s quite clear where he sits. ‘We’re a commodity retailer up against all the other channels. We make our living out of the big stuff: TVs, washing machines, computers. People still think carefully about these purchases because they remain expensive. An investment banker said to me he didn’t care if he got the wrong telly because he’d give it to his daughter. Well most people aren’t like that. A good TV can be a month’s wages.’

He makes the point that face-to-face with customers, his people can upsell from basic models. Sell a home cinema system where the punter only came in for a TV. ‘So, we like to think about ourselves as a car dealership rather than a straightforward shop,’ is how he puts it. It’s all in the metallic paint and leather seats.

But come on. Surely if he was starting Dixons Carphone from scratch today he’d never adopt the current model. Bricks and mortar? Business rates, rent, staff, sick leave, national living wage. Corporation tax – all the offshore Americans laugh at that. A mug’s game in the online age.

‘If I was beginning from scratch I would not go for an online pure play. Honestly I wouldn’t. We are structurally profitable. Amazon makes no profit. Neither does AO.’

He has ongoing ‘fisticuffs’ with John Roberts, the founder of AO. ‘It brilliantly positions itself as a tech play but it’s a catalogue retailer selling washing machines. We have the same proposition but we do things better. Amazon has a 48 million SKU [stock keeping unit] long tail on which it can make money. AO doesn’t. It’s small and I’m not sure what AO’s business model is in the long term.’

How does he feel about Amazon and all those US multinationals with their lack of enthusiasm to pay any corporation tax to the countries in which they operate?

‘There is no point moaning about Amazon paying no tax. In the UK it makes no profit, which is a brilliant way to avoid tax – we used it ourselves for a few years…

‘Amazon is an economic anomaly the like of which we’ve never seen. It appears to have access to free capital. Investors are mesmerised. We just have to live with it. Certainly in the US with the rules about inter-state sales tax, it has a real leg up. There’s no point Andy Street [boss of John Lewis] moaning, until they level the international tax playing field to create a truly global capitalist system. John Lewis is super-smart by the way. Loved, loved, loved.’

Not so loved are the mobile phone operators. The UK market is the most competitive in the world and when you cannot even get a 3G signal in parts of central London many wonder why they bother upselling to 4G.

‘Well you make very much less in the UK per customer. If you’re Vittorio Colao [Vodafone’s CEO] sat there at his desk surrounded by dozens of capital requests, you will choose India over the UK because of the low return here. So, over time our networks will degrade at the margin.’ James is relaxed about the reduction in player numbers in the market with the consolidation currently going on. He says he likes BT, approves of the EE deal and doesn’t see why Openreach should be broken up – ‘if it ain’t broke, don’t fix it’.

The question is, where does James take Dixons Carphone in search of new markets? The answer is the Internet of Things. (Who isn’t trying to get their head around this to work out how to monetise it?) ‘The future is connectivity,’ he says. ‘What happens after you’ve got the stuff home.’

He’s proud of the fact that his guys can install a new washing machine in eight minutes flat including getting the old one out and into the van. ‘We’ll be the Uber for services. We’ll do washing machines to Wi-Fi. You’ll pay for a hotline or an app where we can look at and monitor everything. We’re already getting there. Every Bosch washing machine will be connected to Wi-Fi next year.’

There must eventually be a market for this. Not least because the whole thing is so complex for simple non-geek folk to cope with. But what will people be willing to pay for this British Gas boiler maintenance-style deal? ‘We don’t know yet. We don’t know about the moral hazard. What the cost will be of delivering. But we should try something next year and have something significant in three years’ time.’

The youngest son of Christopher, fifth Baron Northbourne, we cannot allow James to leave without talking about his schooling. He has taken a considerable amount of stick over the years about the fact that he was a contemporary at Eton College with our prime minister. They both attended Oxford, and he appears in the legendary black and white photograph of the Bullingdon Club members (also including Boris Johnson) which has been plastered all over the web and many tabloids – despite the fact that the copyright owner has forbidden its reproduction.

Why should he feel any guilt or embarrassment about attending what is accepted to be one of the finest schools in the land? ‘It’s a great school,’ he says. ‘But it’s also become a symbol of a ruling elite. They wear tailcoats. The truth is that many boys attend these days on bursaries.’

It isn’t our place to get involved in a row about privilege in 21st-century Britain but it’s also true that two of Jeremy Corbyn’s closest hard left advisers attended the equally expensive and ‘socially divisive’ public school Winchester College.

James’s PR is squirming ever so slightly that the school issue has appeared, but the man himself is quite happy to talk about it. ‘Look. The truth is that I vowed I wouldn’t send my boys there. I was quite unhappy in my first few years. A typical scene would be me on a payphone to my mum in a central area, crying while trying to put the 2p pieces into the slot while someone behind me was giving me a wedgie. Not great.’

But times have changed, and his two eldest boys do attend. ‘Now however I can talk to my boys on FaceTime every single day.’

‘It’s a great school but so is the Dixons Academy in Bradford, which we sponsor. Eton makes children believe they can achieve what they want. No request is treated with derision. "You want to be prime minister? Well let’s see. We have produced 20 of those." However what this does mean is that a lot of people are going to be disappointed because they won’t become PM. Not everybody gets to achieve that ambition. I haven’t wanted to sell washing machines since I was a small boy…’

The school thought James might make a good barrister. He probably would. A High Court judge, perhaps. Maybe he didn’t have the Latin.

James and his wife have four children, the youngest of whom is only nine. His wife Anna is also a high-flyer having been marketing director at Carphone Warehouse and group marketing director at Mothercare. It was she who introduced James to Charles Dunstone, and she has subsequently started an online business, Spring Chicken, for elderly people after her father developed Parkinson’s. ‘She stops older people getting ripped off by stairlift companies,’ says her husband.

After Oxford, James joined Bain & Company. ‘I loved it. I was a 21-year-old, feeling like a god for a bit. They properly worked you really hard on a 75% margin. Then I went off to INSEAD for my MBA and when I got back the place was in utter disarray, caught up in the whole Guinness affair. So off I went to BCG, which was rather more cerebral and considered, where Bain had been swashbuckling.’

James did have one go at doing something as an entrepreneur. After a short dalliance with a Northern Irish paintbrush maker, which supplied B&Q, he launched a DVD business called Silverscreen which lasted from 2003 to 2006.

‘It was the wrong idea although I was convinced it was absolutely an incredibly good idea. The consensus view at the time was that you were never going to get sufficient telephonic bandwidth to get video down it. That turned out to be total bollocks. We did three years and had 65 stores and I lost enough of my own money for it to hurt, because I didn’t have that much.

‘The last six months were very, very difficult. I had three kids with one more on the way when it went down. It was alarming. Like a bereavement. No redundo. No safety net. No family resources because we lived off what I earned. I remember walking down Pall Mall after seeing a headhunter, convinced I might never get a job again. Many people were very kind and you never forget them. Some were less kind and you don’t forget them either.

‘I don’t think I’m a very good entrepreneur. But you have to have a go to realise that. Everyone should do it once. I like sorting out big, complex things where you’ve already got some momentum.’

His longtime friend (and longtime MT contributor) Octavius Black of the Mind Gym is fulsome in his praise of James: ‘He’s a lovely, generous, larger-than-life man. He cuts to the quick, gets to facts fast but expresses everything in very human ways. Charisma and humility are a winning combo.’

James will do well from his success this year. The Guardian – on constant fat cat watch – has already noted that ‘James, could earn up to £4.9m next year if he meets performance targets for the newly merged retail group. James earned £1.7m in the nine months to May 2015.’

My guess is he thinks he has one if not two big jobs still in front of him. ‘We have a great change team here and I have no end date. We’ll see if after three to five years there’s something big that needs changing again.’ If not he will find something else. That’s the consultant in him. ‘Humphrey [his FD] and I have vowed to leave it in good shape. We don’t want to bequeath anything like what we inherited.’