Supply issues will dampen AO’s Christmas spirit

Shout it out: AO – no go! At least not in the City after a nasty profit warning.

There’s a certain schadenfreude in seeing AO World, a company with one of the most irritating ad slogans around, getting stuck in the mud. And don’t even get me started about the way it calls its workers “AO-ers”.

But I also have some sympathy when it comes to the cause of the company’s woes.

AO World says it is a victim of the supply chain crisis; that festering boil which regularly spits pus over the backs of multiple businesses across multiple sectors.

The company says it has its own fleet of lorry drivers in good order, which is quite an achievement. The fact that it’s fully stocked up with drivers could inspire the envy of its peers. In fact, AO makes good money using its fleet to make deliveries for other businesses (the company calls this third-party logistics). Its problem is that it is suffering from “poor availability in certain categories, particularly in our newer products where we have less scale, experience and leverage”.

These difficulties, the company said in its stock exchange announcement, resulted in peak period trading that was “significantly softer than we anticipated only eight weeks ago”, which was when the company issued its first profit alert.

These things come in threes, and no that isn’t just an old City trader’s tale. It’s often true. With AO warning of “shipping costs, material input prices and consumer price inflation” acting as “challenging uncertainties” for the business, well you do the maths.

Badly run businesses like to have a ready excuse when they have to issue statements like this, and the supply chain crisis is going to come up a lot in that context. But AO has legitimate cause for complaint.

The group has sought to expand and diversify its offering, having started out selling white goods, which it likes to call MDAs, or major domestic appliances. It then moved into smaller pieces of kit and beyond into games consoles, iPhones and the like. It is comparable to an online-only Curry’s with international ambitions (AO currently operates in Germany and the UK but wants to add more).

The problem is, while it has clout in white goods, it lacks it in some of its newer product lines which are in short supply. At a time of shortages, suppliers will inevitably direct their goods towards the more established players with which they have longer-standing relationships. When it comes to that PlayStation, people like Amazon and Curry’s will be ahead of AO in the queue.

Some of these problems are global in nature. But they’ve been made worse in Britain through inept policymaking on the part of government. Your starter for 10 is Brexit. AO has real cause for angst about that.

Newer, expanding companies like it will inevitably suffer the most from the supply chain crises that Brexit is a major contributor to. This doesn’t say much for Boris Johnson’s “buccaneering” global Britain.

Those input prices the company warned of are also going to get worse before they get better.

The latest IHS Markit/CIPS flash composite purchasing managers’ index (PMI), eased down to 57.7 in November from October’s final reading of 57.8. Given that anything above 50 indicates expansion, the headline number looks good for UK plc.

However, the figures came with a sting in the tail. What they revealed is that the combination of rising wages and energy bills together with other cost pressures caused input prices to rise at the fastest rate since the series began in January 1998.

An interest rate rise in December is starting to look like a racing certainty.

This will create another challenge for companies like AO. The latter was worth more than four times what it is now when the shares hit a peak of more than 430p as sales boomed during lockdown.

When it rains it pours, and you get really soaked when the government takes it into its head to break all the brollies.