Look around your local high street. What do you notice? That’s right – too many mobile phone shops! Glynn Davis at The Fleet Street Letter reckons it’s only a matter of time before this land grab produces some serious casualties – and that’s a profit-making opportunity for the canny investor…
Charge into your local high street or nearest shopping centre, and you can’t fail to spot it. There are simply too many mobile phone shops in Britain today.
So many mobile phone shops have opened up, in fact, several shopping centres have banned them from renting more units for fear of boring their visitors! Yet despite their ubiquity, the mobile networks and retailers continue to seek new outlets.
The Carphone Warehouse wants to open 100 more stores. Phones 4u has stated it would like a similar number. Both 3 and Orange are also on the expansion trail, as are Vodafone and O2 – with the latter even opening stores through a franchise model. And Virgin is opening new concessions in WH Smith stores.
For retail landlords, terrified by the UK consumer downturn, this aggressive expansion must be heaven sent. No other retailers are opening up space like this on the nation’s high streets. Somebody should tell the mobile operators. Total retail sales for the bulk of 2005 were down from 2004 on a like-for-like basis. Press reports suggest Christmas ’05 on the high street proved better than the previous year, but it didn’t have much to beat.
And yet we are experiencing a new bubble in the mobile phone sector. Each player is battling it out for new retail space.
Fuelling this land grab is the desire by the phone networks to increase sales through their own ‘direct’ channels. They would like to lessen sales through the less profitable ‘indirect’ routes, such as specialist retailers like The Carphone Warehouse and The Link. The margins just don’t compare.
Needless to say, these retail specialists are fighting back by – you guessed it – opening more shops! In their desperate search for new stores they have become willing to open outlets in secondary locations near much smaller towns than they would have previously considered. But many of these marginal stores will fail to attract sufficient business. And when you combine this strategy with the massive growth of online sales, then the ‘land grab’ appears a suicidal move by the mobile sector.
Of course, the supermarkets are cleaning up in the online sales market, and we are not just talking about food. The big beasts, led by Tesco, have been successful in pretty much every non-food market they have entered – clothing, financial services, books, music…they have ripped into the specialists in all these categories and caused major grief on the high street.
With the supermarkets now setting their sights firmly of the telecoms sector, this represents serious trouble for the mobile retailers. Not only are they selling mobile phones online, but they have given them an increasing amount of space in their superstores. They can shift plenty of units and there is a good margin to boot.
Where the supermarkets have excelled is in attracting that great swathe of customers who are not gadget freaks, but simply want a mobile phone to make voice calls and send the odd text message, probably to their grown-up children. For these customers the supermarkets have provided a straightforward pre-pay offer, a much- needed development. In contrast, the networks and mobile specialists are not that interested in this less lucrative part of the market. They have a much greater appetite for those more technologically literate consumers. They can tempt them into using the latest mobile services such as video messaging, accessing the internet, and receiving the latest sports results, traffic information and so on.
Both the network operators and the retailers gain from the increased revenue that these value-added services generate. But if they are to all make their aggressive expansion plans pay-off, both these groups need to get more people to use these additional functions.
And for the networks there is also the small matter of earning a return on those massive multi-billion pound bets they made at the turn of the century acquiring their 3G licences from Gordon Brown. However, there is one serious flaw in this plan. It involves the technology.
At the moment mobile phones are simply not user friendly enough. According to a recent survey, a hefty 81% of phones owned by 16-34 year-olds and 75% of those owned by 35-49 year-olds are capable of sending video messaging. Yet a massive 80% of non-voice revenue from phones is still derived from good old text messages. But they’re not a great earner for anybody in the mobile sector.
Customers simply find it too difficult to understand the settings needed for accessing the more complex services on their phones. Nor can they figure out how their billing systems would charge for these functions.
Yes, the Fleet Street Letter agrees that these problems will eventually be resolved. The additional services will then be used by the mass market, generating new streams of revenue. But rest assured that by then, the supermarkets will be ready and waiting to step in and grab a sizeable chunk of the market.
Already we are seeing this strategy at Tesco, the dominant force in so many of Britain’s retail markets. It has stated that next year it will launch a range of simple-to-understand mobile phone contract deals to add to its current pre-pay offer. It also recently opened a dedicated ‘store-within-a-store’ selling telecoms gear at its Tesco Extra outlet in Slough. If this concept works then Tesco plans to roll it out around the country. Let’s be clear here, Tesco is deadly serious about telecoms. This means difficult times ahead for existing mobile phone retailers. Most exposed are the specialist outlets such as The Link, The Carphone Warehouse and Phones 4u.
By far the weakest of the bunch looks to be The Link, owned by Dixons. It has reported some pretty awful numbers of late. For the 28 weeks to November 12 like- for-like sales collapsed by 28%. The Link suffers from being a subsidiary of a larger group where management attention is probably now diverted to sister chains Dixons, PC World and Currys. They too are all having a torrid time battling both the online electricals retailers and, of course, Tesco.
Like all other retailers, the mobile phone stores know the Christmas sales period is the most crucial time of the year for their profit & loss account. All eyes will be on their trading statements this month. Any signs of weakness, and their rivals – along with the City – will go in for the kill.
In our view, the downside story for shares in the quoted mobile phone players is compelling. Short sellers take note.
By Glynn Davis for The Fleet Street Letter
Glynn Davis is a regular correspondent for the Grocer magazine – the retail industry’s weekly ‘bible’. A former fund management and venture capital specialist in the City, today Glynn also writes for the Guardian, Financial Times and RetailWeek. His specific stock market recommendations appear in The Fleet Street Letter, the UK’s longest-running investment newsletter.