Business Watch: Come back Carphone

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Come back Carphone Warehouse, all is forgiven. That is the message new Vodafone UK chief executive Guy Laurence is telegraphing to Charles Dunstone after apparently judging that the exclusive deal the network signed with Phones 4U was a failed experiment.

That three-year deal, signed in October 2006 by Laurence’s forbear Nick Read, came at a time when the networks were trying particularly hard to cut their commissions and take power away from independent retailers.

Carphone shares took a big hit at the time – 14 per cent in a single day – as City analysts started questioning whether other networks would follow suit and jeopardise the retailer’s incredibly strong position in the market place.

Carphone chief Dunstone said back then that he was “surprised and disappointed by the decision”, which Vodafone hoped would change the face of mobile retailing in the UK (where there are more independent mobile shops than other European markets).

Unfortunately for Read, it didn’t.

Vodafone is being forced to rethink its UK strategy because, frankly, the business is underperforming – as the company’s full-year results last week demonstrated all too clearly.

While messaging revenue and data revenue both improved, voice revenues – which still make up the vast majority of the business’s turnover – tumbled 7 per cent to £3.2 billion in the year to March 31, dragging overall UK revenues down almost one per cent.

Direct costs, customer costs and operating expenses all rose too, causing adjusted operating profits to almost halve to £235 million. Once again the UK was the least profitable of the European operations – which also include Germany, Spain and Italy.

Then there were the customer numbers. In the three months to March, the company lost 450,000 UK customers, taking its customer base to 18.7 million.

In contrast, market leader O2, added 141,800 punters. The company has outplayed Vodafone with its exclusive iPhone deal and has done a better job at getting its pricing right for the recession.

To be fair, Vodafone UK’s customer fall was largely self-inflicted by Laurence, who made a decision to stop counting the 310,000 Vodafone SIMs located in mechanical devices like vending machines.

Ignore that counting change and the UK arm actually added 179,000 contract users over the three months to end March, helped by the BlackBerry Storm.

But as more punters feel the pull of prepay to cope with tougher times, Vodafone is continuing to lose out because of its historic reputation as an expensive supplier focused on the business market.

Group chief executive Vittorio Colao, who vowed to offer more value to customers when he took the job almost a year ago, wants to change that impression.

“We have had a perception of being more expensive in the UK, which is not fully deserved to be honest,” he admitted last week.

But he isn’t promising a quick fix to Vodafone UK’s difficulties, and to some extent it is hard to do so while competition remains so fierce.

That is why he again pointed out that having five network operators in a market the size of Britain does not look sustainable over the long term and there has to be consolidation somewhere down the track.

What form it will take remains to be seen. Vodafone has agreed to merge with 3 in Australia, which has prompted talk of a similar team-up in the UK, perhaps with T-Mobile involved too.

“I don’t know if there is a three-way, I don’t know if there is a two-way, I don’t know if there is a way at all,” Colao told reporters.

“But it is clear to me that there are a few markets around the world where consolidation would make sense and we are one of the leading players so we have a duty to look at everything. If things make sense and improve the conditions in the market, we will try our best.”

Full article in Mobile News issue 440 (June 1, 2009).

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