Business Watch: Carphone unsure about what Christmas will bring

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Carphone Warehouse is riding high on the stockmarket after its first half-results but wobbly consumer confidence in its core UK market has raised question marks about Christmas

As the industry gears up for the busiest time of the year, Carphone Warehouse is cautious about the outlook in Britain, where the Tories’ austerity measures may begin to bite before Santa arrives.

There is also less room for growth in the smartphone market in Europe than there is in Carphone’s other market, the US, where take-up of the gadgets has been slower but is now catching up, according to chief executive Roger Taylor (pictured).

Taylor said Christmas could prove to be better than expected if shoppers are prepared to trade up to prepay smartphones, which typically cost £60-£150, compared with older products at £20-£40.

“Are customers going to be willing to make that leap in the current economic climate? That is the unknown,” Taylor told Reuters.

Carphone’s UK prepay performance has weakened in the last six months, which analysts say is probably due to an unwinding of the market share it picked up during the downturn.

That share increase was largely due to consumers trading down from contract to prepay of their own choice, rather than people buying prepay phones in the gift market.

So it’s anyone’s guess what will happen this Christmas as the spectre of a possible double-dip recession looms.

Carphone growth
The latest figures showed that growth slowed at Carphone‘s European handset business, weakened to 1.6 per cent in the last quarter, down from 3.7 per cent the previous quarter.

Connections were down 3.3 per cent, versus 1.1 per cent, showing that revenue per handset is on the rise as more people buy smartphones, particularly on contracts.
Nevertheless, Taylor stood by his full year guidance of between zero and three per cent like-for-like revenue growth for the full-year to March.

Enders Analysis said Taylor was on track to achieve that target but that he would need a strong holiday spending spree from consumers to beat it.

“Wider macroeconomic trends are likely to influence second half growth, and are very hard to predict, with the latest consumer confidence figures mixed across Europe, and are improving overall but deteriorating in the UK,” wrote Enders in a note clients.

“On the positive side the wider availability of cheaper (£100-£150) smartphones could drive a bumper prepay Christmas. On the downside, the UK mobile operators have moved from 18 month to 24 month contract lengths over the last two years, and this is likely to start to impact the market from around the end of 2010.”

Wireless World
Christmas is all about prepay sales of course but, in the meantime, 70 per cent of Carphone’s UK contract sales are now from smartphones. That’s according to Andrew Harrison, chief operating officer of Best Buy Europe, the holding company for the stores, in which Carphone owns a 50 per cent stake.

Harrison sees Carphone’s Wireless World store format as a winner as the boundaries blur between smartphones, tablets, netbooks and laptops.

By 31 March 2001, he aims to have 75 Wireless World store formats rolled out in UK – up from 43 today – and 100 across the UK and Europe, with around 400 across the UK and Europe by March 2012.

Harrison showed investors a slide showing that media tablets [such as the Apple iPad] are likely to sell more volume than netbooks in 2011.

Harrison said that it costs around £100,000 to refit a Carphone store to the new format and that payback takes less than two years with footfall up by between 15 per cent and 20 per cent, and trading margins up 20 per cent. Compelling stats.

Big-box stores
But the new chain of Best Buy big-box stores will cost a lot more than that and take longer to make profits.

The company has now opened six of these megastores, in Thurrock (44,000 sq ft), Southampton (29,000 sq ft), the West Midlands (33,000 sq ft), Liverpool (36,000 sq ft), Croydon (26,000 sq ft), and Derby (30,000 sq ft).

But higher marketing costs means that Carphone expects the Best Buy megastores in Britain to make a loss before interest and tax of between £50 million and £55 million this year, compared with previous guidance for a loss of £40 million to £45 million.

Analysts say it is hard to have too much confidence in the prospects for the stores, pointing in particular to questions over their ability to do well in the white goods market. But the good news for Carphone shareholders is that its Best Buy US operations are performing so well that profits are rising sharply enough across the company to more than offset the additional investment.

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