Dominic White questions whether the retailer’s planned domination of the electronics megastore market will actually materialise
Could Carphone Warehouse’s ambitions to build an electronics megastore empire end in tears?
It seems possible, after it emerged that the company and its US partner Best Buy are chewing over the future of the loss-making “big box” stores business.
When first announced, the move into megastores looked like another stroke of genius from Carphone founder Charles Dunstone.
Back in 2009 the property market was crashing, and the joint venture he set up with Best Buy looked set to pick up lots of cheap out-of-town space to build on as developers cut their losses and sold off land cheap.
But the problem is that the much-hoped-for recovery in consumer demand has failed to materialise in force. Indeed, consumer demand is now on the slide again with fears of a double-dip recession.
At Carphone’s annual results this week it revealed that losses at the Best Buy-branded megastore division, which currently trades from 10 stores in the UK, had trebled to £62 million.
And despite news having leaked beforehand that the business was under review, investors were disappointed to learn that a final decision on the next steps has yet to be made.
Carphone, which opened the first Best Buy Europe store in Thurrock, Essex just over a year ago, said it was still in the process of evaluating its multi-format, multi-channel consumer electronics strategy.
“We did hope to have it finished by June, but it’s now looking like it’s going to be anything up to another two or three months before we’ve finished all the evaluation,” chief executive Roger Taylor told Reuters. He added that there had been no disagreement with Best Buy.
Taylor also says that “all options are on the table” and estimates that it would cost about £40 million to exit property leases on Best Buy UK’s existing stores if that were to ultimately happen.
When Best Buy first announced plans to come to these shores, it said it could have 100 megastores by 2013, but that target was later trimmed to 80.
Since then, the coalition Government has announced a slew of austerity measures that have hit many consumers in the pocket, denting discretionary spending on big-ticket items like consumer electronics.
Best Buy and Carphone are not alone, of course.
Household-goods giant Home Retail has reported a plunge in sales at its Argos stores; Dixons and Kesa – which might sell Comet – have both had profit warnings this year. Even Tesco’s missed its sales targets.
But analysts are now questioning whether Carphone should stick to its knitting and concentrate on selling mobile phones and tablet devices, and stay away from selling TVs, fridges and washing machines.
You can see why, when you look at the results for the rest of Carphone’s business.
Carphone Warehouse Europe raised its earnings before interest and tax by 18 per cent, to £135 million, as the percentage of smartphones sold soared to 80-90 per cent of handset sales.
Carphone’s share of Best Buy Mobile US’s profits doubled to £98 million and Virgin Mobile France, in which Carphone owns a 47.5 per cent stake, turned a loss of £22 million last year into a tidy £21 million profit.
But it was not all rosy.
Carphone warned that it expects connections in the European business to fall between zero and five per cent, reflecting potential weakness in the prepay market and the fact that many companies moved to 24-month contracts in mid-2009, which means there will be less churn than normal.
“The switch will dampen post-pay volumes, particularly in the first half of the [financial] year,” said Carphone.
The better news was that it expects to offset that with, in part, the additional sales generated through its ‘Wireless World’ format stores.
Announced around the same time as the big-box stores, this format is beginning to look like a much savvier and safer bet, as it only involves a relatively cheap upgrade of existing stores.
Carphone said it would accelerate the roll-out of its Wireless World format from 106 to 400 stores by the end of the current financial year, rebranding existing Carphone Warehouse phone shops to sell all mobile electrical devices.
Taylor said Carphone is getting a 20 per cent margin uplift on the converted stores, and he expected to lift profits by selling punters smartphones and tablets at the same time on 24-month contracts.
The result is that he expects European net profits to be £135 million to £150 million this financial year, versus £135 million for the last financial year, which is a result many retailers would kill for in this environment.
Shares in Carphone, which have more than doubled over the last year, were trading above 400p on the day of the announcement.
Meanwhile, trouble is brewing between the mobile networks and the Government, which has warned the industry not to start legal action that would delay the auction of 4G mobile spectrum.
O2 claims that Ofcom’s proposed structure for the auction means Everything Everywhere and Three could end up paying £1 billion less for sub-1GHz spectrum than they would otherwise need to.
But the Government has reacted by saying it’s important that the spectrum, which it plans to auction next year, is released “as soon as possible”.
The UK is trailing the US and Japan, where many folks are already enjoying the benefits of 4G, which can theoretically offer peak download speeds
But one could argue that it’s actually in the interests of the UK network operators to delay the auction, so they can carry on maximising returns from the huge investment they made in 3G at the turn of the millennium.
Finally, Nokia has had a rare piece of good news, by announcing that Apple will pay to use the Finnish phone giant’s technologies, in a move that signals the end of years of patent litigation between the two deadly rivals.
Nokia chief executive Stephen Elop has also dismissed as “baseless” rumours that electronics behemoth Samsung is bidding for the company.