Business Watch: Carphone scouring world for growth

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 The retailer’s CEO is clocking up air miles in his quest for growth, and Dominic White reckons it will take whatever it can get at the moment

I wish I had Roger Taylor’s air miles account right now.

The Carphone Warehouse chief is on a worldwide hunt for growth as the retailer struggles with weak markets in its European homeland.

Taylor’s world tour has taken him from China to Latin America via Eastern Europe.

“We are exploring similar what I call ‘store within a store’ opportunities with business partners around the world,” Taylor told Reuters as he revealed Carphone’s first quarter figures.

The CEO calls the concession store model a “capital-light model”. It’s unsurprising that he’s drawn to such a method given that Carphone’s last big expansion – into big box stores in the UK – was both capital-intensive and a great big flop.

Going global
Of course, many a UK retailer has come unstuck expanding outside of Europe but Taylor is confident that Carphone can sidestep the mousetraps while spreading its footprint.

“I’m travelling a lot around the world trying to explore who are the best partners and the best markets. It’s something we are very keen to do,” he said.

Markets such as China, Mexico, parts of South America and Eastern Europe are attractive to Carphone.

“These markets have… high ARPUs, large populations, competitive environments between networks. They are all-important dynamics.”

A quick glance at Carphone’s latest results tells you why the company’s management is looking to foreign shores to reinvigorate its growth prospects.

Same-store sales at CPW Europe, which boasts 2,400 outlets across the Continent, tumbled 5.5 per cent in the three months to the end of March versus a year earlier. That was lower than analysts’ average forecast for a fall of five per cent.

Not only that, but total connections plunged by a whopping 19 per cent. Connections have been negative for the company for some time now, but they are more than double their level of a year ago.

Carphone’s biggest problem has been the collapse of the prepaid market, where volumes were down between 30 per  cent and 40 per cent, the company estimated.

As James Barford at Enders Analysis told his clients in a research note: “This is largely a result of the prepay subsidies in the UK being cut to near zero, which has eliminated ‘box breaking’ volumes altogether, and discouraged genuine prepay customers from upgrading, an effect likely magnified by both difficult economic conditions and the absence of strong smartphone offerings at prepay price points.”

Prepay turnaround?
Taylor meanwhile noted that two thirds of British consumers still don’t own a smartphone – even though the vast majority of new handset sales are smartphones these days.

But the CEO predicted that this will change if more smartphones are priced between £50 and £100, giving a fillip to the dismal prepay market.

“What we need is a catalyst to get the prepay market going again and I think that’s only going to happen when smartphones are available at that pricing point. Generally, that’s below £100,” he said.

The good news, according to Barford, is that the prepay market is not going to get any worse and may start to improve in the Christmas quarter.

Carphone pointed to the cheaper prepay smartphones it expects to come on the market, including ones from cheaper Asian manufacturers and even lower-end Nokia Lumia devices.

“It is easy to be sceptical, as the company had been hoping for a prepay smartphone Christmas for the last two years, but prepay smartphones must eventually take off, and it could be this year,” Barford said.

He could be right if Huawei’s targets are anything to go by.

The Chinese giant revealed at the Mobile World Congress in Barcelona that it has a target to sell some 60 million smartphones in 2012, up from 17 million last year.

Me old China
Of course, most of those will be sold in China, which is one of the reasons Taylor wants to get involved in the country. He is doubtless learning much about the different rules of engagement in Chinese business.

Carphone already has some experience through its Global Connect venture with US retailer Best Buy.

The US behemoth plans to open 14 Best Buy Mobile SWAS stores within its branded stores in China. The Global Connect agreement would entitle Carphone to a 20 per cent share of incremental earnings from these SWAS stores.

Despite Carphone’s disappointing results, shares in the company rose four per cent on the day of the results after it said headline earnings for the 12 months to the end of March would be in line with previous guidance.

“We expect to deliver full-year profits for CPW Europe in line with guidance, despite the market shift from 18- to 24-month contracts, a material decline in the prepay market and a tough consumer environment,” Taylor said.

Flat returns
Of course, that guidance had already been lowered back in November when the company said that full-year operating profit would be at the lower end of a £135 million to £150 million forecast – effectively flat compared to the previous year.

But the fact that the company is committing to those forecasts is a big relief for investors who had the value of their investments in Carphone lose a third of their value in the past 12 months.

Particularly, that is, at a time when the tremendous uncertainty in the eurozone is continuing to suppress stock markets and the performance of many European retailers as shoppers continue to have their budgets squeezed by government austerity measures.

The good news for Carphone is that the more profitable contract business is holding reasonably well, bolstered by sales of tablets such as the iPad, and Taylor now sees a “significant” opportunity to boost sales of other ‘non-cellular’ products, including accessories and applications.

Carphone recently unveiled a range of unfortunately named ‘App-cessories’. These gizmos, which connect to smartphones and tablets, include such
gadgets as sleep monitors and cooking thermometers.

The truth is that the company will take whatever growth it can get at present.

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