Charles Dunstone, Carphone Warehouse’s CEO, gave his views on the state of the economy to staff a few weeks ago. He also stressed why Carphone is best placed to cope with the turbulent conditions, and directed similar views to the City last week.
The message was simple and not at all surprising – the outlook is bleak for the economy. That said, a plan is in place to ensure that Carphone is able to ride out the storm.
‘It’s very, very tough out there. You can’t put what’s going on [on a spreadsheet in] Excel anymore,’ says Dunstone.
He lays out, in stark terms, the view many have thought privately but have not dared utter publicly. ‘I think the run-up to Christmas is going to be difficult, but if we think that’s going to be difficult, the retail market in the UK after Christmas is going to be a complete nightmare.’
Fearing he was sounding overly pessimistic, he adds: ‘I wrote an outlook statement, and rang a few of my friends in retail, and I said, “I’m writing an outlook and feeling a bit gloomy. Am I going to look an idiot?” And they said, “No, it’s terrible out there.”’
Profits for the first half of this year are down to £37m for the retail business, compared with £46m in the same period last year. The retail business is worth £3bn per year in revenue. The share price fell from £1.22 to £1.16 as the City reacted to his candid assessment. The price had been over £1.50 in mid-October. Meanwhile, more optimistic observers could still see reasons to be cheerful.
More exclusives and the biggest range
With a sharp decline in the number of consumers now shopping for new products, Dunstone (pictured) believes that increasing Carphone’s share of what will be a much smaller market is the top priority.
He says: ‘I keep saying to the business that the main focus [in the second half of the financial year] is market share, cash and margin. And I want it in that order.’
Carphone’s share of the contract market is understood to hover between 18% and 21% and, in the battle with rival retailer Phones 4u, it enjoys a 60-40 advantage, albeit with more stores.
Phones 4u’s stores have seen sharply falling contract sales in recent months, but has been partly rescued through direct sales and websites – an area it has traditionally been weak in. The number of contract deals carried out in Phones 4u stores for October is thought to number 47,000 – half what it was 18 months ago. However, sources say Phones 4u’s direct sales business brought in 25,000 contracts, also for October. One analyst says: ‘Dunstone will really turn the screw on Phones 4u now.’
On prepay, Carphone enjoys a similar share of the market as it has on contract, but that dips towards the end of the year when the likes of Argos see a huge spike in sales. Carphone will now sharpen its focus on exclusive handsets and strengthen its relationship with the manufacturers.
Given the mobile retail landscape, it is difficult for Carphone to claim to have the best deals on the high street when the operators’ own stores are undercutting Carphone and Phones 4u with unmatchable £15 deals. Carphone can beat everyone else with the most comprehensive range of products, which include exclusive devices. It builds on Carphone’s raison d’etre that consumers shop for phones, not tariffs.
The buying team, led by commercial director George Dymond, has already been successful in landing some notable exclusives, such as the Nokia Comes With Music 5310, LG Cookie and Samsung i8510. There has been an absence of wild cards, such as the Cath Kidston flower print devices or the quirky colour exclusives that have featured previously in the
run-up to Christmas.
One supplier says: ‘They are worried about getting the range right. They could have made mistakes in the past, now it’s just sure things.’
Another supplier says: ‘They want some big price drops from us.’
Dunstone explains: ‘It’s a time when you have to keep your market share growing, because that’s the way you get the best leverage from suppliers, and we’re already seeing benefits because we’re getting very good volume, suppliers are really wanting to support us and give us promotions, new products and exclusives.’
Nokia cut its sales forecasts last month after previously trimming prices, and Carphone (as one of Nokia’s biggest customers in Europe) is likely to use the vulnerability of manufacturers to secure better terms.
By denying Carphone’s competitors access to the most desirable handsets entering the market, and having the best prices, the theory goes that Carphone will inevitably start taking an increasing number of customers from its biggest competitors, specifically Phones 4u.
Keep generating cash
The ‘cash is king’ maxim is especially true in current conditions. It has been registered as a particular black mark in its last results with working capital showing up at £-217m on the balance sheet; a much weaker position than the £-96m in 2007.
‘We might have got carried away with £1bn [entering] in our accounts,’ concedes Dunstone, referring to the financial injection from Best Buy for half of the retail business.
Having free access to cash to trade is a major asset in current conditions, and the poor cash performance for the first half of this year was attributed to early payments and settling discounts with suppliers.
Carphone is arguably better placed than its two main rivals.
Private equity-backed Phones 4u is obliged to pay back a huge debt from bankers who funded the £980m acquisition in August 2006, which will become increasingly difficult to service as the market continues to contract.
Carphone’s new competitor, DSG, is facing its own cash problems, with credit insurers reducing the amount of debt they are willing to insure, which is affecting the ability of Curry’s and PC World to trade. Dunstone elaborates on the importance of cash: ‘For CEOs of UK retailers it’s about staying alive, rather than targets they want to meet. We will stay alive, and the people still standing will be in the strongest position.’
One source close to Carphone speculates that margins (third on the priority list) are expected to fall 10 points from where they were in the pursuit of volume – a level that is tenable for the business.
Carphone appears to have more reasons to be bullish about its longer term prospects. As one network sales director says: ‘They continue to execute really well. They are leading the way, and the things they do in store are remarkable at times. They’ve placed a few bets, and it’s just a case of how they come off now.’