When Carphone Warehouse and Dixons joined in a ‘merger of equals’ in 2014, the objective was clear: to become a full blown electrical outlet geared towards the internet of things, selling everything from fridges to mobile phones.
The combined force of the two high street stalwarts would create ‘significant synergies’ - £80m of savings as well as increased buying power with big suppliers as it moved towards an end-to-end service model. Deputy CEO Andrew Harrison compared the company to an AA or RAC as an ‘an emergency service for the connected world,’ offering everything insurance, advice and support as well as the products themselves.
The honeymoon's officially over. First half profits were £61m this year, a dramatic tumble from last year's £154m. The share price, meanwhile, has fallen by nearly half over the last 12 months.
Because it doesn’t provide mobile service, Dixons Carphone is heavily reliant on postpay mobile sales. When a phone and contract is sold, the company takes a portion of the revenue from the service provider, such as Vodafone or O2, that it packages in the deal. This is taken as upfront revenue, calculated as a percentage of the contract’s value. The model's worked well in the past, but now there are problems.
First of all, mobile sales have slumped amid a 16% rise in the cost of handsets, which the company can thank a weak Sterling for. Square this with tightened incomes and reduced consumer spending, and a shiny new mobile is the last thing on most people's minds.
But there is a second, deeper problem: consumers simply aren’t upgrading their existing phones as frequently as before, because the pace of innovation is relatively less. A case in point is a comparison of the changes between the iPhone 5 and 6, versus the iPhone 7 and 8 (we’ll have to see about the iPhone X). With only incremental changes, the imperative to upgrade has been somewhat more subdued.
‘As a consequence, we have seen an increased number of people hold onto their phones for longer,’ said group CEO Seb James. ‘While it is too early to say whether important upcoming handset launches or the natural lifecycle of phones will reverse this trend, we now believe it is prudent to plan on the basis that the overall market demand will not correct itself this year.’
On top of this, Dixons Carphone has had to contend with last year’s EU legislation that came into effect this July, abolishing roaming charges across the bloc.
It’s still early days, but the company estimates this will result in a £10-40m negative adjustment to its finances this year, which is doubly painful given that various adjustments and one-off items last year resulted in a £71m net positive.
Faith in Contracts
Pressure is mounting to close stores. According to Bloomberg, there are 250 Carphone Warehouse stores within a radius of less than a mile from the ‘three in one’ stores, encompassing the same brand along with Curry’s and PC World, that initially reduced the number of stores by 134. More could be set for the chop.
There’ll undoubtedly be investor scrutiny on where the company goes next, with James confident that the postpay market will return to normal. ‘In the meantime we have taken a conscious decision to invest in our margin and proposition to maintain market share and scale so we remain in a strong position as the market leader when this happens,’ he said.
The problem is that we’ve already reached ‘peak smartphone’ in developed markets: most people who are going to get one already have one. Dixons Carphone has depended on the rate of innovation and handset upgrades remaining steady, but if it does slip in the long term, this means it’ll need to find growth elsewhere. It will surely try to negotiate better terms from network providers to capitalise on more expensive handsets, but that’s becoming more difficult now that the network providers are teaming up with other telco companies into quadplay behemoths.
In response to this quandary, some have even suggested axing the mobile division altogether, especially with the electrical division of the group showing strength across Europe, with like for like sales up 6% to August.
‘The European electricals space has started to consolidate over the past 1-2 years and we see potential for further activity as many markets are still fragmented,’ said a recent report from UBS. ‘The leading retailers have been gaining share, highlighting the benefits of scale in the face of online competition.’
The idea may gain traction once Dixons Carphone posts its full year results. The company is expected to be boosted by a strong black Friday, and questions will be asked about the future of mobile if there is a large disparity in figures.
Image Credit: Geograph
This article has been amended to correct erroneous profit and share price figures.