Chipping away at the hi-tech sector

Technology manufacturers and retailers are feeling the pinch as demand slows, profits fall and brands crumble. Unless new revenue streams are created they will not survive.

Tiny Computers is the latest victim of the fallout and consolidation afflicting the PC and mobile phone industries. After collapsing into administration last week, it has been bought by rival Time Group.

The technology market is maturing and retailers are facing declining sales. The mobile phone sector has been particularly badly hit – among its casualties are the WAP Store, which ceased to trade, and The Phone People, which was forced into administration. And while The Carphone Warehouse battles with falling new subscription connections, The Link is facing a slump in like-for-like sales.

Mintel Retail Intelligence senior European retail analyst Bryan Roberts says: “The [PC] market is cooling and only the strong [brands] will survive. We will see further consolidation, but not to the same extent as the [weaker] mobile phone market.”

The profits that PC retailers enjoyed until recently are fast disappearing. Research from Gartner Dataquest shows that PC sales in the third quarter of 2001 fell 12.2 per cent – from 1.5 million units to 1.3 million units – compared with the same period in 2000.

Gartner Dataquest industry analyst Ranjit Atwal says: “PC technology hasn’t been moving fast over the past two years. Manufacturers are dependent on Microsoft coming up with new ideas and computers are more reliable, so we haven’t seen a spurt in demand for PCs.”

Now dominant players in the market are becoming apparent and Atwal says PC World and Time Group will represent 40 per cent of all UK PC sales, 20 per cent each.

Retailers are having to place emphasis on brand names in order to stand out in the market. They are also diversifying into PC peripherals and related products to lessen their reliance on PC sales.

Before the Tiny purchase, Time Group had already decided to rebrand its retail operation as Computer World. These stores will sell Tiny and Time branded computers, as well as a wider range of peripherals. Time Group will also close 60 stores where Time and Tiny locations overlap and scrap concessions in Powerhouse stores to leave 150 outlets rebranded as Computer World. The possibility of Time selling other manufacturers’ PCs has been put on hold following the purchase of Tiny.

Time Group, seen in the past as a PC manufacturer with its own-branded outlets, now wants to be seen as a retailer that also makes PCs.

Time Group marketing manger Brian Trevaskiss says: “We are positioning Time as a brand and Computer World as a retailer. We believe Time is a PC brand and people will associate the new name with accessories as well as PCs.”

Atwal adds that, as a manufacturer and a retailer, Time Group will also have to look at how it distinguishes its products, using developments in PC design.

He adds that the line between electrical retailers and PC retailers is blurring, particularly as PCs can be used with other electrical items such as cameras and video cameras. “In the long term, PC retailers are aiming to position themselves against the likes of Dixons.”

Even the mighty Dixons Group was hit by falls in demand for PCs and mobile phones, according to its latest results for the 28 week period ending November 10.

Although sales at Dixons’ PC World were up five per cent to £581m, like-for-like sales were down two per cent, illustrating that a 17 per cent decline in the PC market has made some impact on the chain. The Link, which is 40 per cent co-owned by mm02, reported a decline in sales of nine per cent to £161m – on a like-for-like basis this means a fall of 18 per cent.

Even leading independent mobile phone retailer The Carphone Warehouse has not been left untouched. It reported a fall in subscription connections to 661,000 for the 13 weeks ending December 29, down from 687,000 for the same period in 2000.

But Mintel Retail Intelligence analyst Richard Perks says: “The Carphone Warehouse results were staggeringly good given the level of subscriptions was almost flat in a market that’s 40 per cent down.”

As retailers fall by the wayside, analysts say that others are well placed to pick up a market share. For instance, The Carphone Warehouse claims to have built up a 20 per cent share in the UK, and The Link and Phones 4U are understood to have shares of about ten and five per cent respectively.

Networks keen to shift mobile users onto more lucrative contracts have been phasing out subsidies on pre-pay handsets, which has had a knock-on effect on independent retailers

Perks says: “I think an awful lot of the independent retail chains were opportunists that weren’t set up to cope with the shift from selling pre-pay phones to contracts.”

When it comes to subscription contracts, the normal retail model does not apply and the method of payment is complex. Commission payments by networks to retailers can be clawed back if users switch operators within a specified time limit. Like the PC market, mobile phone retailers have had to generate additional income through the sale of mobile accessories, ring tones, chargers and content such as graphics.

Advertising has also moved on. Once it was enough for non-network-owned retailers to promote “independent” advice, now the likes of The Carphone Warehouse and Phones 4U are focusing on the “shame” of not having a stylish and up-to-date mobile phone.

Credit Suisse First Boston retail analyst Nathan Cockrell believes that a replacement cycle for handsets that is faster than that for white goods will help secure the future of mobile phone retailers.

The Link marketing director Joe Garner expects that the market will – in the short term – be driven by aesthetics such as colour screens. He adds that there is “significant oversupply” in the market and the new mobile technology will only boost the market when it “translates into meaningful consumer benefit.”

The networks hope the use of content services based on the new technology will help to increase the average revenue per user and offset income lost through the reduction in the numbers of new subscribers.

Some analysts doubt the need for network-owned retail outlets, claiming that consumers will seek out independent retailers for objective advice. But One 2 One head of retail marketing Carl Hargarve says: “The multiple retailer will do a job, but it won’t be able to represent what a brand stands for. And, as technology develops, products will be more complex and it will be difficult to advise people without being in front of the consumer.”

It remains to be seen whether newcomer Hutchison 3GUK, which launches later this year, will take the same line. But reports suggest that the third-generation (3G) mobile operator may buy Caudwell Communications’ Phones 4U.

Given that there will not be another Microsoft launch for some time and the introduction of 3G mobiles as a mass-market proposition is a long way off, PC and mobile phone retailers will be forced to find other forms of innovation to survive.

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