Carphone Warehouse puts money where the mouth is

Twenty years ago it was the first independent mobile phone shop but now Carphone Warehouse is facing tough competition. Rufus Jay reports on how it is diversifying its services to stay ahead

Carphone Warehouse is facing multiple challenges from numerous competitors in a crowded market. The original “independent” mobile phone shop has diversified into fixed-line, mobile, broadband and internet services since launching almost two decades ago and must now manage a raft of differing businesses and conflicting brands.

Carphone was launched in 1989 by the then-25-year-old Charles Dunstone with his £6,000 life savings. He opened his first store in 1990 and by 1993 had 17 retail shops and a mail order operation under the Carphone banner. At the time it competed mainly against the mobile operators’ own-label high street shops, but its niche was so successful it spawned a wealth of imitators.

In 1996 rival mobile phone reseller Phones4u was launched by the Caudwell Group and the two share the spoils. There are also independent resellers who compete against Carphone, as well as Dixons-owned The Link and offerings housed within the major electrical retailers.

Industry observers say the Carphone brand has grown around giving independent advice to consumers on the best mobile deal, although some suggest its forays into becoming an own-brand provider potentially dilute this premise. Verity Evans, creative strategist at branding agency Venture Three, likens the brand to the “gocompare.com of the high street”. “They simplify a confusing market and try to find the best fitting deal for the consumer, regardless of operator,” she says, claiming this is where the company’s value lies and gives it traction over mobile operators’ retail outlets.

Carphone’s financial performance remains strong in the face of a gloomy economic outlook. In the 13 weeks to the end of December, Carphone’s retail revenue increased 1% on a like-for-like basis to £650m, while retail gross profit rose 3.1% like for like.

Evans thinks the retail operation can continue to be successful, despite a saturated UK mobile phone market and a relentless focus from rivals on over-the-phone or Web deals, as people still like face-to-face interaction and having a phone’s features demonstrated.

However, she warns Carphone will need to put out a stronger brand message in order to ensure further growth. “It could position itself as being more on the side of the consumer,” she says. “The miserable phone [Mobli] ad showed the importance of having the right phone. But it doesn’t say much about the company values”.

She adds that if Carphone could extend the brand on that principle of independence: “In such a crowded market, that becomes increasingly confusing, there is a role for someone who can make it clearer.”

But Carphone has itself diversified out of being just a mobile reseller to launch mobile, fixed line and broadband services under the TalkTalk brand in 2003. It is hoping the appointment of Wendy Becker, to oversee its fixed-line and broadband activity, will help take these services to the “next level” (MW last week). But rivals are providing increasingly sophisticated offerings.

Carphone launched its landmark “free” TalkTalk broadband service in April 2006, but the company was quickly overwhelmed by customer demand and struggled to connect users – resulting in a media backlash. Sources suggest that it rushed its offer to market, and is only now recovering.

Carphone says TalkTalk Broadband is now performing well, and is the third biggest UK player, with 2.6 million customers in December, a 20% year-on-year increase. Martin Olausson, digital media director at Strategy Analytics, agrees. “Customers either made their peace or moved to another operator,” he says.

The move certainly shook the broadband industry, with rivals including Orange and BSkyB launching their own free and bundled services. Meanwhile BT was forced to “raise its game in terms of quality”, according to Olausson.

Adam Rumley, research analyst at Enders Analysis, says that Carphone’s entry created a cost divide. “The Carphone offer is available, but people are still paying, and willing to pay, for, broadband – 60% of BT joiners are opting for the high-end options.”

Another ISP executive wonders if TalkTalk’s “utility” feel will count against it, in the face of competition such as Sky, which bundles services together with entertainment content. “People get excited about entertainment, not about just a home phone,” he says, adding this puts Sky best positioned to capture growth.

Philpott points to a shift to multimedia as the next big hurdle for Carphone Warehouse. “This is why Sky is in such a strong position with its premium multiservice brand,” he says. “I don’t know what Carphone will do. It will have to do something as it is missing out if it just offers phone and broadband”.

But Carphone insists its offer is still compelling, particularly as people seek value in the credit crunch environment. A spokeswoman adds “not everyone” wants multiservice packages.

Carphone’s subscriber base has also benefited from the acquisition of AOL’s UK access business in December 2006. But the source feels that going from a dual position of both challenger and incumbent across two brands will cause problems for the group. “The acquisition creates tension between the products and customer bases,” he comments. “The cost of AOL’s service is high, but TalkTalk is free, and it is still trying to reconcile this”.

Carphone says it has no plans to rebrand AOL. Instead, it is focused on gaining share through expansion – 86 stores opened last year taking the global total to 2,423.

Becker, meanwhile, will have to find a way to move TalkTalk away from a price proposition towards consumer demand for sophisticated service bundles. Moreover, if Carphone is to maintain growth it will have to push its independent credentials to an ever-choosier audience.

Timeline: Carphone Warehouse†

1989 Carphone Warehouse started by Charles Dunstone†

1990 First store opens 1996 Enters France and Ireland†

2003 TalkTalk brand launched†

2006 Acquires AOL for $686m (£344m)†

2006 Launches free TalkTalk Broadband

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