Cellnet pays price for upward mobility

Dixons chairman Sir Stanley Kalms was right when he described Cellnet’s investment of up to 57m in its Link chain as “an interesting opportunity” (MW April 10).

But the question remains as to who is most “interested” in the deal. Dixons, which now has the money to double the size of its fledgling chain. Or Cellnet which, suffering from both a fall in profits and a fall off in subscribers, now has a more direct contact with retail customers – especially the estimated extra 5 million people in the UK who are expected to buy mobiles by the end of the decade.

Cellnet has bought a 40 per cent stake in a company not yet three years old which has a turnover of 21m, assets of 7.5m and losses of 2.9m (April 1996 figures).

The initial 25m investment, to be followed by a further 32m depending on performance targets over the next five years, will more than double the number of stores from 87 to 200. The two have already been co-operating in the Shell Smart card consortium.

But there will be no Cellnet branding in Link shops and the stores will continue to connect to rival networks Orange and One2One – Cellnet will be very much a sleeping partner.

“There will be absolutely no changes to the way in which The Link operates,” says Dixons corporate affairs manager Ruth Docherty. “Although it’s a significant move for the company, there will be no obvious sign of the deal having taken place. Staff will continue to offer informed and impartial advice on all networks.”

Cellnet’s head of corporate affairs William Ostrom insists that The Link staff will not be encouraged to favour Cellnet products when offering advice. “Cellnet will have no control over the training of sales staff – they will continue to be trained by The Link,” he says. “We do not want to squeeze out Orange and One2One. It is good business for the retailer to stock a wide range as this means choice for the customer.”

It’s a view echoed by at least one City analyst: “No retailer would be too happy to stock just one network. In a highly competitive market, it would be cutting its nose off to spite its face.” Both Orange and One2One, which have much smaller subscriber bases but are growing at a faster rate than Cellnet, refused to comment on the merger or give any indication as to whether they will pursue similar deals with retailers.

Cellnet’s move follows Vodafone’s purchase of retail market leader Peoples Phone for 77m last December. Narrowing the gap between operator and subscriber is a major objective for all the mobile operators. But especially, it seems, for Cellnet which could end up paying more than 50m for a 40 per cent stake in a company that has less than 20 per cent of Peoples Phone’s 130m turnover.

The reason for the development into buying retailers is twofold. More than 15 per cent of the UK’s adult population – 7 million people – now own mobiles. A figure which is expected to rise to 12 million by the year 2000. Secondly, despite what Cellnet and The Link are saying the deal does give the network greater control over how it is sold to retail customers.

Indeed, this could become an issue for consumers aware of the connection between the retailer and the network – a link which will not be advertised in the stores. As one analyst bluntly puts it: “The average customer is not a complete idiot.”

Charles Dunstone, founder and managing director of the independent mobile phone retailer Carphone Warehouse, which has 90 outlets throughout the UK, is not convinced that Cellnet will be as silent as it claims.

“It would not spend 57m if it didn’t think it would increase its sales,” he says. “We are not in discussions with anyone and have no intention of merging.”

Dunstone claims network/retail mergers are a sign of weakness. “It’s a negative way of operating because if a company is confident in its brand, it will be happy to sell within the natural market force. These ‘investments’ make networks look weak to their customers,” he says.

“All this merging gives us a unique strength and position in the market. The Link was looking to be a strong competitor but it has sold its birth right to the highest bidder. We have a much healthier relationship both with the supplier and the customer.”

But behind Dunstone’s bluff manner is the disquieting fact that the Cellnet deal will allow Dixons to accelerate high street store openings of The Link. But neither of the recent mergers will be accompanied by large advertising campaigns to celebrate the new relationship between network and retailer.

Peoples Phone spokeswoman Corinne Norris says the company is currently reviewing its marketing and advertising strategy but has made no “firm plans”. Yet a revamp of Vodafone’s corporate identity is expected to follow the appointment of design consultancy Springpoint and could also lead to identity changes at Peoples Phone outlets.

The Cellnet/Link deal also conjures up the prospect of Dixons working more closely with Cellnet’s majority owner BT, which owns 60 per cent of the company. Last year it had unsuccessful talks with BT over buying some of its stores (MW March 29 1996). Ostrom insists that, “BT is not involved in the merger except insofar as it was consulted as a major shareholder”. And says there is “no question” of BT stores, of which there are about 120, trading as The Link.

But, with Securicor’s 40 per cent stake in Cellnet looking increasingly likely to come onto the market, Dixons could be seen as a potential suitor.

Securicor wants to sell after issuing a profits warning in March; BT would like to buy it out, but existing legislation prevents it from doing so. Dixons is an option although Docherty declines to comment on whether the electrical retailer, with a profit of 57.5m for the last six months of 1996, would be “interested” in doing a deal.