MarketLine Blog

Did Phones 4U fail to pick up the signals?

On 15 September 2014, Phones 4u went into administration. The United Kingdom-based mobile phone retailer had more than 700 high street outlets and a workforce of nearly 5,600. However, when network operator EE announced that it was not going to extend a supply contract with the company, its business model became unworkable.

Phones 4u started life as a wholesaler of cellphone handsets called Midland Mobile Phones, founded by entrpreneur John Caudwell in 1987. The Caudwell Group entered the cellphone retail market in 1996 under the Phones 4u banner. Phones 4u expanded rapidly, with particular appeal to the 18-24 year old demographic. In 2006, annual sales exceeded £2.25bn, it employed around 10,000 people, and sold 26 handsets every minute. The company sold handsets with accompanying contracts from the main wireless telecommunications system operators, paying them a commission for each.

Although sales had fallen away from their mid-2000’s peak, it was still a major retailer in this sector on the eve of going into administration. Two related factors had some responsibility for its downfall.

Firstly, to use Michael Porter’s classic terminology, Phones 4u experienced strong supplier power. The mobile phone service industry in the United Kingdom is highly concentrated. The leading five service providers O2, EE, Vodafone, Three, and Virgin, account for nine in every ten subscribers. With their revenues under pressure because of fierce competition in their own end-market, and a cap on certain charges recently imposed by the EU, they had a strong negotiating position relative to retailers such as Phones 4u. Starting with O2 in 2012, the system operators decided one by one to terminate their supply contracts with Phones 4u. When EE announced this month that it would not be renewing its contract in September 2015, Phones 4u was forced to enter administration.

Secondly, the system operators were making longer-term changes in their distribution strategy. The Unite Kingdom cellphone market is mature. The system operators no longer want to access consumers with no phones using every available channel. Rather, they want to be able to performance-manage their distribution system more effectively, by bringing it increasingly in-house. All the major operators have high street stores of their own, plus online retail channels, and the need for third-party dealers is less important to them.

Troubling news, of course, for the workforce at Phones 4u, as their continued employment is now precarious. And consumers may well ask whether a less diverse phone retail market will lead to higher prices. But this story is a cautionary tale for retailers. The moral is: keep a sharp eye out for changes in distribution channel usage, not only by consumers (the woes of HMV et al. should have made that clear) , but also by your suppliers.

For related reports, check out:

United Kingdom – Wireless Telecommunication Services

or

United Kingdom – Mobile Phones

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