Carphone Warehouse counts cost of weak European markets
Mobile phone retailer’s European high street revenues fell by 5.5% to £3.3bn in the year to 31 March
Carphone Warehouse has warned that it expects the consumer environment in Europe to remain difficult as it forecast a decline in new sales due to weak demand for pay-as-you-go handsets.
The mobile phone retailer said revenues at its European high street business fell by 5.5% to £3.3bn in the year to 31 March, caused by an overhaul of its German arm and a drop in pay-as-you-go sales of up to 40% in some markets. Pay-as-you-go users are a low-margin business for Carphone Warehouse, which posted a small rise in pre-tax profit, but they are a significant customer base for the retailer.
Carphone Warehouse said a lack of attractively priced smartphone products had contributed to the dearth of customers in the low-end pre-pay market. The company, founded by the retail entrepreneur Charles Dunstone, generates its revenues from signing customers up to mobile phone networks, reaping a commission and then a share of the subsequent revenues. The UK is its largest retail market, accounting for 800 of its 2,400 stores, but the retailer is something of a bellwether for the European consumer, with stores in Germany, Sweden, Ireland, the Netherlands, France and its second biggest market – Spain.
A general shortage of household cash and confidence among consumers has hit the business, which has coincided with mobile phone operators cutting back on subsidies for pay-as-you-go customers because of a European Union crackdown on charges such as termination rates – levied on customers when they switch networks – and roaming charges that are imposed when travelling abroad. As a consequence connection volumes, or new sales, fell by 14% to 9.8m. About half the group’s revenue decline was caused by the shift of its German business to a straightforward retail model after it ended its approach of acting as the front for a mobile network by carrying out billing, call centre work and other tasks. That move cost £100m in lost revenues last year.
Predicting the current year for its European business, Carphone Warehouse said: “We expect the consumer environment in Europe to remain challenging in the year ahead along with the continued effect of regulation and competition in the mobile market.” Stripping out the one-off gain from the £838m sale of its stake in a mobile-phone joint venture with the US retailer Best Buy, Carphone Warehouse reported a 4% rise in pre-tax profit to £58.3m, reflecting the low-margin value of its pay-as-you-go customers, in contrast with the more profitable customers who sign long-term contracts with mobile phone groups but make up a smaller part of the company’s customer base. The other significant element in Carphone Warehouse, Virgin Mobile France, saw revenues climb 19% to £390m.
Carphone Warehouse also demerged its TalkTalk broadband operation in 2010.
Analysts at Singer Capital Markets predicted a positive response to the figures. “The stock has fallen by 23% over the last 3 months but held up better in the last month, falling less than 5%. The shares could go better today given the recent slump,” they said.