Archive for the ‘Others’ Category

Dixons Carphone: What’s It All About?

Posted: September 1, 2014 in Others

Source: 1clicknews.com

In Spring 2014, Dixons Retail (Currys and PC World) and Carphone Warehouse (CPW) announced a merger between the two stores to create the biggest technological superstore in the UK which will be known as Dixons Carphone. As the new mega-company was founded in 7th August 2014, we look into more detail on the merger and discuss the reasons behind it and the potential risks and gains.

 

BACKGROUND OF THE TWO FIRMS

– History of Carphone Warehouse

Founded as “Car Phones” by Sir Charles Dunstone and Julian Brownlie, the company started in 1989 based in London. With the help of an old friend (and chartered accounant) David Ross who became a financial director, the company expanded to 20 stores within 4 years of opening. With continued success over the 90’s with stores opening in Western Europe and with Guy Johnson joining as a Logistics and Distribution director, the firm was truely independent and didn’t need assistance from investors by the start of the 21st century.

In 2002, it took over the fixed line operator Opal Telecom PLC and a year later launched TalkTalk by using the assets of Opel Telecom and taking advantage of the liberation of the UK fixed line market. In 2006, it also launched Virgin Mobile France was launched as a joint venture between the Carphone Warehouse group and Virgin as a leading mobile network. In 2007 the company launched Geek Squad, a support centre for all home technology.

Also in 2007, Best Buy Mobile was launched as a cooperative agreement with Best Buy (a major technology retailer in the US) and a year later Best Buy Europe was created from the 50% acquisition of the Carphone Warehouse group from Best Buy. By 2010, Carphone Warehouse and TalkTalk demerged creating seperate entities and over the next few years Best Buy failed to meet expectations and was eventually closed in Europe. Carphone Warehouse brought back its 50% share in the group and the deal was completed in June 2013 for £471m.

More information on the history of Carphone Warehouse can be found here

– History of Dixons retail.

The firm which was started by Charles Kalms registered in 1937 as Dixons Studios in Southend as a photographic studio. Unusually, the name “Dixons” was actually chosen at random from the telephone directory rather than the surname from the founder or the name is directly associated with the market the company is in (e.g. PC World selling PC’s). It expanded to seven stores in London by the late 1930’s/early 1940’s but was reduced to a single store in Edgware, North West London by the end of the second world war.

By the 1950’s the company took advantage of the demand of photography under the advice of Stanley Kalms (Charles’s son) and sold physical cameras as well as accessories. With this plus aggressive marketing and a mail order division allowed Dixons to be a market leader in the 1950’s and resulted in rapid expansion – so rapid that in 1957, the firm had to relocate its head office. During the 1960’s, the company continued to expand from acquisitions of rivals such as Ascotts and Bennetts (1962 and 1964 respectively) and entering the audio and hi-fi market by the end of that decade.

By the 1980’s the company further expanded its portfolio by acquiring The Currys Group, Mastercare (which was the nationwide electrical appliance service organisation) and Bridgers – goods discount stores which was the basis of today’s Curry’s megastores. In the 1990’s the Vision Technology Group (VTG) who operated under the name of PC World was purchased by Dixons. Also Dixons opened “The Link” which was its first step into telecommunications.

Dixons eventually opened 295 The Link stores across the UK. Pictured above is one in Derby. Source: grosse.is-a-geek.com

In the start of the 21st century, the company was the UK leader in household and media appliances and a strong competitor for other markets such as telecommunications and gaming. It continued to strengthen its portfolio by opening megastores in the UK, investing into the internet by launching the biggest online electrical store. and buying and selling companies across Europe. Acquisitions included Ei System (a leading PC retailer based in Spain and Portugal) in 2000, UniEuro – an electrical retailer based in Italy – in 2002 and had an “long-term co-operation agreement” with the Eldorado Group – a specialist electrical retailer from Ukraine and Russia. However in 2006, The Link was sold to O2 (UK). At the end of the decade the company suffered at the global recession and announced company restructuring which kept them afloat during a difficult time. Despite most high street stores closing down or operating at a loss, Dixons announced in 2010 that had a 61% rise in full year profits. With most direct rivals now in administration now (e.g. Comet) Dixons leads the way in electrical household goods in the UK.

More information about Dixons history can be found here

 

REASONS BEHIND THE MERGER

– Planning For The Future: The “Internet Of Things”

With both firms publishing strong sales at the end of 2013, the reasons behind the merger are not to do with any current financial problems. The Carphone Warehouse and Dixons both announced a 59% rise and 76% increase in earnings in the financial year 2013-14 respectively, compared to the year before. The main reason why the two organisations will be merged together is because they’re planning for the future with the “Internet of Things”. The Internet of Things (IoT) is simply where physical products can be digitalised, all connected to the internet and can communicate with each other – which then has the potential to be become far more useful. There was smartphones, then smart TV’s, now smart watches and next will be smart homes and smart cars (not Smart Automobile – a division under Daimler AG) and all these objects would be connected to the internet and interact with each other. For example, watches only just tell the time but with smart watches built by companies such as Samsung and Motorola, they can communicate with your current smartphone, by letting you read texts and display maps without having to get your phone out of your pocket.

Currently with the IoT, the trend seems to be everything in the household connected and run by mobile gadgets. Smartphones and smart watches will be able to communicate with bigger appliances such as TV’s, dishwashers and even central heating systems. At the consumer electronics show (CES) 2014, there was innovative ideas from firms that showed possible concepts for a smart kitchen. These ideas included a wifi-enabled refrigerator, a cooker that warns users via text when their food is ready and even a touchscreen cooktop. Korean manufacturers LG and Samsung showcased smartphone apps that allowed users to control their appliances. Of course it’s not all about what’s in the kitchen but also the living room. Currently there are apps on smart phones that work with TV’s and gaming consoles such as Microsoft’s Xbox and Sony’s Playstation. Other possibilities could include car tech by Geek Squad (by CPW). Geek Squad is a “24/7 tech support team” that offers advice and help in selected Carphone Warehouse stores, for those unfamiliar with the latest technology. Android Drive and CarPlay by Google and Apple respectively will be available for consumers soon and Microsoft’s version of a operating system in a car is currently in development. Some user may find installing or even using the car software difficult and could need assistance.

 

LG's HomeChat app allows users to communicate with home appliances as if they are real people. Source: foodtechconnect.com

LG’s HomeChat app allows users to communicate with home appliances as if they are real people. Source: foodtechconnect.com

So what does this mean for Dixons and the Carphone Warehouse? With the IoT, there’s a massive opportunity for these firms for expansion and instead of investing possibly billions of pounds, they would even save as much as £100m by merging together due to overlapping offices. However, since all these appliances would be connected to the smartphone it could be seen as more of a benefit to Dixons rather than CPW since their knowledge and expertise on mobile technology is much more valuable than home appliances. For Carphone Warehouse though there’s another reason why the merger makes sense – defence.

– Defence: CPW vs. Mobile Networks

Mobile phone Networks want third parties like CPW and Phones4U gone since they will have better control over their network and save on costs. The UK’s 3 major mobile networks with contracts available to Carphone Warehouse (O2, EE and Vodafone) are rumoured to have falling profits, potentially part due to the dying of smartphone and tablet sales. EE have already started considering to continue its partnership with CPW and the other 2 networks could follow suit. Three – the 4th biggest network in the UK – already pulled out of CPW in November 2013. It’s worth remembering that Vodafone did pull out of CPW back in 2006 due to a disagreement on much commission Vodafone had to pay, but then re-joined 3 years later. A repeat of Vodafone discontinuing their partnership with Carphone Warehouse cannot be overlooked.

“The networks would like to be more reliant on their own direct channels and take the same route as Three, but they do too much volume through Carphone. There is a lot of noise, but they are all waiting for each other to show their hand”

Matthew Campelli – News Site Mobile Today

During 2013, O2 sold their broadband and fixed line business to BSkyB and Vodafone returned their 45% stake in Verizon in one of the biggest corporate agreements in history. The mobile networks say that these deals will allow them to concentrate on 4G and their core business, but you can almost feel that one of the main reasons was to save costs.

Also, with further increases in operating costs due to legislation in the next few years, mobile networks want more independence on the high street by cutting out the middleman. Ofcom announced that not only will it cost networks “up to 430% more to use radio spectrum” but also in 2015, roaming charges while using a phone abroad in Europe will be gone. As a result, there is a fear that these operating costs would be pass down to consumers, but networks are already at risk losing customers coming off mobile phone contracts due to increased financial pressure in the current climate.

So what does this all mean for Carphone Warehouse? With the combination of spending money on installing 4G equipment, higher legal operating costs in the future and the slowdown of sales on smartphones and tablets, networks will be in financial trouble in the next few years. One way to save on all these liabilities would be to withdraw their partnerships with third-parties like CPW but with their merger with Dixons, if a network was to pull out it could risk losing too much business – even more than before the merger was announced – and made it even more difficult for the likes of EE, O2 and Vodafone to become truly independent.

 

WILL IT WORK?

– Failed Attempts: Carphone Warehouse with Best Buy.

As discuss earlier in the history of CPW, Carphone Warehouse and Best Buy did have a 50:50 partnership formed in 2008 and planned to expand throughout the country opening 200 American-style electronic “mega-stores”. However, the joint venture didn’t work – it only manage to open 11 stores – and in 2011 pulled out of the UK market completely costing the 2 companies around £200m each. Officially Best Buy blamed “economic downturn, low brand recognition and a stiff competition from British market.” but looking deeper into why the plan failed, it could only blame itself…

  • Economic Downturn – with the recession during around the same time as Best Buy entering the UK market, sales targets should of been realistic. However, they were over ambitious with CPW predicting sales of between £600-£700 per square foot – over 20% more than Dixons at the time. Established retailers Dixons and Comet were already suffering from the economic downturn (with Comet closing down all together eventually) so Best Buy’s targets were never going to be met.

 

  • Low Brand Recognition – while in the US Best Buy is successful electronics company, in the UK it could easily be mistaken for a firm to compete with for Aldi or another discount grocer, according to research by a rival retailer. Also, due to the nature of the market consumers would only enter a electronics retail store a few times a year – after all, how many times would you need a new fridge? With the vast majority of the public not knowing the company and a very small footfall in stores, advertisement and promotion would be the only way to let the public aware of Best Buy and drive them into their stores, as long as it was relevant to the UK market. Unfortunately this was never the case and it got criticized for being too American which never helped. Best Buy should of adapted better to its new environment – especially since it had CPW at hand.

 

  •  Stiff Competition – in all technological markets competition is very fierce, therefore all firms would need to find as much advantages as possible. Best Buy’s rivals once had a reputation for its shops to be not organised or clean with staff not customer-friendly – only concerned with their commission due to the amount of pressure on them. However, in 2007 Dixons overhauled everything with staff having the proper training required and stores receiving a full refurbishment. Best Buy did not follow suit and was even described as “immature” which lead to its rivals having a stronger case. Also when announcing its plan to open its 200 mega-stores, it gave Dixons and Comet a chance to react because the plans were 2 years ahead of its time (i.e. the first store didn’t open until 2 years after the announcement). Best Buy should not of made its plans public at first – or at least not have released so much details.

 

Despite its success in the US, Best Buy was a failure in the UK. Source: soultsretailview.co.uk

Despite its success in the US, Best Buy was a failure in the UK. Source: soultsretailview.co.uk

 

Of course, most of the reasons why Best Buy failed will not apply to Dixons Carphone. The economy is now recovering (slowly), both brands are well known in the UK and the rest of Europe and it’s only direct competitor would now be Phones4U with other threats from high street retailers such as Argos and Richer Sounds. Also there’s a huge opportunity with the IoT, but Dixons Carphone must not forget why its previous partnership with an electronic store failed.

– Potential Online Threats: “Click-And-Collect”

Online shopping is on the rise, both on a PC and now on smartphones due to its convenience, range of products available and pricing compared to high street stores. However, one of the issues with online shopping is with delivery – you must be available at a given time and date to collect your goods which could be a nuisance. To get around this problem, companies such as Tesco offer time slots which allow customers to choose when they have their items delivered – at a cost. The more popular time slots such as weekday evenings would be more expensive compared to lunchtime during the week.

Other companies – like Dixons – offer an alternative service called “click-and-collect”. Viewed as “the potential saviour of the high street as it connects the fast-growing online shopping world with physical stores”, in short, the customer does all their shopping on the internet, pays of it online and then collect their good(s) at their local store whenever it’s best of them. In Dixons case, they offer to hold a customers items for up to 28 days after it’s been delivered in store. This gives customers of all the benefits of online shopping without the hassle of delivery – provided they’re willing to collect the item(s) themselves. This might not be suitable for home appliances like fridges and washing machines but for smaller gadgets like tablets and gaming consoles it could be an advantage.

The problem is popular online shopping sites like eBay and Amazon are starting to offer (or already offering) a similar service which could be a potential threat to Dixons Carphone. eBay has extended its partnership with Argos to offer a click-and-collect service with “65,000 eBay sellers are expected to offer items for collection at Argos, rising to 80,000 in 2015”. Amazon on the other hand will soon release trials to offer online shopping pick-up lockers in London Underground station car parks. What all this means is customers could feel persuaded to use rivals firms like eBay and Amazon since one of the advantages of using the high street rather than online would be effectively be gone. One of the reasons Dixons and CPW merged in the first place was to provide an service on technological products and gadgetry like no other on the high street, but this could be pointless if everyone switches to online shopping and uses click-and-collect. Dixons Carphone must keep an eye on consumer behaviour and be ready to adapt.

 

Dixons Carphone is one of the most exciting mergers to come out in recent history due to not only the success of the 2 companies in question but also the opportunities that lie ahead. However it must not get too complacent, especially due to the rapid change in the market it is in and of course the economy. How Dixons Carphone manages in the next few years we will have to wait and see…

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