Carphone Warehouse: Strategies

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The Carphone Warehouse is one of the most successful telecommunications businesses in the UK. It is now Europe’s leading independent retailer of mobile phones and services, with over 2,144 stores that combine a retail operation across 10 countries with an extensive and growing telecommunications services business. Today it is operating with a turnover of £2,220 million in 2005, which already contributes half of the Group’s revenue and is set to be a major driver of future profitable growth.

The Carphone Warehouse Group PLC
      1. Type

        1. Public

      1. Founded

1989
      1. Headquarters

Acton, London, UK
      1. Key people

Charles Dunstone, CEO
G. Roux de Bezieux, COO
Roger Taylor, CFO
John Gildersleeve, Chairman
      1. Industry

Telecommunications
      1. Products

Home and Mobile telephone equipment and services
      1. Employees

19,810 (2,144 stores)
      1. Subsidiaries

TalkTalk
      1. Slogan

Your phone, Your way
Website http://www.cpwplc.com

The story behind the success of Carphone Warehouse rests on some strong and constructive strategies set by the administration. Strategy is a game plan for how to get there. Carphone Warehouse strictly follows some strategies for achieving its goals. Here we have discussed those strategies under three categories:

  1. Marketing Strategy,
  2. Financial Strategy,
  3. Operational Strategy.

Marketing Strategy

Once the company has obtained an adequate understanding of the customer base and its own competitive position in the industry, marketing managers are able to make key strategic decisions and develop a marketing strategy designed to maximize the revenues and profits of the firm. 1 The selected strategy may aim for any of a variety of specific objectives, including optimizing short-term unit margins, revenue growth, market share, long-term profitability, or other goals.

Maeketing Strategies used by Carph one Warehouse

Segmentation, targeting and positioning in Carphone Warehouse

To achieve the desired objectives, Carphone Warehouse typically identifies one or more target customer segments, which they intend to pursue. Customer segments are often selected as targets because they score highly on two dimensions:

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1) The segment is attractive to serve because it is large, growing, makes frequent purchases, is not price sensitive (i.e. is willing to pay high prices), or other factors; and

2) The company has the resources and capabilities to compete for the segment’s business, can meet their needs better than the competition, and can do so profitably.

The implication of selecting target segments is that the business will subsequently allocate more resources to acquire and retain customers in the target segment(s) than it will for other, non-targeted customers. It seems that Carphone Warehouse has a ‘company policy’ that it will not sell its broadband service to anybody over the age of 70.2 (Dick Stroud, Commendable Intention– Idiotic Execution. Because Carphone Warehouse is afraid that the ‘forms will be too complicated’ and it suggests that the decrepit customer bring somebody younger along to explain the long words to the poor old soul. There has been a lot of consumer hassle in the UK about companies being to aggressive in their selling of services like electricity, gas and telephones and apparently Carphone Warehouse is reacting to this by refusing to sell to older customers, thus avoiding such an accusation.

In conjunction with targeting decisions, marketing managers will identify the desired positioning they want the company, product, or brand to occupy in the target customer’s mind. This positioning is often an encapsulation of a key benefit the company’s product or service offers that is differentiated and superior to the benefits offered by competitive products3. Carphone Warehouse’s strategy focuses on further steps to reinforce its retail market position and improve the profitability of its retail operations across Europe. This includes:

  • The restructuring announced today
  • Continuing to invest in training, branding and service development to drive market share
  • Selective investment in content for multi-media messaging services and Java applications to increase customer adoption and usage of new mobile services
  • Driving greater efficiency in logistics, purchasing and support systems across the group
  • Closing poor performing stores, combined with opening new stores in locations appealing more to higher value destination retailing.

New market entry

British mobile phone retailer, Carphone Warehouse is increasingly strongly positioned in this changing and new market. Whilst the total margin on subscription phone sales is substantially greater than on prepay sales, a number of mobile retailers have historically focused heavily on prepay phones. In the new market environment, the Carphone Warehouse dropped particularly in prepays sales and the increasing need for customer advice and cares are leading to a contraction of mobile phone outlets. A number of general retailers have cut back or ceased selling mobile phones and a number of specialist mobile phone retailers have lost market share or, in certain cases, ceased trading. (http://www.cpwplc.com/)

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Carphone Warehouse, has announced plans for a major push into the U.S. market, via a 50/50 joint venture with consumer electronics retail giant, Best Buy Inc. Carphone’s products will be rolled out in Best Buy stores throughout the United States over the next 18 months, and will be sold under the Best Buy Mobile brand name. The companies have begun testing the business model in a few Manhattan stores. Roger Taylor, the Finance Director of Carphone Warehouse said that the presence of a nationwide independent cell phone retailer would improve the buying experience for U.S. consumers.

Service Gaps in Carphone Warehouse

Now let us focus on the concept of service gaps. There are five types of encompassing gaps:

  • Information and feedback-related gaps;
  • Design-related gaps;
  • Implementation-related gaps;
  • Communication-related gaps; and
  • Customers’ perceptions and expectations-related gaps.

Carphone Warehouse is working efficiently and effectively to meet up these gaps. The introduction of content services has caught the eye of the revenue assurance wary, given the impending complexity. Content offerings involve many transactions involving consumers, operators and multiple parties providing content or content services.4 For consumer oriented offerings like mobile content that the Carphone warehouse offers, these controls often come after the fact due to the pressure to bring products to market rapidly. Closing the gap between launch and revenue management is becoming increasingly important, especially when many offerings are expected to come and go like fads.

Price and promotion

Europe’s biggest mobile phone retailer, Carphone Warehouse, has unveiled an aggressive new pricing strategy, by offering free broadband connections to its UK landline customers.

For just £21 (plus a £29.99 one-time connection fee), customers get unlimited fixed line calling within the UK, as well as a free broadband Internet connection. This is quite a persuasive deal, as most British ISPs charge around £18/month for high-speed Internet service alone.

To make this service profitable, Carphone will need to install its own equipment at about 1,000 UK telephone exchanges, so as to reduce its reliance on BT, the country’s former telecom monopoly.

“Our free broadband proposition, announced today, will require significant levels of investment in the short term. However, the broadband market is growing rapidly, and we are well placed to become a major force within it,” said Carphone Warehouse CEO, Charles Dunstone, expressing his utmost confidence in the new offering.

Financial Strategy

Carphone Warehouse pursues well-established strategies for its financial performance. In this purpose, Charles Dunstone, the Chief Executive of Carphone Warehouse said:

“Our excellent financial performance stems from our continued investment in growing our existing businesses and our ability to identify and develop new commercial opportunities both through our existing asset base and via acquisition. We are committed to long-term value creation, through the development of a portfolio of related businesses and services that can deliver attractive and sustainable growth in earnings and dividends. Our track record of earnings growth and strategic delivery over the past three years now speaks for itself.”

The considering and discussing facts that comes under the financial strategy of Carphone Warehouse are:

  • Financial performance of profitability ratios analysis,
  • Efficiency/activity ratios analysis,
  • Management of financial risk,
  • Capital investment decision.

Financial performance of profitability ratios analysis

The P/E ratio is a vital ratio for investors. Basically, it gives us an indication of the confidence that investors have in the future prosperity of the business. A P/E ratio of 1 shows very little confidence in that business whereas a P/E ratio of 20 expresses a great deal of optimism about the future of a business.

Here’s the formula,

Price/earnings or p/e ratio = Current market share price/ Earnings per share

Carphone Warehouse isn’t paying dividends at the moment:

The Carphone Warehouse Pence
            1. P/E ratio
Current market share price 76.0 16.52
EPS 4.6

P/E ratio of 16.52 means that investors are currently paying the equivalent of 16.52 years’ worth of earnings to own a share in the Carphone Warehouse. That is, they hare currently paying 76 pence per share and since the EPS is 4.6 pence per share, this means that they will recover their investment in a share after 16.52 years – equivalent to the break even and payback period if someone likes. (<http://www.bized.co.uk/>)

Efficiency/activity ratios analysis

Activity ratios measure the efficiency, activity and changes in specific assets. These include turnover ratios and inventory turnover.

The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. In its simplest terms, we are just saying that for every £1 of assets, the turnover is £x. The formula for total asset turnover is:

Total Asset Turnover = Turnover/ Total Assets

Carphone Warehouse
Consolidated Profit and Loss Account
31 March 2001 25 March 2000
£’000 £’000
Turnover 1,110,678 697,720
Total Fixed Assets 396,175 100,279
Total Current Assets 315,528 171,160
Total Asset Turnover Ratio for the Carphone Warehouse
31 March 2001 1,110,678
396,175 + 315,528
= 1.56 times
25 March 2000 697,720
100,279 + 171,160
= 2.57 times

We see that the Carphone Warehouse was able to generate sales of £1.56 for every £1 of assets it owned and used for the year ended 31 March 2001. For the year ended 25 March 2000, it was even higher at 2.57 times.

Carphone Warehouse has made major investments in its assets that have yet to generate their previous level of sales: 1.56 times versus 2.57 times. However, they expect that next year this ratio should improve again.5

Over the four years to 2001, this is the Carphone Warehouse’s Net Asset Turnover Ratio profile:

Net Asset Turnover Ratio 2001 2000 1999 1998
Net Asset Turnover 2.27 7.05 5.03 6.17

The Carphone Warehouse is growing steadily in terms of turnover and its asset base.

Management of financial risk

Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly Credit and market risk. Similar to general risk management, financial risk management requires identifying the sources of risk, measuring risk, and plans to address them. As a specialization of risk management, financial risk management of Carphone Warehouse focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

Capital investment decision

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management of Carphone Warehouse seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects are monitored strictly, so that they should be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management returns excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

Operational Strategy

Operations strategy is concerned with matching the characteristics of the operations function with the requirements of the market in order to fulfill the needs of the business.

Inputs-outputs

Carphone Warehouse develops a framework for manufacturing flexibility, which illustrates how to obtain consistency from manufacturing strategy to the resource characteristics in the production system. Provides guidance on how to analyse and develop manufacturing flexibility in a corporate decision-making context. Carphone Warehouse uses the well-known input-transformation-output (ITO) model as a starting point for building the frame-work, which makes a clear distinction between internal and external factors impinging on the company, connecting the market demand for flexibility, the characteristics of the production system and the flexibility of the suppliers. Carphone Warehouse pursues the connection from the strategic level to the individual resource characteristics in the production system.

Description of transformation process

Carphone Warehouse is in the process of going through a quiet transformation from a mobile phone retailer into a telecoms company with a retail arm. At the end of last year it signaled its intentions in the fixed-line market with the 154.2m pound ($271.8m) acquisition of UK telecoms provider Onetel from utilities company Centrica Plc. This acquisition added 1.1 million customers to its Talk service. It also paid 8.5m pounds ($14.9m) for Tele2 UK Communications Ltd and Tele2 Telecommunications Services Ltd (Ireland) from Pan-European telecoms company Tele2 AB. That deal added approximately 188,000 customers in the UK and 36,000 in the Republic of Ireland.

Analysis of Carphone Warehouse operations

Volume

The Carphone Warehouse is one of the most successful telecommunications businesses in UK. It is now Europe’s leading independent retailer of mobile phones and services, with over 2,144 stores that combines a retail operation across 10 countries with an extensive and growing telecommunications services business. Today it is operating with a turnover of £2,220 million in 2005, which already contributes half of the Group’s revenue and is set to be a major driver of future profitable growth.

Variety

At the start of 2003, with a host of potential applications development projects in the pipeline, the company started to examine its systems development strategy in a new light. It was clear that rapid growth and an ever-increasing and diverse customer base required a matching array of sophisticated support services. The challenge for ISENet Solutions (now CPW Group IS – GIS), the Carphone Warehouse’s dedicated information systems and e-business subsidiary, was to meet these requirements with a flexible model that could enable fast, reliable development without creating unwieldy and expensive projects. Outsourcing development to an offshore operation made sense.6

CPW was in search of a mature IT services provider with deep industry experience; and robust methodologies, tools and frameworks. [Case Study: The Carphone Warehouse Group – A win-win relationship with Patni, available at < http://www.patni.com/>]

Demand Variation

Demand for the service took the firm by surprise, with as many people seeking to subscribe in the first eight weeks as had been anticipated in the first four months. The firm said it had made “significant progress” in improving its customer service but admitted that 204,000 people were still awaiting broadband connection and more than 100,000 people have yet to have their phone service set up.

“Our average call centre answering times are now among the lowest in the industry,” Mr Dunstone said, while promising increased investment in customer service.

Carphone is one of a host of suppliers to offer competitive broadband packages in recent months as demand for the service soars. Recent figures showed that nearly 75% of UK households with access to Internet use broadband connections.

Customer contact

The Carphone Warehouse provides a consistent, high quality customer experience across channels. By leveraging the KANA solution to create a single source of accurate, relevant and timely information, the company expects to increase both customer and employee retention while reducing service delivery costs.7 (The Carphone Warehouse Selects KANA.

Five performance objectives

The cost objective

Carphone Warehouse is continually working to achieve cost effectiveness.8 The cost of expanding into broadband and into France weighs heavily on telecoms retailer Carphone Warehouse with profits down despite a 30% leap in revenue. (Rodney Hobson, Carphone Warehouse counts cost of broadband.

The quality objective

The Carphone Warehouse was built by offering their customers great quality, technically advanced products that meet their individual needs. Products bought from the Carphone Warehouse are not only be the most appropriate for the customer’s needs, it will also benefit from a comprehensive range of products, services and after-sales care that cannot be found elsewhere. The vision and core values first introduced by Dunstone remain unchanged and the company continues to be driven by a total dedication to customer satisfaction.

The speed objective

Carphone Warehouse has launched a high-speed broadband Internet and landline phone call package. The Carphone Warehouse understands the significant value that fast the service speed through processes that would occupy most data warehouse systems. At present broadband access costs is from £15 to £20 per month, depending on the speed. It also recently signed a broadband-in-a-box deal with AOL rival Telewest, which supplies high-speed access.

The dependability objective

Carphone Wrehouse has the ability to manage and control their entire network point to point through ensuring guaranteed service levels, quality and dependability for their customers.

The flexibility objective

Carphone Warehouse provides high quality service that yields benefits in terms of quality, access to scarce skill-sets, flexibility, reduced cycle time and a strong management relationship with minimal risk. They are quite flexible to meet the increasing customer demand.

The Carphone Warehouse story is not only well known; it also acts as an inspiration to other wannabe entrepreneurs. Starting with just £6,000 in 1989, Charles Dunstone was 25 when he set up Carphone Warehouse. The company floated on the London Stock Exchange in July 2000. Dunstone’s big breakthrough was to target smaller customers, including small businesses and private individuals, when existing mobile phone companies were neglecting that side of the market. He offered them a one-stop shop, good service and knowledgeable staff and watched his sales explode.

The company had 470 Carphone Warehouse stores in the UK and 647 across the rest of Europe in 2002. Carphone Warehouse appeared on the 1997 and 1998 Fast Track 100 league tables, and on the 2000 Profit Track 100. And all its success rests on the strict application of the above-mentioned strategies.

References

Case Study: The Carphone Warehouse Group – A win-win relationship with Patni, Web.

Dick Stroud, Commendable Intention- Idiotic Execution, 2007. Web.

Edward J. Finegold, Revenue Assurance Reaching Maturity, Web.

Marketing management, From Wikipedia, the free encyclopedia, Web.

Ries, Al; Jack Trout (2000). Positioning: The Battle for Your Mind, 20th Anniversary edition, McGraw-Hill.

Rodney Hobson, Carphone Warehouse counts cost of broadband, Web.

TeleClick Enterprises, (2007), Mobile Content Services Show Sluggish Growth, Web.

The Carphone Warehouse Group Plc., (2005), Web.

The Carphone Warehouse Selects KANA, Web.

The Carphone Warehouse Group Plc., (2005), Success stories, Web.

Total Asset turnover, © Copyright 1996-2006, Web.

Footnotes

  1. Marketing management, From Wikipedia.
  2. Dick Stroud, Commendable Intention– Idiotic Execution.
  3. Ries, Al; Jack Trout (2000). Positioning: The Battle for Your Mind (20th-anniversary ed.). McGraw-Hill.
  4. Edward J. Finegold, Revenue Assurance Reaching Maturity.
  5. Total Asset turnover, © Copyright 1996-2006.
  6. Case Study: The Carphone Warehouse Group – A win-win relationship with Patni.
  7. The Carphone Warehouse Selects KANA.
  8. Rodney Hobson, Carphone Warehouse counts cost of broadband.
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