Could better market intelligence have saved Phones 4U?

Posted on September 17th, 2014 by

Photograph of Phones 4 u

Phones 4U has been forced into bankruptcy. It has been the worst month imaginable for the company, rapidly shifting from being a profitable company whose future seemed secure, to a retailer with nothing to sell.

Things were going so well a few months ago. The company was profitable – incredibly so having made over £100million profit in 2013 – and they were in talks with their major clients to extend their contracts. In fact, it’s transpired that they were also in talks to sell the company.

Vodafone and EE had done well from their relationship with Phones 4U. Phones 4U accounted for 10% of EE’s sales, and a significant amount of Vodafone’s. The relationship had been so beneficial that, two months ago, Vodafone and EE were in talks to buy Phones 4U in a deal that would give both companies a 50% share. In fact, it’s been claimed that Vodafone were planning to take a 100% share should EE have pulled out.

Parallel talks were taking place between Vodafone and Phones 4U regarding an extension of their contract. Vodafone gave a talk entitled ‘Phones 4U- Partner of Choice’ and it’s claimed that a deal was already informally agreed. By the time Phones 4U made an offer, it was obvious that the proposed Vodafone-EE takeover could not go ahead. Vodafone rejected Phones 4U’s offer in July and didn’t return to the negotiating table.

Through investing in their own high street stores, Vodafone had become less reliant on third party resellers. Market conditions had been changing and Phones 4U now had a lot less leverage over Vodafone. Vodafone claim that the offer they received was ‘out of line with industry norms’, which indicates that Phones 4U did not appreciate the change in market conditions when they made their offer.

Photograph of mobile phones

This left Phones 4U with a single major supplier. However EE eventually walked out too, cancelling a contract that still had a year to run thus making Phone 4U a retailer with nothing to sell.

EE claim that they left Phones 4U because they had become a single operator shop and were no longer able to help compare prices between different operators. In effect, because Phones 4U had become little more than an EE shop that charges commission.

Yet there was more behind this decision. EE had undertaken a strategic review earlier on in the year, and it was recommended that the business focussed on direct selling rather than third party sellers. EE has strategically invested in their own shop, and expect to recoup some of the 10% of sales that went through Phones 4U with EE shops rather than through Carphone Warehouse.

Often your competitors provide you with the best barometer of market conditions. Should Phones 4U have thought to look across to Carphone Warehouse, they would have known how precarious their position was.

Carphone Warehouse merged with Dixons to create Dixons Carphone earlier in the year because of unrest from the major networks. Three networks pulled out and stopped working with Carphone, which should have acted as a signal to Phones 4U before they became embroiled in crisis. Carphone used their opportunity with Dixons to tap into the rapidly growing ‘internet of things’- the growing number of devices connected to the internet- by offering new packages aimed at people who use the internet across a range of devices, and so reduced the risk that networks would walk out on them. They are now growing and secure, and have created over 1,000 new jobs recently.

Had Phones 4U not been lulled into a false sense of security by their good fortune only a few months ago, they would have been significantly less exposed to risk, better able to prepare for the worst, and more likely to make Vodafone an acceptable offer. Not understanding the market conditions will always mean that you negotiate poorly, and not understanding what leverage you actually have when trying to use it can be catastrophic. Phones 4U have been unfortunate, but their demise has been of their own doing.

Let us know what you think – did Phones 4U deserve their fate? Or were the factors that led to their demise unavoidable?