Indirect Channel Seen Growing Cellular Market Share

By Joseph Palenchar -- TWICE, 7/5/2010

NEW YORK — The indirect channel has been gaining cellphone market share in recent years and is poised to gain more, marketers and analysts said.

“We’re definitely seeing a shift to the indirect channel starting about two years ago,” said Sally Lange Witkowski, senior VP of marketing and retail services for cellphone and accessories distributor BrightStar. Because all distribution channels are enjoying sales growth, however, “it’s unclear how big the shift is.”

But a shift is underway, Witkowski said, attributing the indirect channel’s share gains in part to an expanded presence in the prepaid-cellular segment by so-called nontraditional retailers, ranging from Dollar General to the BigLots closeout chain. Multiregional agents with dozens to hundreds of stores are also expanding, each usually allied with a single carrier, and national CE chains and mass merchants have also stepped up their cellular presence.

For the first time last year, she pointed out, Walmart launched a national ad campaign to promote its presence in cellular, and this year, Best Buy let consumers buy and activate phones online, then go to a Best Buy store to pick it up. “Target is also investing,” Witkowksi added.

Consumer electronics retailers in general are poised to grow their share of the U.S. cellphone market in the coming years over the carrier-direct channel, which accounts for 68 percent of handsets sold, a Barclays Capital report contends.

“Third-party retailers such as consumer electronics stores and the mass merchants represent less than 20 percent of the market, providing substantial room for the non-carrier branded retailers to grow faster than the industry by gaining share,” the report said. “The mobile phone category offers very attractive long-term growth potential for U.S. consumer electronics retailers such as Best Buy and RadioShack.”

Barclays cited multiple reasons for potential growth in the indirect channels’ share, including growing consumer willingness to buy cellphones from noncarrier- owned outlets and better in-store pricing from larger retailers, who eschew the carrier practice of promoting handset prices after mail-in rebates.

Barclays pointed to an IDC study that found that 47 percent of surveyed respondents in 2009 would purchase their next phone at a retailer location, up from 35 percent in 2008. Growing consumer willingness to buy from a retailer is attributable in large part, Barclays said, to consumer interest in comparing and contrasting services and handsets from multiple carriers in one location. The ability to compare multiple carriers’ services and handsets in one location “is becoming increasingly important as high price smartphones comprise a higher percentage of the mix,” Barclays explained.

“The additional education needed for these more complex products bodes well for unbiased third-party retailers,” the company said.

Barclays also cited these reasons for potential indirect-channel growth:
• third-party retailers “offer a broad assortment of products from multiple carriers and thus benefit from any device or carrier that is in high-demand;”
• the four largest carriers have reduced their combined store count to 7,600 at the end of 2009 compared to 8,100 at the end of 2008, although AT&T’s store count held steady at 2,200 and T-Mobile’s grew slightly, Barclays said in citing carrier reports and its own estimates;
• in-store prices from major retailers “tend to be lower at the third-party retailers as they typically offer handsets net of any mail-in rebate, rather than having the consumer send it in themselves, and offer exclusive, limited-time discounts to drive traffic;” and
• “convenient locations and intensive customer service, which are critical given the consumer interaction during the sales process.”

Major retailers are incentivized to get more aggressive in cellular, Barclays continued, because of the velocity of handsetreplacement sales, which at roughly one year “is attractive for CE retailers since it is much shorter than other products such as televisions or appliances.” As a result, “unit demand for mobile phones should be more predictable and less cyclical than other CE categories,” Barclays said. As cellphones account for a greater percentage of a retailer’s sales, a retailer’s “overall results could become less volatile,” the company continued.

In addition, retailers’ margins on mobile phone transactions range from 35 percent to 40 percent, “well above the average for consumer electronic products such as TVs and PCs, which are in the low 20 percent range.”

Even if the indirect channels handset share remains stable, indirect volume will grow because of expected continued growth in handset unit sales and rising average selling prices. “The rapidly increasing functionality off ered by [smartphones] is driving heavy unit demand spurred by the replacement cycle.” Citing a Gartner study, Barclays said unit demand for entry- level and enhanced featured smartphones is projected to increase by 46 percent in 2010 to 62 million units to account for almost 35 percent of all units sold, up from 25 percent in 2009.

The shift to higher-priced smartphones has driven increases in the weighted average selling price for the total mobile phone market since 2007, Barclays said. For 2010, Gartner forecasts a 1,000-basis-point shift in the mix towards smartphones will produce a 6 percent increase in the overall weighted average selling price of cellphones. In addition, smartphone growth “is a major positive for the retailers since the attachment rates of high-margin accessories is much higher with these premium priced products,” Barclays said.

For their part, carriers are partnering with indirect retailers more closely than before, BrightStar’s Witkowksi said, because they understand that “consumers want access when they want it.”