CE Retailers Mull Multiple Options For Entrance Into Cellular Business

By Joseph Palenchar On May 2 2011 - 4:01am

NEW YORK – More consumer electronics retailers have entered the cellular market in recent years or aggressively stepped up their cellular presence.

As a result, the indirect channel’s share of the cellular market has grown – albeit slightly — in recent years, marketers and analysts say. Strategy Analytics estimates that about one-fourth of U.S. handset sellthrough in 2010 went through non-carrierowned brick-and-mortar stores, and the ratio will grow to a third in 2015, Strategy Analytics senior analyst Alex Spektor said.

Retailers, however, continue to struggle with the challenges of entering a market that is more perplexing than traditional consumer electronics, but nonetheless presents opportunities because rising technology-driven replacement rates are raising sales despite high market penetration. Cellular handset sellthrough in the U.S. grew 5.5 percent in units in 2010 to 172 million following 3.2 percent growth in 2009 and 1.9 percent growth during 2008, the first year of the Great Recession, Strategy Analytics said. The figures combine sales to consumers as well as sales to enterprises.

Because of the market’s size, many retailers have ramped up their cellular efforts. Retailers also realize, however, that they have the potential to win share because their stores, unlike carrier stores, generate more foot traffic and can offer service from more than one carrier.

“The broader choice for the consumer, combined with strong foot traffic, gives retail stores an advantage over operator-controlled direct stores, which generally have lower foot traffic and a handset selection limited to a single operator,” said Spektor.

Stores such as Best Buy Mobile, he continued, have been “ramping up the sophistication of their consultative selling approach, for example, by helping users configure their new devices in-store.” Those efforts are designed in part, he said, to compete with online sales, estimated by Strategy Analytics to have grown its share of U.S. retail sales 7 percent in 2007 to 14 percent in 2010.

The indirect channel’s share is growing with the encouragement of carriers, who in the 2000s were actively expanding their company-owned store counts. “Before, carriers wanted to cut out the middleman, but now they realize authorized agents are really good at it,” said Sally Lange, Brightstar’s president of global retail services. Carriers have also come to realize that their stores are “expensive,” she said.

Kevin Sinclair, president/CEO of the 440-store Wireless Zone franchise chain, agreed. “Carriers are still opening stores if it makes strategic sense,” he said. “But if a sophisticated agent steps up and gives them what they’re looking for, then why wouldn’t a carrier lean on better quality agents?”

Although carriers’ existing stores “are paying off,” he said, “do they want to keep adding to their fixed expenses or switch to a variable expense?” The issue has become more important to carriers, in part because the market is more mature, driving up the cost of getting a new subscriber, he said.

Carriers are particularly supportive of large agents dedicated to a single carrier and to operating multiple stores that look like carrier-owned stores, Lange said, pointing to such multistore Verizon agents as Moorehead Communications of Marion, Ind., Go Wireless of Las Vegas, and Wireless Zone. All four major carriers support multistore wireless-specialty chains dedicated to selling only their service.

Carriers also realize that cellular is no longer a niche business and that people want to buy cellular where they already shop, Lange said.

Outsourcing options: Despite the potential to tap into a broad-based and growing market, the challenges of coping with the market’s complexity has driven many retailers to outsource most or all of their cellular operations to third parties ranging from multi-carrier master agents, such as Wireless Advocates, to singlecarrier master agents, such as Moorehead Communications (one of Verizon’s largest wireless agents). Moorehead has moved H.H. Gregg from prepaid and unlocked phones into the more lucrative enterprise of activating postpaid phones, though only on the Verizon network.

For its part, Target has outsourced its cellular departments to RadioShack, which in effect becomes Target’s master agent. RadioShack said it expects to expand its Target Mobile kiosks to about 1,450 Target stores by the end of June, up from 887 at the end of March.

In a limited number of cases, carriers operate the cellular departments of some retail stores. Verizon Wireless, for example, said it operates cellular kiosks departments in P.C. Richard and Sons appliance/electronics stores and in BJs. The kiosks are staffed by Verizon salespeople. AT&T operates kiosks in Walmart stores in Puerto Rico.

Carrier-operated kiosks, however, are less common than they once were, marketers said.

The most common outsourcing option – using a master agent -- is less profitable than running it yourself, but master agents “provide a turn-key suite of services such as handset purchasing, managing commissions, retail training, MDF, co-op support, and POP/merchandising,” said Alex Paskoff, EVP of sales and marketing for distributor and master agent Brightpoint.

In return, master agents get compensated through revenue sharing and possible rental payments, marketers told TWICE.

In most cases, master agents don’t provide plan-o-grams or fixtures to their retailer clients. Instead, retailers usually apply co-op funds toward purchasing fixtures that they would select in conformance with carrier requirements, Paskoff said.

In some cases, a master agent will staff a retailer’s cellular department, Paskoff noted. Costco and AAFES (the Army and Air Force Exchange Service) are cases in point.

When a master agent provides sales staff, the master agent also usually provides a plan-o-gram and fixtures in close coordination with the retailer, he noted.

Key challenges: In general, master agents relieve retailers of the challenges of keeping salespeople up-to-date with frequent changes in handsets and rate plans for each carrier’s service. “Everyday something changes, and we [Wireless Zone] focus only on what Verizon is changing,” said Wireless Zone’s Sinclair.

Outsourcing to master agents also relieves store management of the stress of coping with carrier partners that, for competitive reasons, often inform indirect- channel partners of new phones and rate plans as little as a day before launch. “Sometimes we find out about it by reading the newspaper,” said an executive with one large cellular chain.

The migraine of cellular headaches – cash flow – also gets a dose of Tylenol when master agents get involved.