The Carphone Warehouse Group PLC

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The Carphone Warehouse Group PLC

1 Portal Way
London, W3 6RS
United Kingdom
Telephone: ( + 44 20) 8896-5000
Fax: ( + 44 20) 8753-8009
Web site: http://www.cpwplc.com

Public Company
Incorporated: 1989
Employees: 12,258
Sales: £2.35 billion (2005)
Stock Exchanges: London
Ticker Symbol: CPW
NAIC: 517110 Wired Telecommunications Carriers; 443112 Radio, Television, and Other Electronics Stores

The Carphone Warehouse Group PLC, a U.K. company listed on the London Stock Exchange, is the largest independent retailer of mobile phones and services in Europe. The company divides its business between two divisions: Distribution and Telecoms Service. Distribution is broken down further to include retail operations in more than 1,500 stores located in ten European countries, selling mobile phones, network connections (either by subscription or on a prepaid basis) as well as accessories for both mobile and fixed-line telephones, and insurance. In the United Kingdom and Ireland, stores operate under the Carphone Warehouse banner and in other countries as Phone House.

The Telecoms Service Division includes customer management operations, providing networks with such outsourcing services as credit checking and approval, billing, and customer care. The division also acts as a Mobile Virtual Network Operator (MVNO). It purchases excess network capacity from the likes of T Mobile and offers it to consumers in packages that include a low monthly line rental, no contract, and paperless billing. In effect, the MVNO product combines the advantages of both the subscription and pre-pay models. In addition, the Telecoms Service Division includes Carphone's consumer landline subsidiary Talk-Talk, which generated controversy in the United Kingdom by offering free broadband Internet service (up to 8 Megabits per second) to its telephone customers. Carphone also operates Opal Ltd., providing mobile, landline, and communication solutions to businesses in the United Kingdom.

COMPUTER SALESMAN: 1983

Carphone was founded by Charles Dunstone, who was born in Cambridge, England, in 1964, the son of a British Petroleum executive. Dunstone received a public school education at Uppingham, and it was here that he first displayed an entrepreneurial spirit, buying lighters, pens, sunglasses, and other goods that he sold at a 100 percent markup to his fellow students. Rather than do the selling himself, he hired another student, Johnny Vaughn, to act as barker. It was an inspired choice. Vaughn would go on to become a fixture on British television, the host of the country's most popular morning program, The Big Breakfast. After graduation, Dunstone was accepted to Liverpool University to study business, but decided to take a year off. In 1983 he accepted a job as a salesman at Torch Computers in Cambridge and received a company car as part of the bargain. After the year was up, much to the surprise of his parents, he decided to forego higher education and keep his job.

Dunstone stayed at Torch until 1986, when he became a sales manager with Japanese electronics group NEC. After two years on the road selling computers, Dunstone was told that he would now sell mobile phones. He was not receptive to the idea at first. "It took me about three days to realize that this was the best thing that had ever happened to me," he told Management Today in a 1999 profile. Dunstone was becoming involved in an area that was just beginning to explode. Corporate demand was so strong for mobile phones, which at the time were anchored to an automobile, hence a "Carphone," that salesmanship was hardly needed. He essentially allocated the products to his customers, distributors including Vodaphone and Cellent, who in turn resold them for use in company cars. Dunstone soon noticed that these resellers were uninterested in reaching small tradespeople, including self-employed builders, plumbers, and taxi drivers. He realized they were major users of mobile phones, having the greatest use for them. However, they lacked places to buy the phones, especially where they might get objective advice on what was the best product to suit their needs, and with the proliferation of mobile operators and tariffs many customers were in need of sound advice they could trust. Restless at NEC, Dunstone quit in 1989, and with £6,000 in savings he launched Carphone Warehouse to primarily serve tradespeople. Although he had no warehouse he opted for the name because he wanted to emphasize the idea that the store offered a wide choice of phones and cheap prices.

Soon after he set up the business, Dunstone recruited Guy Johnson, a former NEC customer. It was Johnson who would take charge of product distribution and logistics. At first they sold phones out of a friend's apartment. "We had the sitting room and the dining room as our offices, and we kept the phones in the airing cupboard," Dunstone told the Daily Telegraph. Evicted after a year they opened a shop nearby. The extent of Dunstone's ambition at this time was to own a few shops, certainly no more than a dozen or so. In reality, the success of the venture was far from certain. Advertising was key. "There was a time when we first started," Dunstone recalled in a Daily Telegraph interview, "if you didn't place an advert on Capital Radio or in the Evening Standard the phone was not going to ring and you would be out of business." Lacking cash, Dunstone was fortunate enough to convince Capital Radio, a London commercial radio station, to run some ads for Carphone on credit. It was a move that paid off for both parties. "Then we reached a point where the phone kept ringing even though we hadn't advertised," Dunstone said, "and we realized we'd begun to create a brand."

DAVID ROSS JOINS
CARPHONE: 1991

In 1991 Dunstone recruited an old Uppingham classmate, David Ross, who quit his job as a chartered accountant at the Arthur Andersen accounting firm to handle Carphone's finances. It would be Dunstone and Ross who became known as the men behind Carphone's success, relegating Johnson to the background. Nevertheless, Johnson would become a wealthy man for his efforts in building the company. None of the three young men had ever worked in retail, let alone run a business. For guidance they turned to Ernest Saunders, the former chairman of Guinness plc who had become embroiled in a scandal regarding a corporate takeover. He was ultimately sentenced to prison for two and a half years, only to be released in 1991 after serving ten months because he was deemed to be suffering from the pre-senile dementia associated with Alzheimer's disease. Dunstone met Saunders through his daughter and he proved to be sound enough in mind to begin providing business advice to Carphone, especially in marketing, his strong suit. (Saunders blamed his dementia on a bad combination of prescribed tranquilizers and sleeping pills, while skeptics claimed he was simply feigning Alzheimer's disease to get out of jail.) Carphone took a great deal of criticism for being associated with Saunders, but Dunstone was unyielding in his support of the man.

COMPANY PERSPECTIVES

We aim to exceed our customers' expectations by providing an innovative approach to service. To stay at the front of this dynamic and rapidly moving industry, we constantly develop new ideas and services for our customers.

A significant turning point in the history of the company came in 1993 with the introduction of digital technology that resulted in line rental rates being cut in half. At this point the Carphone operation consisted of 17 stores and a mail-order unit. With a drop in price, mobile phones began moving toward mass acceptance and Carphone enjoyed explosive growth in the mid-1990s. By early 1996 the company owned 60 shops across Britain and began expanding into Europe. Growth was spurred around this time by the introduction of pre-payment packages that did away with credit checks. Sales soon doubled and within two years Carphone was operating 180 shops in Britain, some of which were gained through acquisitions, and another 139 in Ireland, France, Spain, Sweden, and the Netherlands. The explosion in the sale of mobile phones was not lost on retailers, and soon supermarket, drugstore, and convenience store chains began selling them, too. In order to keep growing, Carphone looked to expand in Europe and to diversify into other areas, taking advantage of its strong brand image to become involved in fixed-line phone and Internet services. In 1999 Carphone also acquired the 270-unit Tandy chain of electronics stores, essentially the British version of Radio Shack. The stores would keep the Tandy name and continue to sell electronics, but more importantly their addition provided the Carphone stores with a deeper retail infrastructure. In time, the Tandy stores were either converted to Carphone stores, closed, or sold.

Dunstone never needed to seek funding. After the initial investment, cash flow proved sufficient to allow the company to maintain strong growth. Dunstone expressed no interest in taking Carphone public, eschewing the pressures that came with shareholders, but that would all change in 2000. The number of Carphone stores approached 900, with about half operating in Britain as Carphone Warehouse and the rest in Europe as Phone House. Firmly established in Europe, the company was eager to expand even more aggressively on the continent. To do that, it needed better funding in place and the use of common stock to make further acquisitions. To manage the initial public offering (IPO) of stock, Carphone turned to Morgan Stanley and Credit Suisse First Boston, both of which had worked with the company on potential acquisitions, provided advice, and had spent considerable time developing a relationship.

About one-third of the IPO's proceeds were earmarked to reduce debt, another third was for use in opening more stores in Europe, and the balance was devoted to the development of other services to provide some diversification. They included MVNO packages and a wireless intent portal called Mviva. In 2001 Carphone strengthened after-sales customer relationships with the creation of the Telecoms Service division. The company also became involved in the European after-sales market by acquiring the French telecommunications services company Communications De Mobile Cellulaires for £54 million. When the year was complete, Carphone tripled the revenues of telecoms service to £30.5 million, but this represented only a small fraction of the company's more than £1.1 billion in sales. Retail sales led the way at nearly £650 million and wholesale sales followed at £348 million.

ACQUISITION OF OPAL
TELECOM: 2002

Telecom services continue to grow at a rapid clip in 2002, generating £89.3 million in sales. Retail and wholesale revenues, in the meantime, enjoyed only modest growth, a reflection that mobile phones had reached a 70 percent penetration in Europe. All told, Carphone experienced negligible growth in revenues in 2002. The emphasis was on selling innovative new mobile phones to existing customers and catering to high-spending subscription customers, rather than focusing on the sheer number of customers that could be signed up. To achieve further diversification, in November 2002 Carphone spent £65 million in cash and stock to acquire Opal Telecom, which provided fixed-line telecom services to business customers. The addition of Opal also opened the way for two more business opportunities. Carphone leveraged Opal's infrastructure to begin selling residential fixed-line service under the TalkTalk brand, launched in February 2003. The company also tapped into Opal's pool of business customers to sell corporate mobile telephone service. Both of these new ventures, along with Opal, contributed to record results in 2003, when Carphone recorded revenues of more than £1.8 billion.

KEY DATES

1989:: Charles Dunstone founds company.
1990:: First store opens in London.
1996:: Company expands into Europe.
2000:: Initial public stock offering is completed.
2002:: TalkTalk is introduced.
2006:: TalkTalk offers free broadband.

Carphone had grown well beyond its roots, wisely expanding out of the mobile telephone retail business and its limited growth potential. Instead Carphone was turning into something of a telecommunications conglomerate by creatively leveraging its customer base. By the end of 2004 the company was operating nearly 1,500 stores, the TalkTalk residential fixed-line business, a mobile network called Fresh, and Opal. Revenues improved to £1.84 billion in 2004 and continued to soar in 2005, topping £2.3 billion. Carphone was eying the Internet broadband market in the United Kingdom. In order to do so, it first beefed up its base of residential customers through the acquisition of OneTel and Tele2. Then, in April 2006, TalkTalk offered free broadband to anyone signing up for its Talk 3 international call plan that included free local, national, and international calls for a fixed price. It was later added to the company's standard Talk 3 package. The response to the offer was so overwhelming that Carphone had difficulty satisfying demand, resulting in delays in providing the service. Dunstone issued a public apology and hired more call-center staff as the company took steps to mitigate the bad publicity caused by the affair. Also in 2006 Carphone looked to achieve further diversification, teaming up with U.S. electronics retailer Best Buy and its Geek Squad unit that provided in-home computer services. European Geek Squad, a 50-50 joint venture between Best Buy and Carphone, planned to provide similar service in Britain and Europe starting in 2007.