But can it steal share from Carphone Warehouse?
Tesco Mobile could soon be a real rival to mobile specialists Carphone Warehouse and Phones 4u, if its achievements so far are anything to go by.
The supermarket is the only MVNO of its kind that can truly claim success, after laying out plans in early 2009 to take on Carphone in prepay.
It announced last April that it was rebranding its mobile outlets as ‘Phone Shops’ and that it intended to double the number of sites to 100 by March 2010.
The move is part of Tesco’s strategy to go beyond groceries and will put pressure on Carphone’s lead. The supermarket has also expanded its contract phones business over the past year.
But with 20 years’ experience, Carphone is still a force to be reckoned with. Lance Batchelor, head of Tesco Telecoms, told The Times last year that Tesco was neck and neck with Argos in the prepay market, but some way behind Carphone.
Tesco’s MVNO is an own-brand mobile phone joint venture with O2 that has around two million customers. Batchelor is aiming to catch up with closest rivals Virgin Mobile and 3 to become the fifth largest in the market.
Robert Davis, telecoms equity analyst at Bryan Garnier Broking, says Carphone must not get complacent.
He explains: ‘My concern in the longer term is Tesco’s ambitions. They had a very strong quarter in the telecoms business and I wonder how Tesco will meet its ambitious targets in this market with out taking share from Carphone.’
But Davis does admit: ‘There is no evidence of Tesco’s impact on the business yet. Tesco has yet to step up the big rollout of its plans in this sector. But Carphone could be feeling the pressure within six months.’
And where other supermarkets have tried and failed – Sainsbury’s MVNO, ‘Fresh’, is now run by Carphone – Tesco may succeed.
It cut its teeth in prepay, a sector where supermarkets such as Asda are also strong. However, with the recent addition of Apple’s iPhone, Tesco may soon become a stronger player in the contract market.
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Distribution presence’Strategy Analytics analyst Phil Kendall says: ‘Supermarkets are great for pushing prepay and voice into market. Distribution is a significant element. It fits well with the attitude that prepay users have – frequent recharging of phones – so it already has a strong distribution presence.’
For example, he adds, an MVNO such as Virgin Mobile needs to make sure people can top-up and will have to pay to ensure supermarkets stock its top-up cards.
Brand positioning is also integral for success, says Kendall. Recent figures show that £1 in every £8 spent on the high street is spent at Tesco. ‘If you want value for money, you are confident you will get it from there,’ says one operator source.
But how will Tesco transfer its success to contracts? ‘My view of that is based on how the prepay market has evolved in the UK,’ says Kendall.
‘Where prepay MVNOs have done well is still where people have got overwhelmingly the best rates.
‘You might look at Tesco and think that 10p per minute looks good, but you want free stuff. It is a harder market where it is traditionally prepaid.’
However, Kendall adds: ‘The benefit at the moment is that UK operators have become too focused on slogging it out at the high end, giving Tesco added value as a mid-range operator.’
Networks have taken their eyes off the market, so they have ‘alienated’ the kind of user who doesn’t want an iPhone, he says.
This also explains why average users have opted out of smartphones. ‘Carphone and Phones 4u are much stronger when it comes to mid-range handsets such as the Motorola RAZR or LG Prada. They want to get someone out in 20 minutes on a mid-range phone. It’s all about footfall and turnover,’ says Kendall.
Operators are much more focused on data share of revenues; Tesco isn’t, adds the operator source.
But how do people buy from a supermarket? Kendall asks: ‘Do you do your weekly shop, notice it has a phone shop and then come back a week later? It does have a fantastic reputation for value for money.’
Yet mobile still feels like a market that needs experts in store. Carphone has its ‘Geek Squad’ to guide customers through more complex handsets. They are also there for when mobile stores diversify to include laptops and electrical equipment. Meanwhile, Phones 4u has its ‘Tech Guys’.
Tesco has this covered. Not only does it have ‘Phone Guys’ in each of its mobile outlets, but it is also bundling laptops with mobile contracts.
And the Tesco model could still be followed. ‘Broadly speaking, more supermarkets will enter the MVNO market,’ Kendall says. However, he adds: ‘If you are specifically looking at the contract market, it will be harder in general.’
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Value for money’For Waitrose or Sainsbury’s, mobile is more of a departure from what they are doing. They don’t do consumer electronics on the scale of Tesco. ‘I don’t think they would be able to offer a £200 subsidy and still be value for money,’ adds Kendall. But he is ‘not that optimistic that Tesco can go from prepay and Sim-only to a contract base’.
He says: ‘I think postpay is much more controlled by operators and to a lesser level, Carphone and Phones 4u.’
Perhaps Tesco can take this share. ‘Carphone trades on a strong reputation and repeat business,’ says the operator source. ‘It seems like they [Tesco] will trim a little bit off the operators – for people who don’t care if they have the latest technology.’
However, Kendall says: ‘The average person isn’t going to tell their mates that their iPhone came from Tesco – so you can almost write off the under 25s.’
But he adds that operators are making it easier for retailers by having a strong focus on high value plans, pulling subsidies out of the lower end of the market.
Operators may be making things easier for Tesco, but it’s certain that Carphone won’t be giving up share without a fight.
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