Should Cell Phone Makers Start Cutting Retail Exposure?

Includes: BBY, DTEGY, GOOG, RSH, S, T, VZ
by: Brian Polino

With the advent of smart phones, cell phone companies have transformed their marketing strategies by switching from retailers to direct sales by use of brick-and-mortar stores and mall kiosks. By operating their own stores, cell phone companies are able to avoid competition by marketing only their products and offering customer service. This strategy of brick-and-mortar selling has proven successful as Google (NYSE: GOOG) failed to market its smart phone, the Nexus One, online. This only solidified the importance and revenue generating ability of traditional retail outlets. It therefore appears that consumers still prefer the hands-on shopping experience with smart phones through brick-and-mortar outlets rather than online “off-hands” shopping. The following data from the Wall Street Journal illuminates the current expanse of cell phone stores:

Cell phone Carrier Retail Stores

Verizon Wireless (NYSE: VZ): 2,300

AT&T (NYSE: T): 2,200

T-Mobile (NYSE: DT): 2,000

Sprint (NYSE: S): 1,100

As compared to Traditional Electronic Retail Chains

RadioShack (NYSE: RSH): 4,500

Best Buy (NYSE:BBY): 1,100

In his May 24, 2010 Wall Street Journal article titled “Cell phone Companies Should Hang Up on Their Stores”, Martin Peers writes,

It may be soon time for wireless carriers to decide which business they want to focus on: wireless communications or retail.

And as the figures above clearly state, cell phone companies clearly have a large presence in the retail business in terms of physical retail outlets when compared to traditional retailers like Best Buy (BBY) or RadioShack (RSH). However, perhaps the cell phone companies have too much retail exposure. While recent cell phone growth has spurred the creation of more retail stores, slower growth may jeopardize the operating margins of overextended retail stores. As Martin Peers further exclaims,

Although nobody [cell phone companies] will want to move first in closing stores, potentially giving rivals a better opportunity to poach customers, it could make sense. Carriers may do better leaving retailing to retailers.

Consequently, while it may be beneficial for cell phone companies to mitigate or lesson their current retail exposure, it still may provide long term economic value to keep most of their stores open for future distribution and marketing purposes. Only time will truly yield what distribution model will work for cell phone companies.

Disclosure: No positions