O2 quits Dixons Carphone – what will happen next?

I’m sure I won’t be alone in expressing surprise at the news Dixons Carphone and O2 have ended their 20 year-long contract. The independent status of Carphone Warehouse, and subsequently Dixons Carphone, has been a major contributor to customer volumes for mobile operators. But this news comes at a time of extremely tough retail trading – the chain had already announced it was to close its 531 high street stores with a cost of 2,900 jobs, even before the covid-19 lockdown.

The first thought anyone in the industry will be having is that there could be a catastrophic domino effect. Phones4U went into administration after networks pulled out, and it happened in weeks!

But you have to remember Dixons Carphone is a more diverse business and it has been here before. Firstly, Three hasn’t sold through Dixons Carphone since 2013, and that’s despite using Three to run its MVNO iD, which boasts 1 million customers. Secondly, Vodafone pulled out of Carphone Warehouse in 2006, only to return again a few years later. One can only assume this is because they lost customers as a result of leaving.

Understanding the decision through customer segmentation

I can only assume that O2 is confident it can address customer segments that would normally buy from Dixons Carphone through other channels. Time will tell as to whether O2 can achieve its goals without Dixons Carphone.

I have my doubts. Research Graystone Strategy has conducted as part of our Customer Market Segmentation shows that 27% of consumers buy from a mobile specialist (stores, online or telesales) whereas buying directly from the mobile networks accounts for 35%.

Of those buying from a specialist, around half will buy from Dixons Carphone or one of its online brands, which accounts for a substantial part of the market.

But when you look at the channel preferences of the different customer segments you really uncover some interesting insight. Our segmentation shows that THREE of the SIX segments over index on a preference to buy from a specialist mobile phone store, rather than a network store. Those segments are Digital Devotees, Technology Trail Blazers and Budget Balancers.

It’s important to bear in mind that the segments we’ve developed are based on customers’ attitudes so they are powerful indicators of behaviour. They provide a far more accurate view of what people do, want and aspire to. They are not assuming anyone with the same postcode will shop and do the same things – as I’m sure you’ll know from looking up and down your street, that’s not how society works.

That’s why we’ve developed a more accurate model and successfully used it help MVNOs and retailers better understand the customers they have access to and in turn make more strategic decisions about how to develop their propositions.

The O2 customer base over-indexes on Digital Devotees and Technology Trail Blazers suggesting that Carphone Warehouse is a good channel fit for them. However, O2 can still acquire a “fair share” through its own stores, it’s just that those segments above have a preference for independent specialists.

And delving a little deeper, I think there could be something else at play here – by coming away from the high street and moving its stores into the Curry’s and PC World retail park stores, Dixons Carphone may have scored an unwitting own goal driving more customers into the high street stores of the mobile operators.

It’s possible the customer wants to shop around and as there is no ‘one-stop-independent-shop’ on the high street then the path of least resistance for the consumer may be to visit four operator stores on the high street rather than driving to the retail park. It’s a theory but my experience supports it.

So, what is actually going to happen?

Well, I would expect O2 to invest in online to drive more direct business through that channel. Let’s face it, we are all having to shop online right now, and it is going to have a lasting impact on all high street stores. I’d also expect O2 to put more focus on other independent channels like AO Mobile and even independent local retailers.

On the other hand, I would expect Dixons Carphone to try and recover the situation and shift the available “category” onto its MVNO iD mobile or offer a greater category share to other MVNOs and Operators that they range.

In terms of other operators, I think we can expect EE to benefit from an increased share. The research shows that Digital Devotees, who traditionally visited a CPW store, also have a high consideration for EE, an adept salesman could easily switch them out of O2 and into EE.

What will be interesting is the reaction of other operators. As long as they don’t use this as an opportunity to change their distribution strategy, and therefore pull out of CPW, then I think Dixons Carphone will weather the storm. Although, I hasten to add, they will lose overall market share of that I am sure.

The big question that remains for me in all this is whether the shoppers in Curry’s and PC World are made up of different segments and if so, does this offer them a strategic advantage – can they offer the networks access to customer segments not readily available in a standalone Carphone Warehouse store.

I’ll have to run more research and segmentation to see if that’s the case but it’s certainly something to think about. Indeed, if you’d be interested in testing the hypothesis with me then give me a call. I’m sure there is much to learn.

For now though, it remains a watching brief for all MNOs and MVNOs, especially as we move through uncertainty and plan for recovery. There’s no doubt that understanding your customer is more relevant now than ever before.

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James Gray

Managing Director at Graystone Strategy

James has over 20 years of experience working in the telecoms and retail industries. He is an expert in subscription-based business models, CRM, direct and indirect channel management and major proposition development and launches. He has held a number of Marketing Director and Consumer Director roles.