As the fallout from the recent decision by Vodafone to move their exclusive sales to Phones 4u continues, Phones 4u have been forced to refute allegations in the market that they have “sold out” to Vodafone.  Chief Executive Tim Whiting has been vocal in his support of the Vodafone deal as a good move for the Group, but denies that Vodafone are “flexing their muscles”.

In recent times there had been a major shift on the high street, from retailers such as Phones 4u to Carphone Warehouse in particular. Carphone Warehouse have been amongst the most efficient in arranging deals with all of the major network providers, who are attracted to the group by the very strong sales performance.  There is a suspicion that Carphone Warehouse are now paying the price for their success, and the strict price controls which the Regulators are forcing onto the network providers.  Basically they have become too powerful on the high street, and the recent acquisition of the AOL Internet Services business is a reflection of their commercial muscle.

Unable to call the shots with Carphone Warehouse, it appears to many that Vodafone have “jumped ship” to Phones 4u, who were desperate to capture a big player in the market, after being left in the shadow of rivals for the last few years. Indeed Phones 4u were the first Mobile Phone darling of the high street, although ironically they began to underperform after Vodaphone decided to open up their networks to the likes of Carphone Warehouse, after previously having such a close relationship with Phones 4u. The situation has now turned full circle.

While there are strict sales targets, which include 30,000 new Vodafone contracts per month (which equates to 78 for every Phones 4u store), these are by no means out of reach of Phones 4u.  Typical monthly sales for Phones 4u  are in the range of 110,000 contracts a month, with Vodafone making up 28% prior to the new deal.  The added bonus for the group is the fact that they will now be the only retailer offering connections to ALL networks in the UK.

While this should prove a good selling point, the terms of the new contract with Vodafone are shrouded in mystery.  It was common knowledge that Vodafone were feeling the pinch due to pricing pressure, and increased commission payable to Carphone Warehouse for monthly connections.  This had prompted a “review” of their cost base, with the likes of Orange and O2 also making similar noises with regards to their relationship with Carphone Warehouse.

It appears that Phones 4u are not totally comfortable with the exclusivity of the deal, and would have preferred a more wide ranging agreement which made the Group the main retailer for Vodafone, without the exclusive clause.  Once Vodafone is able to gauge the trend of sales through Phones 4u, many observers expect them to take a more active role in pricing, knowing that Phones 4u will grow more and more dependent on them as the exclusive nature of the deal kicks in.  This is where future problems may occur, would Phones 4u dare upset Vodapfone if they asked to renegotiate terms in the future?

Ironically, this move by Vodafone has the potential to cause a major shift in sales patterns and commission structures in the sector.  There is no way that Orange and O2 will allow Vodafone to trade on a different commission structure, and they seem certain to try and renegotiate their Carphone Warehouse contracts.  Whether they can change their current terms remains to be seen.

Strange as it may sound, it may be Carphone Warehouse who are the winners as the landscape of the sector changes.  There have been rumblings over the last couple of days, with some of the major networks looking to fill the void left by Vodafone at Carphone Warehouse. This may be the angle which the likes of Orange will take, in talks with Carphone Warehouse, less commission but increased sales. 

If the main network providers are not able to reduce their outlay, then we may see a greater emphasis on own brand shops, which would mean reduced choice for the customer, and less pricing pressure.  It remains to be seen what the knock on effects will be.