FOCUS: Russia’s top cell operators say mobile retail chains expanded too much

By Yekaterina Yezhova

MOSCOW, Dec 5 (PRIME) -- MegaFon and MTS, two of Russia’s leading mobile operators, are worried about excess of mobile stores, weighing too heavy on business margins. The companies said ready to slash the number of their retail chains jointly with other market participants, while analysts expect the plans to come true in five years. Electronics retailers bet on online sales.

“The Russian cellular retail was shaped in the middle of the 2000s against the background of boisterous growth of subscriptions and, as a consequence, sales of mobile devices. In the conditions of today’s market, the number of mobile connection stores in the country is excessive and does not reflect the current situation: clients more often prefer online purchases and switch on additional services via their online accounts,” MegaFon’s Chief Commercial Officer Vlad Wolfson said in the company’s research.

“The number of mobile retail outlets in the country will decrease by 2019: a low-margin business requires more and more expenses to attract clients without demonstrating previous efficiency.”

MegaFon counted that the country’s four biggest operators – MTS, VimpelCom, T2 RTK Holding and itself – spend over 60 billion rubles per year to maintain the retail business and add new subscriptions. The opening of an own store costs 1–1.5 million rubles, excluding the value-added tax. The bulk of capital expenditures in retail do not pay back, MegaFon said.

“I think the market of mobile retail is really oversaturated. There are 28,000 outlets in total across the country. Since handset retailers Euroset and Svyaznoy are affiliated, in the first case, or cooperate, in the second case, with MegaFon and VimpelCom, the big four operators account for 23,500 stores,” Finam financial analyst Timur Nigmatullin told PRIME. Euroset with some 4,000 stores is owned on a parity basis by MegaFon and VimpelCom, though there are talks the operators could split the asset soon.

“According to our estimates, one third of the market is excessive, which, on the one hand, ramps up rent rates at places with heavy traffic, and, on the other hand, makes a third of stores unprofitable due to the lack of clients,” the analyst said.

Below is a breakdown of the number of stores run by the top four operators, as provided by MegaFon in its research:

Operator	Own stores, units	Franchise, units
MTS	4,087	1,751
MegaFon	~2,000	~2,000
VimpelCom (Beeline)	1,500	~2,000
T2 RTK Holding (Tele2)	-	3,300

“Opening of a mobile store costs up to 1.5 million rubles and approximately the same amount is spent to support unprofitable outlets. But in view of the telecom market’s stagnation, operators justifiably seek to maintain a general margin by cutting expenses on retail development and commissions paid for new subscriptions. They raise the investment in reducing a net outflow, among others, thanks to offers of convergent service packages,” Nigmatullin said.

MegaFon will gradually optimize its retail chain in the mid-term and reduce its dependence on the volume of new subscriptions to focus on the quality of new clients. The operator sees the development of self-service systems quite promising.

MTS’ President Andrei Dubovskov said earlier in November the operator will no further expand its retail business. MTS has reached it goal and hopes the mobile retail in the country would shrink both with its efforts and those of its competitors, Dubovskov said, adding that “we’re ready to optimize retail in response to reciprocal moves of our competitors”.

The operator’s Vice President for marketing Vasil Latsanich added then that MTS is ready to reduce its retail chain if it does not damage the company’s business.

Nigmatullin of Finam thinks operators would find it impossible to cut expenses thanks to retail curbing at the current level of competition, and the number of stores could shrink next year, but not dramatically.

“It seems to me the plans to scale down the retail business by a quarter or even a third are feasible in five years. It would potentially add to the OIBDA margin of the key participants by one percentage point,” the analyst said.

“Own stores prove to be the most efficient. I think franchise outlets would be the first to go.”

VimpelCom’s press secretary Anna Aybasheva said the operator has never artificially inflated its own retail business, “but used a harmonized combination of various sales channels, like own and franchise chains, independent and specialized distribution lines”.

“We focus on improving efficiency of the franchise branch and invest in the development of own stores upon business needs,” she said.

Euroset’s President Alexander Malis said that excess of mobile stores had become evident by the middle of 2016.

“The number of stores, mainly those of operators, spiked by more than 2,500 units within a year, but the market of phones and SIM cards in the operator retail stayed almost flat. It means that operators’ sales per store declined, which reveals a surplus in their number. In the first half of 2016, Euroset’s chain remained almost unchanged by volume on the year,” Malis told PRIME.

A source on the telecom market agreed with the omnipresence of mobile stores. “Volumes and dynamics of subscriptions in monobrand retail do not compensate operators’ expenses on opening and maintenance of own outlets,” the source said.

“In this situation, a further step for the operator retail could become development of an online channel and improvement of efficiency of contract sales, but the existing model of the operator retail would hardly allow connection providers to push forward online sales.”

Sergei Tikhonov, a spokesperson for multi-channel retailer Svyaznoy with some 2,700 stores, said a high turnover and efficiency of any electronics seller became independent from the number of offline stores long ago, but are based on a balanced combination of various channels of sales and a wide range of services, available both online and offline.

“At present, the online channel accounts for about 25% of Svyaznoy’s total sales. The indicator helps the company manage sales and improve efficiency, close less profitable stores and open outlets in spots with heavy traffic,” Tikhonov said.

(64.1528 rubles – U.S. $1)

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