Samsung's High Street Retail Strategy Promises Modest Upside

Samsung plans to follow in the footsteps of rival Apple by rolling out a network of premium branded retail stores in key European markets. It will be working with Carphone Warehouse, a successful European operator of high-street retail stores and online retail platforms, which also has some experience in the mobile service reseller and value-added service provision markets. Although BMI believes the strategy has considerable merit, equally considerable potential downside risks abound including the lack of brand cachet and the torrid operating conditions on Europe's high streets.

The decision comes after the companies worked together to open three Samsung-focused stores in Spain in 2013. In discussing its results for the third quarter of its 2013/14 financial year, ended late December 2013, Carphone Warehouse did not specify the extent to which the pilot initiative contributed to the 'impressive performance' in the Spanish market. However, key operational metrics showed that modest year-on-year revenue growth was achieved despite the closure of a number of its own stores. An increased focus on franchising - which is where the initiative with Samsung would fit - saw the number of franchised outlets increase markedly in 2013.

Carphone Warehouse - Selected KPIs
FY13 FY14 % chge
Consolidated Revenue (GBPmn) 2,470 2,488 0.7
Connections ('000) 6,816 6,462 -5.2
Stores 2,091 2,043 -2.3
o/w Own Stores 1,822 1,750 -4.0
o/w Franchises 269 293 8.9
Source: Carphone Warehouse

Difficult economic conditions across much of Europe have impacted on consumers' propensity to spend on goods in dedicated high street retail outlets. Coupled with rising rental and leasehold rates and costs on intangibles such as heating and lighting, it is increasingly difficult to justify operating a large high street retail presence. Increasingly, Carphone Warehouse has been resorting to establishing franchising partnerships with established retailers to create stores-within-a-store (SWAS). These franchises benefit from the increased footfalls within major diversified retail outlets but bear much lower operating costs. Carphone Warehouse has entered into SWAS arrangements with Media-Saturn Group in the Netherlands, Metro Group in Germany and Harvey Norman in Ireland, among others.

Yet the SWAS strategy does not deliver premium revenue streams for Carphone Warehouse and we can see the appeal of partnering with Samsung - the world's second largest vendor of smartphones and tablet computers - to establish outlets focused exclusively on Samsung's connected devices. The shops will also offer Samsung's growing range of connected home products and solutions, including Smart TV sets and wearable technology. Over the next three months, Samsung shops will be opened in the UK, Ireland, Germany, Spain, Portugal, Sweden and the Netherlands.

Carphone Warehouse states that there is potential to expand the relationship to allow it to act as Samsung's preferred partner across Europe and to operate the majority of dedicated Samsung stores. This implies that Samsung is looking to establish a retail presence beyond the seven-market footprint currently occupied by Carphone Warehouse, so it seems that the relationship will help Carphone Warehouse quickly enter new growth markets across the continent.

While we believe there is ample upside earnings opportunity to be gained from the partnership, we caution that the Samsung brand does not yet carry the same weight with consumers in terms of perceived quality and value as is enjoyed by Apple. Panasonic has made a limited foray into the own-brand retail shop market in Europe, with little apparent impact on its ability to sell high-end consumer electronics products such as digital cameras, music systems and Smart TVs. The popularity of Samsung's products among the middle and low-end consumer segments is appreciated, but we do not think it will translate into a runaway success at the premium end of the market.


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