Phones 4U goes into administration: Why its suppliers hung up on mobile phone retailer

The mobile phone retailer’s demise is a tragedy for its employees, but just business sense for those responsible

Phones 4U stores will remain closed while talks continue with parties interested in acquiring the business (PA)

The collapse of Phones 4U into administration yesterday left 5,596 workers facing unemployment.

That’s a tragedy, but is the inevitable result when suppliers decide to – what is known in business jargon – “disintermediarise”. In plain English that means cutting out the middle man.

That’s exactly the fate of the 25-year-old mobile phone retailer which has had its supply cut, first by Three, 02 and Vodafone and then on Friday by EE.

In a statement, EE talked about its “strategy to focus on growth in our direct channels”. In other words it wants to sell more phones and contracts direct to consumers and avoid paying commission to intermediaries.

It’s a strategy that many suppliers eventually crave. To bandy around some more business jargon, it’s the business dream of vertical integration, where everything in the so-called supply chain is owned by one business, from production, to marketing, to distribution and delivery.

When a business owns all the elements in a supply chain, it can pocket all the profits. And, despite their protestations to the opposite, that’s what the mobile networks appear to be aiming towards.

So while yesterday’s announcement is a tragedy for staff, it could also prove to be a tragedy for consumers. Why? Because squeezing intermediaries out of the market is likely to end up doing two things: increasing the profits made by the mobile networks and reducing price competition.

The fact is intermediaries are not always simply an extra layer of people to be paid. They can also act as a check on an industry and negotiate keener prices. Without that layer there’s little to stop companies from acting in unison and raising prices.

So the demise of Phones 4u throws a sharp focus on high-street rival Dixons Carphone. It’s logical to presume that it could face the same fate as Phones 4u as the mobile giants pursue their dreams of vertical integration.

But telecoms industry sources told The Independent that Dixons’ scale, stronger service and greater number of customers using its contracts make it a more-attractive proposition for suppliers.

In fact it has 160 Phones 4u concessions in its branches, which pre-date the recent merger between Dixons and Carphone Warehouse.

In one small piece of good news, Dixons boss Seb James tweeted yesterday that it needs to “beat the world record for getting 160 stores opened to look after our customers”, and the firm said it hopes to retain Phones 4u staff.

Meanwhile, Dixons Carphone’s deputy chief executive, Andrew Harrison, told The Independent that its strategy, which includes investing in strong, in-store service, is backed by Vodafone and EE – the firms which dramatically shunned contracts with Phones 4U.

Mr Harrison said: “Both give us indication that they have bought into our vision of the future and that our long-term partnerships are well and alive.”

So what went wrong at Phones 4u? After all, the turnover across its 700 stores was £1bn last year. Staff had no idea of the troubles it faced.

One employee at its head offices in Stoke-on-Trent told The Independent: “There was a horrible atmosphere when 1,000 of us were called together and told to go home. It’s tragic for the area. There are very few big, local employers.”

John Caudwell, who set up the operation in the 1980s before selling it for £1.5bn in 2006, said he was “sickened and saddened” by the news.

In an interview at the weekend, he blamed the “ruthless behaviour” of the network operators for the demise of the business.

It is understood the networks demanded the retailer improve its store service and promotion of brands. But the role of Phones 4U’s private-equity owner, BC Partners, has also been questioned.

Begbies Traynor partner Julie Palmer said: “Private-equity firms are often quicker than banks to act when things don’t go to plan.”

The future remains bleak, although Rob Hunt, joint administrator and PwC partner, said last night that they hoped to be able to pay workers their outstanding wages.

“Our initial focus will be to quickly engage with parties who may be interested in acquiring all or part of the business,” he said, adding that the stores will remain closed while discussions continue.

“We will also be talking to network operators and suppliers, and trying to access funds to pay for the costs of the business, including wages.”

Disconnected: questions and answers

What will happen to mobile phone contracts bought through Phones 4u?

Contracts will be honoured and networks will continue to provide mobile-phone services to customers. Existing discount deals are included so those with, for example, a £5 monthly discount, will still receive it.

What happens if I’m waiting for a phone that has been ordered from Phones 4u?

Any phones that have already been sent out will be able to be used as normal by customers. However, orders of phones that have not yet been sent will be cancelled and customers should receive automatic refunds.

What about insurance policies which have been bought through the retailer?

They will be honoured, too.

If you have any queries about an existing contract with the company you can call Phones 4u customer services on 0844 8712253.

If your phone is being repaired, call 0844 8712269. Repairs will be completed and the phone sent back to your home address rather than to your nearest store.