Tesco is putting its share of MVNO Tesco Mobile up for sale. Tesco Mobile is the UK’s largest Mobile Virtual Network Operator (MVNO) with around 4 million subscriptions or 4% of UK subscription base. It is a 50:50 JV between Tesco — the UK’s #1 supermarket chain, and mobile operator O2. O2 itself is changing ownership as Hutchison Whampoa is in the process of buying O2 from Telefonica with the intention of merging it with its mobile operating arm, 3.
Tesco’s core supermarket business has been struggling in the price war that has gripped the UK over the last two years. Its strategy of amassing large edge-of-town sites and filling them with a vast array of relatively cheap , reasonable quality products is being undermined by a combination of changing consumer behaviour: buying less but more frequently, and competition from deep discount stores that don’t have Tesco’s range but significantly undercut it on price on core products. Add to this the growth in online sales from general players (Amazon) and specialists that offer a deeper range in, for example, consumer electronics, and it’s little surprise that Tesco’s ‘all-things-to-all-people’ approach is failing to resonate with consumers. Tesco also made ill-fated forays into China, the US and other countries. It largely failed to gain traction in almost all of these attempts.
As a result of its poor strategy and consequent operational performance in its core supermarket business, Tesco has built up a significant debt position of around £22Bn that it needs to reduce. It’s therefore seeking to sell non-core assets and operations, of which Tesco Mobile is one.
Tesco Mobile is actually one area where is has carved out a strong position. Its range of attractively priced and no-nonsense tariffs appeal strongly to particular segments: young people, family orientated consumers and seniors being primary focal areas. It also offers a good range of handsets at prices on par with most high street mobile stores. Its success means it contributes approximately £100m per year to Tesco’s profits. Assuming similar multiples as other recent trade sales, Tesco could realize seven to eight times net profit — therefore something around £800m when it sells its stake in the venture. The most likely buyer is Tesco’s partner in the business, O2. However other MVNOs may also enter the bidding including Talk Talk, which recently purchased Tesco’s video TV service, Blinkbox.
Tesco Mobile also operates around 250 Tesco Phone Shops, that provide point of sale for a range of feature phones, smartphones and accessories. It sells around 2m units per year through these stores and online. Tesco has done well addressing seniors and is one of the UK’s leading suppliers of Doro’s range of products that are designed specifically for older generation consumers. It is not clear what will become of Tesco Phone Shops — even to staff working in them.
We have long held the view that MVNOs are an effective strategy for branded service players to gain exposure to the telecom market. They’re also a way for mobile operators to utilize network capacity and reach consumer segments that may not align with their own brand values. However, like satellites getting into earth orbit MVNOs often struggle to find an equilibrium with the gravity of the supplying mobile operator. If they’re not successful they tend to burn-up rapidly. If they become very successful they become a takeover target – usually of the incumbent mobile network operator. Some achieve a ‘Goldilocks’ state: not too big, not too small and then survive longer term. Tesco Mobile was one that had achieved that state. Now its fate is being decided not through anything it has done, but through the business missteps of its parent.