Why do telcos dig retail?

Bell Canada's purchase of Circuit City's Canadian operations brings distribution -- and possible headaches.

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Stephanie N. Mehta, assistant managing editor

NEW YORK (Fortune) -- To executives of phone company BCE (BCE), which this week said it would acquire 756 consumer electronics stores in Canada from troubled retailer Circuit City, Tech Daily offers four words of caution: Nobody Beats the Wiz.

The Wiz was a struggling electronics chain operating in the New York metropolitan region (its stores operated as "Nobody Beats the Wiz," which also was the company's slogan) that cable and phone operator Cablevision (CVC) acquired out of bankruptcy in 1998 for about $100 million. At the time of the deal, Cablevision executives vowed to make Wiz stores "one-stop shop," where consumers could test drive and purchase the range of Cablevision phone and entertainment offerings.

The deal didn't work out quite as Cablevision had hoped. Consumers didn't flock to The Wiz for their set-top boxes and phone service; the retailer continued to struggle financially, and in 2003 Cablevision sold or closed the remaining Wiz stores it owned.

Telecom magnate Carlos Slim Helu also had dreams of so-called synergy between communications services and retail when he acquired embattled CompUSA in 2000 for $800 million (after taking a stake in the company a year earlier)Slim, who controls Mexico-based Telefonos de Mexico and America Movil, is a smart investor who understands retail: his empire of holdings also includes a chain of general stores in Mexico called Sanborns. Yet even he was unable to rescue the electronics retailer, and in 2007 sold the remaining assets to a restructuring company.

By those measures, the latest telecom-retail foray looks like folly. But there are some key differences in the deal struck by BCE (Bell Canada's parent) that should prevent the whole thing from ending in tears.

Unlike the Wiz and CompUSA, the retailer BCE acquires is doing pretty well. BCE is buying a Circuit City-owned chain called The Source. The Source isn't a big-box retailer; it offers a more intimate electronics-buying experience. It also has been profitable for seven years, according to BCE. Revenue in calendar 2008 was about $643 million (Canadian) and earnings before interest, taxes depreciation and amortization was about $27 million (Canadian).

As a result of the deal BCE more than doubles to 1,479 the number of locations it owns, or that are exclusive licensees. It currently has 723 Bell-branded stores or authorized dealers selling its products, which include wireless phone under the Bell Mobility and Solo Mobility brands, Bell TV, broadband and home phone products.

The acquisition helps BCE catch up to its two big rivals, Rogers, which has more than 1,000 stores and exclusive dealers, and Telus, with about 800 such relationships.

For telecommunications companies in North America, retail operations have become an extremely important part of the way services, especially wireless phones, are sold. Verizon Wireless, AT&T, Sprint and T-Mobile stores are as ubiquitous on city streets and strip malls as ATMs. And while these carrier-owned stores focus mainly on selling wireless services, a number of them have morphed into the one-stop shops Cablevision once espoused, selling wireless, home phone, television and broadband services.

AT&T, for example, operates 2,200 stores in the U.S. More than two dozen of those are Experience Stores that AT&T uses to demonstrate and sell its range of services, showing consumers how to better integrate their communications products (i.e. how to store online a photo you took on your wireless phone that you can then access on a laptop via your broadband connection). AT&T doesn't break out sales figures for its retail operations, but analysts believe customers acquired through company-owned stores tend to be high quality consumers -- less likely to quit the service, and more likely to pay bills than those that come through some other channels.

But in buying a consumer electronics store that sells more than just phones, BCE is taking a risk. These are tough times for retailers, and especially hard for appliance and gadget sellers. (After all, CompUSA failed despite Slim's expertise and financing, and Circuit City is liquidating.)

And while BCE says stores it is acquiring will continue to operate under The Source brand, and will be independently managed, the chain will have to walk a fine line between hawking Bell products and maintaining its credibility with consumers. "You run the risk of alienating customers if you only offer them one choice," says Josh Martin, a senior analyst with the Yankee Group.

BCE says it will honor all existing contracts with Source vendors, including, for now, Rogers. But Rogers' exclusive arrangement with The Source concludes in December , and Canadian consumers can be sure that come 2010 they'll see Bell products in Source stores.  To top of page

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