Arvidas Alutis was appointed the CEO of MTS’s retail network a year ago. Prior to his appointment, for three years, he oversaw MTS’s customer service department and began his career with MTS 15 years ago as a consultant in one of our retail stores.
Interfax spoke with Arvidas about the performance of MTS’s retail network, the company’s strategy in mobile retail, market trends and the outlook for 2015. See below the abridged and translated version of the interview.
What are the financial results for RTK (i.e. MTS’s retail division)? Is the retail business profitable?
Surprisingly we are. Usually any retail owned by a mobile operator is a money drain. Our profit resulted from two major factors. Firstly, we worked to improve efficiency throughout 2014 and will continue to do so in the future. For instance, we decreased our rental expenses by approximately 10% in 2014 over 2013.
The second factor is our impressive product line. Not only do we bring MTS new mobile subscribers, but we also develop segments, in which our competitors are not present, such as fixed-line broadband and financial products.
Our OIBDA remains positive and our net income almost doubled last year. We are the only retail business owned by a mobile operator staying above break-even. Everyone else is in the red.
What goals does the MTS retail business have?
I’ve set three major goals for our employees this year. First, we want to achieve significant growth in online sales. Sales through online channels allow us to decrease expenses, including rent and salaries. Besides, the Internet allows us to expand the products we offer indefinitely. For example, we will soon launch our own line of accessories, and customers will be able to customize these products online. For example, you will be able to simply upload any photo, edit and submit it and then receive a personalized phone case with an image of your dog or your family.
Our Internet sales have benefited a lot from our synergy with Ozon, in which MTS owns an 11% stake. Ozon has a great base of customers who already make purchases online and are accustomed to shopping online, while we offer products Ozon has not offered before. Recently we have launched a pilot project allowing customers to pick-up products ordered through Ozon in five MTS retail stores in Moscow and two stores in Saint Petersburg. We plan to open at least 50 Ozon delivery locations in all major Russian cities in 2015.
Our second largest goal is to become the most efficient retail business run by a mobile operator and offer the best quality of service. This is because clients who get used to high standards in customer service here and now are likely to return when they need to get a new phone or to purchase one as a gift. I see the future in improving quality of service, and I’m sure that this is the right path for every mobile operator. Clients no longer get in queues for products. Now we are the ones who get in queues for the clients.
The third goal is to develop our human resources. This is rarely emphasized in retail companies, where employee turnover may amount to 70-80% per year. Our goal is simple: we want to be the best employer in retail and reach the lowest possible level of employees turnover in this business. Our goal is to achieve employee turnover of less than 35%. Retail generally employs young adults, who are only testing the ice in adult life: we are the first employer for over 50% of our staff. We must make sure that they understand that they have an option to professionally develop within our company, to become a manager and to grow both vertically and horizontally within MTS Group.
Do you plan to diversify your product lines? Will we be able to buy a blender at a MTS store in the future?
I doubt you will be able to get a blender, but you will be able to buy a TV in our stores. That’s because MTS, unlike other players on the market, is developing other businesses besides mobile. We own a PSTN provider in Moscow, we are the second largest provider of fixed broadband in Russia, and we will soon launch our satellite TV service. Products which come as complimentary to these services, such as a TV with built-in IPTV or satellite TV options, are a logical purchase for the clients. And through our partnership with MTS Bank we are able to offer our clients a loan or an installment payment plan under our own brand.
Last year the number of mobile retail stores in Russia decreased from 28,500 to 28,000. But MTS retail chain increased its footprint by 3% up to 2,900 proprietary stores. Do you plan to increase or decrease the size of retail chain?
This year we are probably the only company to grow its retail presence rather than reduce it. MTS plans to increase both the number of its stores and number of employees per store. We plan to open 300-400 proprietary stores in 2015.
Where will you open new outlets: in Moscow or in regions? What is your priority: major cities or increasing availability of internet access in the regions?
There is no decisive answer here. We do realize that we need additional stores in specific locations. This depends on the dynamic of the operator’s client base in specific regions. We know that Svyaznoy and Evroset reduced the number of their stores this year by closing unprofitable outlets. They are most likely focusing on large cities where there is money left. But we take into consideration not only sales of devices, but also developing the MTS client base. If clients used to top-up their accounts at a specific store that our competitors have closed and are not ready to go to another location, we will open a store there even if we don’t expect to make profit from selling devices there.
How have rent expenses changed? Do you expect the rent to grow?
We decreased rent expenses last year by almost 10% over 2013. Despite the fact that we expect to grow our number of stores by 10%, our rent expenses should remain the same as the last year. That’s possible even when you have many outlets.
You’ve mentioned that you plan to increase the number of employees per outlet. Will that result in increased expenses for the retail business?
Of course it will. But we understand that these expenses are necessary because, first of all, we don’t want clients and prospective customers queuing for services, and second, our employees should have sufficient time to serve every customer to not only help them with purchase of a phone or a tablet, but also resolve any other problems they might have. That means spending money on training our employees, on professional development, on retaining our staff. Last year we increased our personnel cost per store by 10%, but this increase has already paid off. We saw an increase in sales per store which outweighed these expenses.
What percentage of MTS clients do you acquire through you retail chain?
Over 50% overall, and over 70% in some of the regions. This is a lot, and you should also add up contribution from our franchising partners which generate up to additional 20% of SIM card sales in some regions.
You are experimenting with smartphone only format of the stores where you sell smartphones almost exclusively. When will MTS retail transition to this model?
Smartphones account for almost 60% of our sales, the latest monthly figure was 65%. We are once again ahead of the market here, by 3-4%. That’s only natural as the market follows the demand. Our goal as a retail business owned by a mobile operator is to shape this demand. That’s why we are ahead, and I believe that feature phones will become a thing of a past even without forcing it. However, a decrease in supply could also work. We opened the first smartphone only outlet last year in Moscow, this year we plan to open around 40 such outlets in every city with population of over one million.
What product range will be available at these stores?
We will still offer mobile phones for senior citizens, with large buttons and a large screen. Also we will keep cheap phones you won’t mind giving to, say, a child. There will be only 1-3 models to choose from. Everything else will be smartphones.
What kind of smartphones? How many items?
There are three things customers pay attention to. First one is the price, especially now. Our goal is to either make a device affordable enough for instant purchase, or to provide customers with options for installment payment or taking a loan.
The second one is screen size. Tablet sales are in stagnation and will soon dwindle as modern large-screen smartphones are yesterday’s tablets. Why should you carry around two devices when you can have everything you need in one?
The third one is specifications: OS, support of LTE standard, camera resolution, memory size. I refer to the majority of the clients as there are also customers who will buy only Apple or other brands like Samsung, who would never choose anything else. But for most of the customers, these three things matter. 40 smartphone models meet set requirements of 80% of the customers. Those who want an exclusive device can order it either from our online store at home, or online at our outlet.
What are your Q1 2015 results? Did the forecasted decrease in sales following market saturation in December actually occur?
As of Q1 we slightly increased sales over the same period in 2014. Our revenue was stable, but sales of smartphones in units increased by roughly 4% despite the economic difficulties and lower customer demand. Sales of budget LTE smartphones increased 30x year-over-year and constituted one of the key drivers of growth. At the same time, we do see the demand shifting to a lower price segment. But we were prepared for that. In Q4, we aimed to smooth any increase in prices and didn’t let our prices skyrocket as would have been expected. On April 1 we lowered prices on 70 devices even further.
Did you lower the prices at the expense of markup? Or did your suppliers lower theirs?
We did it at the expense of the markup. We won’t end up in red ink though. Our negotiations with suppliers led to some interesting offers. We saw a significant decrease in sales of high-end devices priced over 30,000 rubles, because these devices were sold out before the New Year. But we never aimed to maintain strong presence in this segment.
Why is that? IPhone users generate higher ARPU than average clients.
MTS has more Apple owners among its clients than its competitors. But over 40% of them purchase their iPhones and iPads abroad. They order the devices from global online stores or they just purchase devices while they are on a business trip or travelling. There is no point in trying to win this segment.
What was share of your sales did LTE devices account for in Q1? What do you expect from the LTE segment going forward? Could these devices be getting too expensive for customers?
Last quarter LTE devices accounted for 25% of total devices sold. In Moscow we are ahead of the market in sales of LTE smartphones as we are focused on this region as the quality of our LTE network here is superb.
Customers do spend less now and the demand is probably bound to decrease. However, our prices for LTE devices are also declining. 4G chips still cost twice as much as 3G chips. Manufacturers promise that the prices will decrease by summer and that the prices depend on how many devices have been sold. It is the assembly line principle: the more units that are produced, the cheaper every single unit is. More than 1 million LTE devices are sold in Russia every quarter and penetration of LTE devices grows much faster than in many of the European markets.
Do you sell less LTE smartphones in the regions where the average income is lower?
It’s not a matter of income, it’s a matter of client experience. If the LTE network is there, if one’s friends start using LTE, a transition to LTE becomes enjoyable. Considering the fact that we are lowering our prices, money is not an obstacle. In some regions, LTE devices account for almost 20% of total sales. The difference from Moscow is not drastic by any means.