The three major U.S. wireless carriers have scheduled special events starting today (Wednesday, March 10, 2021) with Verizon and followed by T-Mobile tomorrow and AT&T Friday to inform and reassure the investor community of their strategies after the $81 billion C-Band auction. The auction’s surprising size may necessitate some belt-tightening as the carriers begin to deploy equipment to light up their new spectrum. We expect a portion of these upcoming presentations will feature new efficiencies that can free up cash for investment and debt reduction. New action to rationalize the carriers’ substantial retail presence may be a sizable margin opportunity and allow much swifter deleveraging.
U.S. wireless carriers operate massive retail operations that include thousands of retail locations throughout the country. These retail operations consume large amounts of capital. They incur all of the ongoing operating expense associated with any retail operation including rent, distribution, inventory management, and wages. Each store has dozen or more employees attached to it who earn commissions based on their sales productivity.
Wireless Transactions are Shifting to On-Line
The COVID-19 pandemic altered consumer behavior in 2020, accelerating wireless carrier sales from retail store networks to online and phone-based sales. The carriers reported declines in store traffic, exacerbated in part due to store closures necessitated by the virus. For example, Verizon initially closed approximately 85% of its retail store network in March, gradually reopening throughout the year. As of now, only an estimated 15% of stores remain closed.
J.D. Power reports that online sales grew 7% year-on-year, and phone-based sales grew 6%. The trend toward digital sales has been in place for some time, enabled by wireless plan simplification, the emergence of the Apple/Samsung handset equipment duopoly and increasingly commoditized handset selection, and speedy (often next-day) fulfillment. The growth of the younger digital-native consumer cohort as a proportion of the buying public also played a major role in the growth. Verizon Consumer Group’s EVP & CEO, Roanne Dunne, recently explained:
[W]e innovated around our model in customer service, in telesales, in retail, and what we did there… is we pulled forward innovation that we had in the pipeline, because I think the long-term effect of COVID will be that it has accelerated trends that were already visible as opposed to a fundamental shift in people’s behaviors.
Store Rationalization is a Sizable Margin Improvement Opportunity
In Europe, where value-brand MVNO operators are a much larger presence, several wireless companies natively adopted a 100% digital sales model and with tangible financial benefit. Perhaps the most aggressive is Illiad S.A. which possesses nearly zero retail square feet. As noted in the table below, Illiad’s margins stand up favorably to its facilities-based competitors despite the lack of Illiad’s network economics on the network, illustrating the financial burden of a large brick and mortar selling presence.
Source: SRG analysis and S&P Capital IQ
Rationalization of the U.S. carrier-owned mobile phone retail stores is a sizable long-term opportunity to enhance financial returns. Accelerated near-term store closures may allow the carriers to reduce leverage at a faster pace. The carriers’ debt-laden balance sheets are a renewed concern after T-Mobile’s Sprint acquisition and the Big 3’s $78 billion combined C-Band spectrum acquisitions. Increasing the sense of alarm, S&P placed AT&T’s BBB debt rating on “negative watch” on March 4th.
As noted in the table below, Summit Ridge estimates that the three national carriers spend approximately $3.7 billion annually on their owned retail networks representing a significant one percent of aggregate sales. T-Mobile will be the biggest beneficiary because it has many legacy Sprint locations to close.
Source: SRG analysis and estimates
Increased digitization of sales will also reduce the carriers’ reliance on third party resellers to whom the carriers pay commissions on a fixed and variable basis. Carriers have reseller agreements with big box store chains such as Best Buy and Costco, as well as thousands of independent retailers that enter into exclusive selling arrangements and adopt corporate branding. These reseller costs are more difficult to estimate but could be also be substantial. The number of reseller locations is notably larger than the carrier-owned retail store presence.
We believe evolving conditions, accelerated by COVID-19, make the carriers’ massive retail presence less necessary, potentially unlocking a sizable margin benefit. We look forward to learning more about the carriers’ 5G strategy, network investment, and deleveraging plan this week.
 Ronan Dunne, EVP & CEO, Verizon Consumer Group, “Citi’s 2021 Global TMT West Virtual Conference,” (Jan. 5, 2021). Mr. Dunne explained: “People may recall that post-March, we closed about 85% of our stores at the back end of March. And by September, I was largely back to full store portfolio open. Since then, what we’ve seen is, as we’ve seen a second wave across different parts of the United States, we’ve seen, particularly during November and December, somewhere between 150 and 250 stores, of our corporate stores, plus in addition, some of our agent stores have been closed due to COVID. And so that has resulted in — probably across, I would say, November, December, probably I had 85% of my capacity.”
 J.D Power, “Brick-and-Mortar and Phone-Based Sales Reps Still Play Key Role in Wireless Purchase Experience, J.D. Power Finds,” (Aug. 13, 2020)