Retail News Update

Chief executive Sol Trujillo made a rare Australian appearance to open the shop and will be pleased that it is unlikely to suffer the fate of its Sydney sibling: being dwarfed by a glamorous and more impressive, three-storey Apple megastore across the road.

Trujillo and his mini-me, Telstra retail chief David Moffatt, made all sorts of cooing noises about their big plans for the telco’s retail chain, but behind the facade of sweetness and light that Telstra likes to project all is not well.

Telstra has three main arms of shopfront retail: about 300 branded stores, the (shrinking) Fone Zone chain and a string of small business dealers.

For nigh on four years Mr Moffatt has been on something of a jihad against commissions paid to the group’s third-party dealers. It was 2004 when he first started targeting the “rivers of gold” he believed others were banking thanks to Telstra.

It has certainly been a lucrative business for people like the late John Ilhan and Fone Zone founders David MacMahon and Maxine Horne, but the glory days are over.

There are ways and ways of doing things and Telstra’s approach, as is common with big corporations, has always tended towards the heavy handed.

Moffatt’s campaign is clearly working — at least in raw financial terms — as all is clearly not well at Fone Zone. The company issued its second profit warning inside two years last month. It has said it will shut 20 shops but insiders are saying it will probably be 30 or even 40.

Yet in 2006 Fone Zone was Telstra’s poster child, enthusiastically signing up to a new remuneration contract that effectively cut its revenue. A profit warning followed and then, last month, another. Over the past six months Telstra has been working on a new remuneration agreement, or wholesale changes to the existing one.

The telecoms giant has been considering what, for retailers, is the armageddon option: removing the so-called trailing commissions that provide the bedrock of the business for their third-party and licenced retailers.

Telstra is not alone in trying to move its incentive and remuneration model away from the pure trailing commission mode of the early boom days of mobile growth. Now there is at least one mobile connection for each Australian and the game is more to do with grabbing users on rival networks and making them spend more.

Telstra has about 300 branded stores, of which it owns about 135. The rest are franchised, or licenced stores owned by small business people.

A constant complaint from Telstra licensees and third-party retailers is that the company constantly tries to pinch their customers.

In this way, Telstra does not have to pay commissions.

In the past, to be charitable, some or much of this has been through sheer incompetence.

The other complaint is that Telstra keeps moving the goal posts for payment of its third-party retailers. It also makes it difficult for its licensees — small business people all — to control or expand their businesses.

Telstra tried the same trick with Crazy John’s in 2006, trying to stop it opening more shops. It failed there, and that relationship is history. But licensees that don’t own their brand have found expansion tougher.

The vast majority of licensees are struggling to make ends meet and last year formed an association in an attempt to try for a better deal from Telstra.

Yet the telco recently refused to release a survey as the results were too ugly, licensees have told this column.

Right now the main problem is quarterly bonuses paid to retailers — which are in the vicinity of $20,000-$40,000 per quarter. If a store misses out on something like Foxtel, the entire bonus is blown.

Instead of being set on an annual basis so businesses can plan properly, targets are set quarterly and move around, as Telstra shifts targets and incentives with little warning.

A Telstra website shows eight of the retailers are up for sale, but the real number is said to be much higher — between 20 and 30. That’s a lot of very unhappy Telstra store owners.

The situation appears to be getting worse, not better — throw in Fone Zone and it is starting to look like quite a problem.