Does Telstra Have Their Eye On Vita’s Stores?

By Roger Montgomery | More Articles by Roger Montgomery

What a week it’s been for Vita Group (VTG), which operates over 100 Telstra stores.  On 4 April, Fairfax published an article referring to a ‘leaked’ Telstra draft document that said it is considering taking back high performing stores from licensees.  VTG’s share price promptly plummeted.  After VTG rebutted the leak, its share price rebounded.  So, who should we believe?

For us, it’s worth hearing from those who have most recently heard from the company directly.

We believe the investment case for VTG rests on the outcome of two issues.  The first is whether Kevin Russell will have as big an impact on Telstra’s store network as he had at Optus.  And the second is whether Telstra can actually change the nature of its contracted relationship with VTG – remembering that unlike other licensees, VTG brought an existing network of 100 Fone Zone stores to the Telstra brand (inferring a special legal relationship) and VTG holds the master leases on its sites.

Telstra appointed Kevin Russell in early 2016 to lead its giant retail division, reporting to CEO Andy Penn.  Russell previously held executive roles at SingTel Optus and was most recently country chief officer and chief executive of consumer, Australia. It is perhaps helpful to know that Russell quit his post at Optus in February 2014 after just two years in the role.

We note the departure was less than a year after he appeared on the ABC’s Inside Business program with Alan Kohler, where he stated:

“I am saying that the industry in Australia in my view has gone backwards over the last five or six years in terms of how it treats its customers. I think that’s a collective issue, I think it’s across all of the major carriers.

I’m also saying to SingTel our board, that we are also going to save things, we’re going to reduce 45 per cent of our retail footprint, 45 per cent of our stores we will cease to trade in or exit and there is significant savings there which we will invest into network, we will invest into service capability, we are reducing our marketing budget this year because to me, trying to shout loudly and spend your marketing dollars when your core service needs to get better doesn’t make sense so it isn’t just a case of spending, it’s a case of balancing how you invest your money in my view in a smarter way, in a customer centric way.”

At the time of Kevin Russell’s resignation Informa senior analyst Tony Brown was quoted by the SMH as saying: “Over the last few years, Optus has been the forgotten tale of Australia’s telco sector.”

The SMH also observed on March 16, 2016 that:

“Mr Russell(‘s)…near-two-year stint at the top of Optus saw it reshape the mobile industry by launching bigger download data plans. He was also successful at growing profits by cutting costs and hundreds of jobs.

“But Optus, under Mr Russell, wasn’t able to capitalise on the exodus of customers from Vodafone Hutchison Australia and did not grow its fixed-line internet or mobile subscribers.”

At the Australia-Israel Chamber of Commerce address on 30 May 2013 entitled Transforming Customer Experience, Russel said:

“We have closed, or are closing, 45 per cent of our retail distribution, from last month to three months out, which is pretty big. We’ve done that because we believe there are poor selling practices in large parts of our retail, and we think we can get a fundamentally better experience for customers in a smaller, branded, retail channel.”

The release of the leaked paper this week suggests Russell is again exploring the selling practices and structure of Telstra’s retail network.

On the other side of the coin is the fact that unlike other licensees, Maxine Horne of VTG brought to Telstra an already-operating network of stores. It is reasonably safe to assume that the agreements would not give Telstra many rights other than to ensure no harm is done to the brand by VTG.

To help cut through the supposition, one of our brokers spoke to Ms Horne and reported the following:

“The [Telstra leaked] report was 60 pages long, and was prepared a few months ago.  All conversations with Telstra (including Kevin Russell) in recent months have contradicted those statements in the leaked document.  The fact that VTG recently bought 5 Telstra stores off them illustrates how inaccurate the leaked document is about the current state of affairs.

“Kevin Russell called Maxine to apologise. Telstra is tracking down the source of the leak.  Maxine’s hope is that Kevin and Telstra will see fit to correct the inaccuracies in the document with a joint statement.

“The Telstra Dealer Agreement expires in 2020.  The nature of the agreement is that it is ‘all or nothing’.  Telstra cannot ‘cherry pick’ certain VTG stores.  They either withdraw the whole agreement or nothing.  Maxine reiterated that VTG operate 1/3 of Telstra’s retail store network and 25% of its Business Centre network, so changes to their Telstra Dealer Agreement are not one sided…

“She did say that Telstra may buy some VTG stores, but this would be to aid Telstra’s own ‘clustering’ strategy but …The price would be determined by mutual agreement.

“From VTG’s perspective, it is business as usual.  They are mighty annoyed…twice in 6 months that ‘leaks’ have hurt their share price and reputation.  VTG will continue optimising their Telstra Store Optimisation programme, including the ‘clustering’ strategy.”

Roger Montgomery

About Roger Montgomery

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com. Alan Kohler has referred to Roger as "one of the nations smartest and most successful value investors".

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