Nokia hit by an Apple crunch

Nokia's attempts to match the Apple store failed. It hopes to do better in the smartphones battle, says Nick Clark

It was quite a boast. At the launch of its flagship British store in London last year, the Finnish telecoms giant Nokia said it would set the benchmark in technology retailing and offer the "ultimate shopping experience for Nokia's wide portfolio of mobile devices". The shop was inevitably compared to the Apple Store on the opposite side of Regent Street but Nokia was unfazed, promising to "pioneer new technologies and techniques, setting a new standard in the retail world".

Less than two years on, however, Nokia is preparing to close its shop, while the Apple Store is the most profitable store in London with takings of £60m a year, or £2,000 per square foot.

Nokia says it is "crystallising its branded retail strategy" after a disappointing two years. The Regent Street outlet, which has failed to hit efficiency or profit targets, will be boarded up by March. Greg Hodge, a research director at Planet Retail, said: "After all the fuss on its opening, I'm surprised they are pulling out so quickly. Nokia put significant investment into the store. A store like this is often more of a statement than a revenue driving vehicle. The struggle with sales did point to a problem with the underlying products themselves."

The closure reflects Nokia's wider struggles in the telecoms market, industry experts believe. "It was a marketing experiment, all about status and brand," said one analyst. "It's a different sell and they really needed a high-end device for that. Nokia just isn't as aspirational as Apple."

Nokia grew from a little-known company to the world's leading mobile phone manufacturer in the 1990s. Its roots stretch back more than 140 years and it has negotiated the bursting of the tech bubble and huge changes in the industry. Yet now it is under fierce pressure from new and traditional competitors, its range of top smartphone devices are perceived as weak and it faces pressure from the economic downturn.

Nokia's share price peaked at close to €65 during the dotcom bubble but, despite surviving the crash in robust health, the valuation came off with the rest of the sector. The management team once more overcame talk that it was in decline in 2004, and the shares hit €28.60 in November 2007.

The credit crunch hit Nokia hard. In March it was forced to plan a huge cost-cutting programme, blaming its decision to shed 1,700 staff on the global fall in demand for new phones. Since November 2007, its share price has plunged 70 per cent, with handset sales falling this year for the first time since 2001. Meanwhile, its market share has declined from 38.2 per cent in the third quarter of 2008 to 36.7 per cent this year.

While mobile phone sales recovered slightly in the third quarter, although by only 0.1 per cent, the numbers were bolstered by an almost 13 per cent rise in the smartphones market. High-end smartphones, which allow users to search the internet, send and receive emails and download music and applications, bring the highest margins. This is where Nokia is struggling, without a flagship product. Its total share of the smartphones market hit an all-time low of 39 per cent in the three months to September. That sounds high, but it includes all sorts of low- and mid-range devices with low margins.

Carolina Milanesi, an analyst at Gartner, said: "The biggest problem for Nokia is in the high end. A few years ago they struggled in the middle range of phones, those between $100 and $200, but they sorted that out. At the top end they lost their way."

Apple released its first iPhone in 2007 to huge acclaim, while Research in Motion's BlackBerry devices became the standard for business users. Nokia's own devices missed the mark. The recent N97, released two years after the iPhone, failed to impress technology writers or users, and it now faces competition from companies such as HTC and the forthcoming release of more phones powered by Google's Android operating system.

Nokia's handsets still dominate at the low end, however, and it is especially successful in emerging markets but the margins are not as good. It also faces competition from the emergence of low-cost Chinese vendors. Ms Milanesi said: "Nokia's market share is decreasing; it has been a tough year and 2010 will be tougher. It needs to get it right in the high end. It is good to see the company has identified other problems, such as the cumbersome user interface, and is now revamping it."

Nokia's roots can be traced to 1865 when Fredrik Idestam built a paper mill on the banks of the River Nokianvirta near the city of Tampere, which gave the company its name. It changed from a conglomerate to focusing on telecoms in the early 1990s. It proved a profitable move and between 1996 and 2001 its turnover grew fivefold to €31bn. In a bid to prepare for the future, the company set about shifting again to a services company, offering mobile customers games, media and music. It hopes to increase its number of users from about 60 million today to 300 million by 2012.

Nokia is also cutting its smartphone portfolio by half. Ben Wood, an analyst at CCS Insight, said this was a risky strategy but added: "Nokia has to do something because I don't believe its current model is working."

He said Apple had only a couple of variations on the iPhone, and RIM has a relatively tight portfolio of BlackBerrys. Nokia, run by Olli-Pekka Kallasvuo, hosted its annual Capital Markets Day in Helsinki last week, setting out its financial targets and plans for its devices next year. CCS Insight said afterwards that "a clear acknowledgement of [Nokia's] challenges, coupled with its established competitive advantages" had revealed a company "confident in its ability to meet expectations".

Mr Wood was struck by the executives' speeches. He said: "They all committed to a set of bold and measurable promises, such as fixing Symbian and Ovi, slowing down margin erosion, and manufacturing and distributing phones even more efficiently. These were so explicit that failure is not an option."