Executive summary

Independent mobile phone store operator with a focus on SoftBank

Bell-Park operates mobile phone stores affiliated with telecom carriers. Its core business is the sale of mobile devices such as smartphones, tablets, and phone handsets and mobile device accessories, fiber optic services, and after-sales services. It directly runs stores and franchises in major urban centers (Tokyo, Osaka, and Nagoya). The number of stores has been rising as the company has made acquisitions (more than 100 deals to date). As of end-FY12/21, the company operated a total of 367 carrier stores (versus 363 at end-FY12/20), including 301 SoftBank stores (versus 304), eight NTT Docomo stores (unchanged), seven au stores (unchanged), and 51 Y!mobile stores (versus 44). Revenue is mainly from the sale of mobile devices such as smartphones and tablets to subscribers, accessory sales, commissions on the sale of subscription plans (incentives), agency commissions on applications for various services, stock commissions, and subsidies from mobile phone operators (see the Business section for further details).

Earnings results and outlook

In FY12/21, Bell-Park reported sales of JPY107.3bn (+8.5% YoY), operating profit of JPY4.7bn (-7.4% YoY), recurring profit of JPY4.6bn (-13.1% YoY), and net income attributable to owners of the parent of JPY3.3bn (-9.5% YoY). Fierce price competition among the telecom carriers resulted in an increase in store visits by customers contemplating fee plan changes, and a YoY growth in the unit sales of mobile phone handsets and other mobile products. The company worked on proposing fee plans that matched customers' device usage, encouraged migration from 3G to 4G/5G services, and focused on selling 5G-compatible handsets. It also made efforts to provide a diverse range of services. Theses included fiber optic services, electricity and gas, cashless payment, as well as paid services that were newly introduced in response to popular demand, such as data transfer (phone book entries, etc.) from old to new handsets and application of protective films on displays.

Gross profit increased 4.7% YoY, but GPM declined 0.8pp YoY to 23.8%. SG&A expenses rose 7.8% YoY, with particular upward impact stemming from personnel expenses and rent, due primarily to an increase in overtime hours and a rise in store count that occurred along with an uptick in customer traffic. Despite higher SG&A expenses, the SG&A-to-sales ratio declined 0.1pp YoY to 19.4% thanks to sales growth. As a result, OPM declined 0.7pp YoY to 4.4%.

The company's FY12/22 forecast calls for sales of JPY100.0bn (-6.8% YoY), operating profit of JPY4.0bn (-14.5% YoY), recurring profit of JPY4.0bn (-13.9% YoY), net income attributable to owners of the parent of JPY2.6bn (-20.7% YoY), and annual dividend of JPY41.3 (JPY51.3 in FY12/21).

The current mobile phone market is characterized by intensifying price and service competitions among the telecom carriers. There is a wide variety of fee plans and services to choose from, and Bell-Park expects a strong demand from customers wishing to make their decisions based on consultation with the staff at carrier stores. The company intends to further improve the consulting skills of store staff so that they can propose optimal fee plans and services that best fit the customers' device usage. It will also work to achieve efficient store operations by concentrating its stores within certain areas to improve dominance, implement renovations and store moves to increase customer footfall, and use digital transformation to achieve further efficiency in back-office departments. In these ways, the company will continue its efforts to improve profitability over the medium to long term. 

In FY12/22, the company expects unit sales of mobile phone handsets and other mobile devices to fall 6.3% YoY to roughly 1.0mn units, reflecting slowdown in replacement demand, which has been fueled by the price cut competition for fee plans in FY12/21. Further, if the earnings of carriers were to decline due to their shift to new fee plans, the company thinks the terms of agency commissions could potentially change. Due to these factors, Bell-Park forecasts sales and profits to decline YoY in FY12/22.

The company does not announce medium/long-term targets in part due to ongoing changes in the environment surrounding its core mobile device sales operations, but it does have three medium-term goals for maintaining stable growth in the longer term: maintain steady growth in communication device sales; expand its business portfolio; and maintain a dividend payout ratio of at least 30%.

Revenue at the company’s carrier stores is not determined solely by sales volume such as the number of handsets sold and contracts signed, but evaluation from the carriers from time to time on the degree to which important benchmarks have been met by the stores. Commissions received from the carriers can vary dramatically depending on these evaluations. Bell-Park is taking a number of initiatives to improve the profitability of the stores in the medium and long terms, including improving the consulting abilities of its store staff, streamlining store operations, renovating stores to provide a comfortable, welcoming environment, and moving to prime locations with higher customer pulling power. Bell-Park also plans to build a dominant market position by continuing to take over operations of other subscription agencies and expand its store network.

Strengths and weaknesses

We think Bell-Park’s strengths lie in its skilled store staff, financial strength, focus on SoftBank products, and prime store locations. Weaknesses include reliance on mobile phone sales and over-reliance on SoftBank Mobile (details in the Strengths and weaknesses section).

Key financial data

Recent updates

Revisions to FY12/21 earnings forecast and dividend forecas

On January 31, 2022, Bell-Park announced upward revisions to its FY12/21 earnings and dividend forecasts.

Revisions to full-year FY12/21 consolidated earnings forecast

• Sales: JPY107.2bn (previous forecast: JPY89.0bn)
• Operating profit: JPY4.7bn (JPY4.5bn)
  
• Recurring profit: JPY4.6bn (JPY4.5bn)
  
• Net income attributable to owners of the parent: JPY3.3bn (JPY2.9bn)
  
• Annual dividend: JPY154 per share (JPY136)
  

Reasons behind the revisions
The number of mobile phone handsets and other mobile devices sold at carrier stores operated by the Bell-Park group has exceeded the company’s targets due to an increase in store traffic of customers looking to switch mobile phone plans. As a result, the company now expects sales and all profit lines to exceed its previous forecast. 

Along with the upward revision to its full-year earnings forecast, the company hiked its year-end dividend forecast by JPY18 from JPY68 per share to JPY86 per share, bringing its annual dividend forecast up to JPY154 per share (the annual dividend in FY12/20 was JPY170).

Trends and outlook

Quarterly trends and results

Full-year FY12/21 results (out February 9, 2022)

Summary

FY12/21 results

In FY12/21, Bell-Park reported sales of JPY107.3bn (+8.5% YoY), operating profit of JPY4.7bn (-7.4% YoY), recurring profit of JPY4.6bn (-13.1% YoY), and net income attributable to owners of the parent of JPY3.3bn (-9.5% YoY). Sales exceeded the most recent record high of JPY103.3bn set in FY12/19, partly due to the sale of an all-time high of 1.1mn mobile phones (+26.6% YoY).

Progress versus full-year projections

Results finished in line with the company forecast (upwardly revised on January 31, 2022*). Versus the latest full-year estimates, sales reached 100.1%, operating profit 100.2%, recurring profit 100.1%, and net income attributable to owners of the parent 100.1%.

Sales

Sales in FY12/21 amounted to JPY107.3bn (+8.5% YoY). The company sold a record-high number of 1.1mn mobile phones (+26.6% YoY) as intensified competition among carriers led to an increase in customers who visited shops to review service plan prices. Unit sales associated with the Y!mobile brand, which is characterized by low rates, grew significantly. This growth occurred in part because unit sales in FY12/20 were low as the company responded to the first state of emergency declaration issued by the Japanese government in April–May 2020 by suspending its sales activities. The company also reported a higher number of instances in which it provided after-sales services and attributed this increase to its full-scale April 2021 launch of fee-based smartphone support services*, which complemented its existing after-sales services. Sales of mobile phones and PCs targeting corporate clients rose and contributed to overall sales growth thanks to an increase in the company's workforce, which has been driven by ongoing expansion in its staff size. As of end-December 2021, the company operated 367 carrier stores (versus 363 stores as of end-September 2021).

The company worked on proposing fee plans that matched customers' device usage, encouraged migration from 3G to 4G or 5G services, and focused on selling 5G-compatible handsets. It also made efforts to provide a diverse range of services. These included fiber optic services, electricity and gas, cashless payment, as well as paid services that were newly introduced in response to popular demand, such as data transfer (phone book entries, etc.) from old to new handsets and application of protective films on displays.

Operating profit

Operating profit in FY12/21 was JPY4.7bn (-7.4% YoY). Of the two brands offered through its SoftBank stores (SoftBank and Y!mobile), Y!mobile is associated with lower communication rates, and the company observed favorable performance from this brand. Accordingly, it reported a decline in profit per unit sold. Another significant factor weighing down operating profit was an increase in SG&A expenses that accompanied rises in store count and overtime hours.

GPM declined 0.8pp YoY to 23.8%. SG&A expenses increased YoY, with primary upward impact stemming from personnel expenses and rents, due to rises in both overtime hours and store count following growth in customer traffic. SG&A-to-sales ratio, however, declined 0.1pp YoY to 19.4% thanks to sales growth. As a result, OPM declined 0.7pp YoY to 4.4%.

External environment

In the mobile phone market, the company’s main business area, the major carriers reduced telecommunication fees and launched internet access-exclusive plans in response to requests from the Japanese government asking for reductions in mobile phone service fees. Accordingly, price competition between carriers has intensified, with mobile virtual network operators implementing or announcing telecommunication fee reductions.

Number of stores

The company operated a total of 367 carrier stores at end-December 2021 (363 at end-September 2021). Of these, 301 were SoftBank stores (299), eight were NTT Docomo stores (eight), seven were au stores (seven), and 51 were Y!mobile stores (49).

Of the 367 carrier stores operated by the company as of end-December 2021, 303 were directly operated (versus 298 as of end-December 2020) and 64 were franchised (53 SoftBank stores and 11 Y!mobile stores). During FY12/21, the company opened or acquired 26 directly operated stores and closed or sold 21. Through its SoftBank and Y!mobile stores, which are central pillars of its overall strategy, the company continued to push forward with its plan of establishing dominance in all targeted areas. By achieving this dominance, the company will be able to utilize its personnel more efficiently and avoid competing with different operators for customers in individual target areas. In FY12/22, the company plans to continue implementing this strategy with the aim of improving the operational efficiency of its stores.

The company had three fewer SoftBank stores and seven more Y!mobile stores than at end-FY12/20. The number of NTT Docomo and au stores in operation did not change. It had five more directly operated stores and one fewer franchise store than at end-FY12/20.

Conditions of three non-consolidated Bell-Park subsidiaries

As of end-December 2021, the company had established three wholly owned and non-consolidated subsidiaries: Bellbride, Inc., B-Lab, Inc., and Wactive Inc. (see the "Group companies" section).

Both Bellbride (launched in 2016) and B-Lab (launched in 2017) reported net loss throughout the initial three-year periods following their launches, generated net income in their fourth years, and completely offset accumulated losses in their fifth years. Wactive, which was launched in 2020, concluded its third year as of end-FY12/21, generating net loss.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

Full-year FY12/22 company forecast

Overview

The company forecast for FY12/22 calls for sales of JPY100.0bn (-6.8% YoY), operating profit of JPY4.0bn (-14.5% YoY), recurring profit of JPY4.0bn (-13.9% YoY), and net income attributable to owners of the parent of JPY2.6bn (-20.7% YoY). It projects an annual dividend payment of JPY41.0 per share (JPY51.3* per share in FY12/21)

Assumptions underlying the company's projections

Carrier shops

• The company assumes the sale of approximately 1.0mn mobile phones (-6.3% YoY). During FY12/21, the company observed an increase in customer traffic as more individuals visited its stores to review service plan prices amid a decline in mobile plan rates. In FY12/22, the company assumes that customer traffic will slow down and projects a YoY decline in cell phones sold.
• It assumes that mobile plan rates will trend downward, causing a decrease in stock commissions from carriers.
• The company expects SG&A expenses to increase due mainly to higher personnel expenses and rents stemming from planned expansion of stores although it will make efforts to reduce costs through improving operation efficiency and relocating stores.

Corporate sales

• The company assumes that it will further increase the size of its sales force in pursuit of ongoing business expansion.
• It aims to increase sales of mobile phones and PCs through improvements in the skills of its sales staff, and presumes that the increases in sales and profit will offset growth in SG&A expenses.

The current mobile phone market is characterized by intensifying price and service competitions among the telecom carriers. There is a wide variety of fee plans and services to choose from, and Bell-Park expects a strong demand from customers wishing to make their decisions based on consultation with the staff at carrier stores. The company intends to further improve the consulting skills of store staff so that they can propose optimal fee plans and services that best fit the customers' device usage. It will also work to achieve efficient store operations by concentrating its stores within certain areas to improve dominance, implement renovations and store moves to increase customer footfall, and use digital transformation to achieve further efficiency in back-office departments. In these ways, the company will continue its efforts to improve profitability over the medium to long term.    

In FY12/22, the company expects unit sales of mobile phone handsets and other mobile devices to fall 6.3% YoY to roughly 1.0mn units, reflecting the slowdown in replacement demand, which had been fueled by the price cut competition for fee plans in FY12/21. Further, if the earnings of carriers were to decline due to their shift to new fee plans, the company thinks the terms of agency commissions could potentially change. Due to these factors, Bell-Park forecasts sales and profits to decline YoY in FY12/22.     

Shareholder returns

Bell-Park view the return of profits to shareholders as an important management issue. The company has adopted a policy of maintaining a consolidated dividend payout ratio of at least 30%. By multiplying its forecast of JPY2.6bn in net income attributable to owners of the parent by the consolidated dividend payout ratio of 30%, the company expects to pay a dividend of JPY41 per share (interim and year-end dividends of JPY20.5 per share each) for FY12/22.

Telecom carrier trends and company response

The following are the company’s views on mobile telecom carrier trends and its response to these trends.

Under the administration of Prime Minister Suga, the government has called strongly for lower mobile phone fees. As a result, mobile telecom carriers have been introducing attractive plans, and telecommunication fees have been falling.

With four major carriers now offering fee plans exclusively for online applications, Bell-Park understands that fewer customers may visit carrier stores and that a decline in stock commissions is inevitable.

The business environment has become more difficult for subscription agencies. Carrier stores must work harder to improve their skills and customer satisfaction.

The emergence of a variety of 5G services has created an environment more conducive to providing customers diverse and optimal services (in December 2021, 5G handsets accounted for nearly 60% of the company’s unit sales). Given the development of 5G technology, the company anticipates the dawn of an era in which a focus on price competition will give way to an emphasis on line quality. It also projects that digital transformation will become more prominent throughout society at large as 5G technology continues to develop. In the near future, the company thinks that carrier stores will be expected to function as navigators in a society moving toward digital transformation. Highly informed customers, who can recognize which information they need and set up their devices by themselves, are in the minority, and the majority of customers seek support from these stores. The company view this trend as a business opportunity.

Growth initiatives

Steady growth in communication device sales

Carrier stores

Bell-Park plans to recruit and train personnel, relocate and remodel its stores, and expand its store network with an appropriate amount of investment, while raising the efficiency of store operations by establishing dominance in target areas.

Corporate sales

In FY12/21, Bell-Park recorded record profit in the corporate sales business. In FY12/22 onward, the company thinks there will be opportunities to expand operations targeting corporate clients due to telework-related demand and 5G response. It will work to win new corporate customers and build new related services revolving around mobile phone handsets and PCs.

Building new earnings drivers

The company will work on developing matchmaking support services; planning, import, and wholesaling of IoT devices; and a job placement service for people in their 40s, 50s, and 60s.

It plans to create and expand businesses related to its existing businesses that can serve as new earnings drivers, taking advantage of M&A as appropriate.

Management strategy

The future for carrier stores

Bell-Park thinks the positioning of carrier stores will change significantly over the medium to long term. Amid efforts by the Ministry of Internal Affairs and Communications to foster competition, MVNOs offering discount smartphones and sub-brands by the major telecom companies have risen in prominence and spread. The major carriers offer a variety of payment plans in their main brands, widening the choices available to customers. Meanwhile, the major carriers use their customer base to offer other services such as electricity and credit cards. Given these trends and the impending diffusion of new technologies, such as 5G and IoT, Bell-Park expects carrier stores to move away from simply selling handsets to serving as the coordinator that brings these new technologies to customers. The company therefore believes in the importance of cultivating store staff who have high-level hospitality and consulting skills.

Commercial 5G services were launched in 2020, and 5G service areas were expanded in 2021. Characteristics of 5G include: 1) Enhanced mobile broadband (eMBB) to provide ultra-high-resolution displays, 3-D video, and augmented reality (AR); 2) high-volume, communications with a large number of communication endpoints under massive machine-type communication (mMTC) aimed at smart cities and IoT; and 3) ultra-reliable and low latency communication (URLLC) for mission-critical applications such as remote surgery and autonomous driving that depend on real-time telecommunications.

Qualitative medium-term targets

Partly because Bell-Park’s business category, selling mobile phones, is undergoing major changes, the company does not publish medium- to long-term numerical targets. However, the company does define three qualitative medium-term objectives: maintain steady growth in the business of selling communication devices; work to expand the business portfolio; and secure a consolidated dividend payout ratio of at least 30%.

Steady growth in the communication device sales business

The company will hire and train personnel, improve the efficiency of store operations, relocate and remodel stores, and expand its store network through an appropriate amount of investment. In addition, the company will work to increase its corporate client count and establish new peripheral services centered primarily on mobile phones and PC devices.

Business portfolio expansion

Moving forward, Bell-Park will focus on expanding its marriage matchmaking service, its IoT device business (also encompassing relevant planning, importing, and wholesale), and its personnel placement service, which specializes in middle-aged and senior workers. Further, the company will create and enlarge businesses that could potentially become new earnings pillars (such as peripheral businesses that complement existing businesses) while employing M&A strategies and other measures.

Consolidated dividend payout ratio of at least 30%

Bell-Park has positioned shareholder returns as one of management’s most important objectives. Management is targeting a payout ratio of at least 30% from FY12/21 onward.

Focus areas

Bell-Park understands that the following four areas need management’s attention.

Steady growth in the communication device sales business

In addition to selling mobile phones, the company's carrier stores handle a variety of services targeting individual customers and families. These services cover a variety of elements including mobile phones, wearable devices, fiber-optic internet services, electric power services, and electronic payments. The company thinks in the presence of strong demand from users who wish to discuss rates and services with staff at carrier stores before reaching decisions.

As 5G, IoT and other new technologies come into greater use, Bell-Park expects its carrier shops will increasingly assume the role of a coordinator that connects customers with these cutting-edge technologies.

To achieve steady growth of the Bell-Park group, management is focused on responding quickly to changes in the market environment, earning high evaluations from customers, and expanding its store network in prime locations that will generate high profit margins.

With regard to its store network, Bell-Park will proceed with M&A strategies and store openings, relocations, and renovations, while closely monitoring market trends and carefully considering factors such as sales projections and potential investment profitability. In addition, the company will enhance operational efficiency by improving store operations and reducing customer wait times. Through operations targeting corporate clients, the company will work to increase its corporate client count and develop new peripheral services centered on mobile phones and PC equipment.

Establishment of new earnings pillars

Bell-Park will expand its marriage matchmaking service, its IoT device business (also encompassing relevant planning, importing, and wholesale), and its personnel placement service, which specializes in middle-age and senior workers. At the same time, the company will create and expand businesses that could potentially become new earnings pillars, particularly peripheral businesses that complement existing businesses, through M&A and other measures.

Recruiting and developing human resources

The Bell-Park group vision is to “Become a corporate group that uses highly trained people and innovative services for long-term growth.” The company considers the recruitment and development of superior human resources to be important and will promote an HR strategy that facilitates the medium- to long-term growth of its human resources. This strategy will expedite the development of human resources through careful consideration of employee satisfaction, improvement of working environments, workstyle reforms, the establishment of new businesses, and the creation of conditions that allow employees to take on various business-related and operational challenges.

Sustainability initiatives, such as environment, social and governance (ESG) measures

Another core group value is to achieve mutual prosperity with all the group’s stakeholders, including customers, employees, business partners, shareholders and local communities. Accordingly, the group has positioned initiatives to help realize a sustainable society as an important management priority.

To achieve a proper balance between sustainable growth of the group and contributions to realizing a sustainable society, the Bell-Park group is planning to implement appropriate measures in all areas related to ESG.

Shared Research’s perspective

Shared Research recognizes that mobile telecom carriers’ stance toward acquiring customers as of FY12/22 is significantly different from its stance 10 years ago due to a rise in the penetration rate of subscribers, the maturing of the industry, and regulations. However, in FY12/22 onward, sales agents will likely continue to play an important role in terms of brokering services offered by telecom carriers and distributing their devices. In addition to communication services, mobile telecom carriers are bundling a variety of services and products, including electricity and gas, to avoid becoming providers of dumb pipe, and they need people and locations to explain their services and products to end-users. The company has been keeping its distance from mobile virtual network operators (MVNOs), which have a sales model that does not depend on physical stores.

The number of carrier stores is likely to shrink, although not to a point of disrupting user convenience. However, Shared Research does not necessarily think that the total amount of sales commissions that mobile telecom carriers pay to subscription agencies will be drastically reduced. This is because when these carriers, which do not sell services and handsets directly to general customers, go too far in streamlining sales agency channels and sales commissions, it leaves them susceptible to a decline in the level of services and added value, and could place them at a competitive disadvantage.

In 2021, major mobile telecom carriers have launched their own special fee plans for use when subscribers apply online, and this is proving to be a headwind to subscription agencies. However, there are still plenty of mobile phone users, such as the elderly, who lack IT literacy or who simply do not want to deal with the trouble of applying online. As mobile telecom carriers work to expand their economic sphere by providing additional services, such as payment-related services, there are still many users who rely on subscription agencies. Against a backdrop of intensifying competition and business succession issues, Bell-Park expects to see consolidation among its peers, but if it can absorb staff leaving other companies to expand its own scale, it can enjoy the benefits of being a survivor in the medium to long term.

Business

Business description

Bell-Park mainly operates mobile phone stores affiliated with telecom carriers.

The company’s core business is the sale of mobile devices such as smartphones, tablets, and phone handsets and mobile device accessories, fiber optic services, and after-sales services through stores affiliated with telecom carriers.

Bell-Park directly runs stores and franchise outlets in major urban centers (Tokyo, Osaka, and Nagoya). The company has expanded its store count through M&A and other means, bringing the number of carrier stores operated by the company to 367 as of end-FY12/21 (versus 363 at end-FY12/20 and 343 at end-FY12/19). Of these, 301 were SoftBank stores (versus 304 at end-FY12/20 and 297 at end-FY12/19), eight were NTT Docomo stores (unchanged from end-FY12/20 and end-FY12/19), seven were au stores (unchanged from end-FY12/20 and end-FY12/19), and 51 were Y!mobile stores (versus 44 at end-FY12/20 and 30 at end-FY12/19). Out of the 301 SoftBank stores, 53 were franchised, while 11 of the 51 Y!mobile stores were franchised.

Business model

Bell-Park’s business model is centered on operations of stores affiliated with telecom carriers, where it mainly sells handsets and subscriptions as an agency.

Main revenue sources: sales of mobile devices such as smartphones and tablets to subscribers, sales of accessories, commissions on the sale of subscription plans (incentives), agency commissions on applications for various services, stock commissions, and subsidies from mobile phone operators.

Sales commission

Telecom carriers buy mobile phones from manufacturers, and subscription agencies buy these handsets from carriers to sell to consumers. Subscription agencies usually sell mobile handsets to consumers at lower prices than carriers.

Subscription agencies would accumulate losses if they kept selling handsets at prices lower than what they paid. Therefore, they receive subsidies from telecom carriers through sales commissions. A portion of the commissions is used to finance rebates for mobile handset purchases, and the remainder becomes profit for the subscription agencies. Sales commissions are booked as revenue, while gift certificates used for sales promotion are treated as sales promotion costs under SG&A expenses.

Telecom carriers usually pay different sales commissions depending on whether the purchase is by a new customer or by an existing subscriber replacing a handset. For carriers, increasing new subscribers is essential for growth. The difference in commissions paid for new subscribers and for existing customers is used mostly to finance handset rebates, so handset prices for new subscribers tend to be lower than those for existing customers.

Sales commission structure

Mobile telecom carriers pay subscription agencies sales commissions, which are determined based on various conditions. Shared Research understands the agency contract between SoftBank and Bell-Park is renewed once a year but commissions are reviewed as necessary.

Commissions are controlled by several factors and complex rules, including the type of handset being purchased; whether the sale is to new subscribers or to existing customers seeking replacement handsets; customer satisfaction; operating performance; and competition among telecom carriers.

1. Purchased handsets: Carriers pay higher commissions for handsets that may help attract new subscribers, or when they wish to reduce inventories of unpopular models.
2. New subscribers, handset replacement, and number portability: Commissions are the highest for subscribers switching from another provider with the number portability option, followed by those for new subscribers without the number portability option, and then for existing users replacing their old handsets. In Japan the number of mobile subscribers exceeds the entire population, and there are few new customers without mobile phones. Therefore, mobile carriers must entice customers away from rivals. Carriers accordingly pay high commissions to subscription agencies for customers who choose the number portability option.
   
3. Customer satisfaction: Since carriers recoup sales commissions in the form of telecommunication fees, they must ensure that subscribers continue to use the service. Thus, customer satisfaction at agencies that directly deal with customers is important to keep the churn rate low. Subscription agencies with high customer satisfaction receive higher sales commissions.
   
4. Operating performance: Carrier stores are ranked by operating performance, with better performing stores more likely to receive higher sales commissions.
   
5. Competition among telecommunications carriers: Carriers tend to pay high commissions when there is strong competition. Carrier stores use a large portion of the increased sales commissions to cover rebates to the customers.
   
6. Other intermediate commissions: The mobile phone operators each have implemented various measures to increase added value and prevent termination of service contracts. From 2015 onward, package deals have also been introduced to offer discounts when mobile phone service is purchased in tandem with fiber optic internet or electrical power services. Commissions for contracts on these peripherals services also serve as sources of revenue for subscription agencies.
   

Stock commissions

Subscription agencies receive another type of commission in addition to sales commissions from the carrier for 60 months after the addition of a new subscriber. The amount is the average monthly revenue per user multiplied by a specified factor. While the company does not disclose this multiplication rate or the exact revenue per user, Shared Research estimates the rate has fallen to around the mid-single digit level.

Needless to say, these stock commissions are terminated if the subscriber cancels the contract. If subscribers cancel their contract within six months, they must pay cancellation fees to the carrier. Subscription agencies must also pay back sales commissions to the carrier.

Stock commissions are also paid for a specific period of time for handset replacements, based on the idea that to a certain extent, promoting handset replacements helps lock in subscribers. Although accurate numbers and rates are not publicly available for replacements (as in the case of new sales), based on the same concept as for sales commissions Shared Research assumes that stock commissions are lower than for new subscribers.

Major determining factors for stock commissions are units sold, churn rate, and the average revenue per user (ARPU).

While Bell-Park does not disclose its churn rate, the average churn rate for SoftBank contracts was 0.89% in FY12/20 (versus 1.04% in FY12/19; source: Shared Research calculation based on SoftBank data). SoftBank operates three brands with different features: SoftBank, Y!mobile, and LINE Mobile. Each caters to different customer needs. Y!mobile has attracted a wide following among light users looking for an affordable plan, and has the No. 1 market share in the discount smartphone market. In October–December 2020 the smartphone churn rate was 0.64% (0.53% in October–December 2019). In our view, Bell-Park’s churn rate is slightly lower than that of SoftBank; Bell-Park typically operates stores featuring stronger consulting capabilities than competitors, and the company’s stores are operated by experienced full-time employees.

The graphs below show the average revenue per user (ARPU) at SoftBank. Telecom ARPU had been declining since Q2 2014 (April–June) but in October–December 2018 it turned up slightly, rising 1.2% YoY. Thereafter, ARPU rose 2.1% in Q1 2019 (January–March), 3.0% in Q2 (April–June), 2.8% in Q3 (July–September), and 1.4% in Q4 (October–December). However, it then fell 1.4% in Q1 2020 (January–March), 3.4% in Q2 (April–June), 3.4% in Q3 (July–September), and 0.5% in Q4 (October–December). This downward trend was the result of plans that separate handset charges from telecommunication fees and changes in the way telecommunication fee discounts are recorded following revision of the Telecommunications Business Act.

KPI for mobile business of SoftBank

Regarding ARPU for data, which accounts for a large share of telecom ARPU, carriers would not benefit from the availability of a wide range of applications and extensions unless subscribers use them. Subscribers will not change mobile handset use unless they are taught to use new functions. Therefore, for subscription agencies such as Bell-Park, teaching users how to use handsets is key to increasing ARPU.

Factors that affect revenue

Gross profit is largely determined by handset sales volume; the more handsets are sold the greater commission volumes.

The company’s SG&A-to-sales ratio is about 19% (average from FY12/17 through FY12/21). Personnel expenses have been the largest component, at about 60% of SG&A expenses. Legal complications associated with terminating employees in Japan mean that personnel expenses are more similar to fixed costs than variable costs.

Major variable costs are rent (about 14% of SG&A expenses) and advertising and sales promotion expenses (about 11%). It is Shared Research’s understanding that part of the commissions paid to subscription agencies is used for sales promotion such as cashback deals.

Since 2016, the share of mobile handset sales generated through new customers has been declining compared to levels observed in 2010–2014 (as shown in the above graph).

Since FY12/16, major changes have occurred in sales methods for mobile phones. The legacy business model involved generous cashback deals targeting new contracts through passing on a portion of sales commissions to the consumer. The Ministry of Internal Affairs and Communications—the ministry with primary oversight of the telecom industry—expressed concern that excessive cashback offers through passing on sales commissions was a factor that obstructed fair competition among carriers, and formulated guidelines limiting excessive discounting on mobile devices.

The October 2019 revision to the Telecommunications Business Act has banned discounts on new handset sales conditioned upon users fulfilling the full length of their service contract and capped discounts at the time of entering into a new contract to JPY20,000.

Profitability snapshot and financial ratios

Comparing Bell-Park with industry leader T-Gaia Corp. (TSE1: 3738), the company has a higher net margin (3.1% in FY12/21 versus 2.9% for T-Gaia in FY03/21). Through 2019, T-Gaia generally maintained higher ROE and ROA. However, since FY12/20, the company’s ROA has surpassed T-Gaia’s (see the following table).

Strengths and weaknesses

Strengths

Skills of in-store staff. The ability to explain to customers the services provided by mobile carriers and how to use mobile phones is more important than ever before. According to the company, the staff at its carrier stores not only have strong consulting skills but also excel in hospitality. Staff with a combination of knowledge and soft service skills is a major competitive advantage for Bell-Park carrier stores. Bell-Park has also demonstrated its ability to transfer these hard and soft skills to staff at the carrier stores it has acquired, which would allow it to reap the fruit of business successions in the event of further market consolidation.

Financial strength. The company has ample cash reserves and is able to choose from a number of fundraising options for its acquisitions. Its reputation as a preferred acquirer is also a strength that can help shape its growth through acquisition strategy.

Focus on SoftBank brand and prime store locations. SoftBank has been growing its market share aggressively following entry into the market in 2006. Bell-Park’s focus on the SoftBank Mobile brand means that it stands to benefit from SoftBank’s growth through ARPU commissions and a growing supply of potential after-sales service customers. It can leverage the sales expertise gained through relations with SoftBank in future business expansion. 80% of Bell-Park’s store network is based in the Kanto, Tokai, and Kansai regions. We understand the company also is effectively using its management resources to build a highly profitable store network.

Weaknesses

Reliance on handset sales. Major competing distributors are growing in related businesses, such as corporate solutions and sales of fixed-line services. Bell-Park’s earnings rely on handset sales—meaning mobile phone market trends and handset sales commissions have a significant effect on its earnings. The diffusion rate of mobile phones in Japan exceeds 100%. Further, the mobile operators face pressure to reduce charges from the Ministry of Internal Affairs and Communications. The two main areas with scope for cost reduction while maintaining profit are commissions to subscription agencies (including handset costs) and depreciation related to capex. They may thus review their existing commission structures. Changes such as diversification of sales methods and sales channels, including the spread of online sales, will warrant attention.

Reliance on SoftBank. SoftBank branded handsets, accessories, and plans are the majority of Bell-Park’s sales. As a result, Bell-Park’s performance is closely tied to the popularity of SoftBank handsets, accessories, and plans. Distributors that carry multiple carriers have a broader product offering in terms of phone plans and handset models. Bell-Park is developing its stores with other carriers, but as of end-December 2021, around 80% of its carrier stores were under the SoftBank brand.

Supplementary information

The main focus on SoftBank is both a strength and a weakness, and the relationship could be considered symbiotic, although unequal in profits.

SoftBank receives market intelligence from Bell-Park. It trusts Bell-Park’s feedback as Bell-Park focuses on SoftBank. Information provided by Bell-Park is valued as much or more than other SoftBank distributors, a relative advantage given the company’s size.

The relationship seems comparable to major soft drink companies and regional bottlers. Soft drink companies are clearly more powerful in the relationship, but the arrangement benefits both parties.

The importance of Bell-Park to SoftBank can be seen in the percentage of SoftBank stores operated by Bell-Park, and in unit sales generated. As of end-FY12/21, 301 SoftBank stores were operated by Bell-Park (304 at end-December 2020, 297 at end-December 2019, 285 at end-December 2018, 258 at end-December 2017, and 256 at end-December 2016). While SoftBank does not disclose total store numbers, Shared Research estimates that about one in every 10 SoftBank stores is operated by Bell-Park. Bell-Park sold 1,066,000 devices (for all carriers) in FY12/21, equivalent to 11.4% of the 9,376,000 units shipped by SoftBank during the same period (calculated by Shared Research based on data from SoftBank). The sales ratio may appear to be lower than for the number of stores, but electronics retailers, general cell-phone retailers, and corporate sales also contribute to total unit sales for SoftBank. Considering these sales channels, the company’s unit sales contribution is significant, especially considering the size of its store network. Shared Research believes this is due to operating efficiency.

Group companies

Bell-Park liquidated its remaining subsidiaries and from FY12/09 consisted of only the main company. Bell-Park has a single business focus, mobile phone retailing, following the divestiture of Japan Pro Staff in 2008. In February 2014, Bell-Park acquired all shares in Bell-Park Next (formerly OC mobile), and began to release consolidated earnings in FY12/14. The company’s primary emphasis remains on mobile phone sales. Also, although unconsolidated as of end-FY12/21, Bell-Park has established Bellbride, Inc., B-Lab, Inc., and Wactive Inc. as wholly owned subsidiaries. Bellbride operates wedding consulting centers and provides wedding support services—areas where Bell-Park sees growth potential—and B-Lab plans, imports, and wholesales IoT devices. Wactive operates a variety of businesses, including a job placement business for middle-aged and senior workers.

Both Bellbride (launched in 2016) and B-Lab (launched in 2017) reported net loss throughout the initial three-year periods following their launches, generated net income in their fourth years, and completely offset accumulated losses in their fifth years. Wactive, which was launched in 2020, concluded its third year at end-FY12/21, generating net loss.

Market and value chain

Market overview

Market scale

According to industry trend research company Gyokai Doko Search, the market size of the Japanese mobile phone retailing industry in 2020–2021 (total sales of 10 majors) was JPY760.8bn (-8.5% YoY). The top subscription agency (distributor) was T-Gaia Corp. (TSE1: 3738) with total sales of JPY450.9bn (mobile business and solution business combined; FY03/21). Second was Conexio Corp. (TSE1: 9422) with sales of JPY188.8bn (-9.7% YoY; FY03/21), followed by Bell-Park in third place with sales of JPY98.8bn (-4.4%; FY12/20).

In 2020, the COVID-19 pandemic had a significant impact on the mobile phone retailing industry. State of emergency declarations forced companies to close or shorten their business hours, resulting in declines in both customer traffic and the number of mobile phones sold at each store. After these states of emergency were lifted, customer traffic and sales volumes began to recover, but this recovery was not extensive enough to offset damage incurred during the states of emergency, and the sales of all companies fell as a result. In response to the government's request calling for "lower mobile plan prices," the three major Japanese mobile phone companies simultaneously launched low-cost, online-only plans in March 2021. These launches have brought about major changes in the business environment in the mobile phone retailing industry.

According to Baseconnect, an online knowledge engine that enables searches of data from hundreds of thousands of Japanese companies and businesses, Japan had 2,272 mobile phone subscription agencies (based on searchable result) as of end-February 2021. According to the Ministry of Internal Affairs and Communications (MIC), the number of stores operated by subscription agencies exceeded 16,000 (source: interviews with members of MIC’s working group for reviewing and strengthening rules for protection of consumers). There are thought to be about 8,000 primary distributors and about 7,000 secondary distributors, with many of them being small and medium-sized businesses. We understand these companies create acquisition opportunities for larger players as aging business owners seek a successor for their business.

Mobile phone shipments in Japan

According to data from MM Research Institute, 36.5mn mobile phones were shipped domestically in 2021 (+12.6% YoY). Of these, 33.7mn (+12.2% YoY) were smartphones (92.3%, up 2.6pp YoY). Shipments by four carriers (NTT Docomo, UQ Mobile [operated by KDDI], Y!mobile [operated by SoftBank], and Rakuten Mobile, Inc.) comprised 31.5mn mobile phones (92.9%), while SIM-free shipments (not associated with these four major mobile network operators) comprised 2.4mn mobile phones (7.1%). 5G smartphone shipments comprised 19.6mn mobile phones (+213.6% YoY), accounting for 58.1% of all smartphones shipped (+37.3pp YoY).

Projected total shipments for FY2021 amount to 36.6mn mobile phones (+4.3% YoY), including 34.4mn smartphones (94%). Of these smartphones, 22.7mn are projected to be 5G smartphones (about 2x YoY), and the share of 5G smartphones within the broader smartphone market is expected to expand to 65.9%.

Mobile phone subscribers

The mobile phone market in Japan is saturated. Comparing mobile phone subscriptions to the total Japanese population, the market penetration rate is about 149% as of end-December 2021 (source: Shared Research based on data from the Ministry of Internal Affairs and Communication and the Telecommunications Carriers Association).

The market is also relatively young–it got its first real boost after the 1995 Kansai Earthquake when fixed-line communications were temporarily unavailable and the value of mobile phones was made clear. The market quickly gained momentum in the late 1990s; total mobile phone subscribers grew from 2mn users in 1995 to 27mn in 1997. To capture this explosive growth, early store networks were designed to maximize exposure to consumers with the goal of quickly growing subscribers (e.g., a kiosk-type location that offers few services other than handling new sign-ups).

Data collected by the Ministry of Internal Affairs and Communications shows that the median YoY growth since 2000 is about 6%. Although growth has begun to flatten as adoption rates increased, the introduction of smartphones from 2010 onward provided additional fuel for growth. The increase flattened once again in 2013, but returned to nearly 6% in 2014. The growth rate is trending downward again, however, due to a rising smartphone penetration rate and changing regulatory climate.

Market development

The first service provider of mobile phone service was Nippon Telegraph & Telephone Corp. (TSE1: 9432) better known as NTT. It later spun out its mobile operations as NTT Docomo Inc. (TSE1: 9437), which began service in 1979 in Tokyo and Osaka. Competitors DDI Cellular and IDO entered the market in the late 1980s, planting the seeds for the modern landscape.

Deregulation in the mid-1990s brought the creation of New Common Carriers (NCCs) and increased competition. Carriers could now subsidize handset sales as opposed to the legacy rental model. NCCs entering the market in 1994 included Digital Phone, Digital Tsuka, and Tsuka Cellular. A wave of M&A activity reshaped the industry in the late 1990s: Digital Phone and Digital Tsuka combined to create J-Phone in 1999; DDI Cellular acquired Tsuka Cellular in 1999, which then merged with IDO to become KDDI Corp. in 2000. J-Phone became part of the Vodafone group in 2001, and officially changed its name to Vodafone in 2003. SoftBank would acquire Vodafone in 2006 and subsequently change the name.

Market share between the top three carriers has shifted significantly; NTT Docomo’s 55% share in December 2006 declined to 45% as of December 2014, while SoftBank increased from 16% to 26% over the same period; KDDI’s share has essentially been flat, fluctuating between 28% and 29%. SoftBank’s market share increased sharply after acquiring a business from Vodafone in 2006. However, from 2015, services provided by the various carriers have reached a point of extreme similarity, and market share fluctuations have decreased.

Market growth

Mobile phone subscriber data suggests that mobile phone diffusion in Japan has expanding rapidly, with the number of handsets now greater than the Japanese population. Legacy business models revolved around methods to capture as many MNP customers as possible, as the commissions provided for these clients were the most attractive. However, under the guidance of the Ministry of Internal Affairs and Communications, carriers and began revising sales methods from the spring of 2016, eventually completely separating handset costs from telecommunication fees in October 2019. Due to these factors, customer liquidity among the various mobile phone operators may decrease in the future, and it is possible that the purchasing cycle for new handsets may become longer.

On the other hand, the launch of 5G networks capable of faster transmission of large data volumes and advanced handset functions will likely lead to demand growth for mobile phones. The spread of smartphones has required carrier store staff to know about the devices, creating a more stressful working condition. Shared Research believes this has caused staff turnover rates to rise above those typical in other industries. The ability to secure talented staff is therefore a key to providing high-quality service to store customers.

Reorganization and integration of major subscription agencies

Over the years, changes in the market environment have led to reorganizations and integration of major subscription agencies, as shown below.

April 2008: ITC (TSE1: 9422; now Conexio Corporation) acquired Hitachi Mobile’s retail arm and merged with Panasonic Telecom Co.

October 2008: T-Gaia was created between