Cellular Phone Distributor Pins Hopes on New Strategy : Retailing: CM Communications is shifting from wholesaling other firms’ products to marketing its own through a chain of stores.
CM Communications, a Panorama City distributor of cellular phones, initially sold stock to the public for $5 a share in January, 1990. For investors it was a wrong number.
CM’s shares now trade for about 50 cents. The company’s problem is heavy competition in the cellular phone business and sinking prices.
The company hasn’t turned a full-year profit since 1987, and last year CM lost $1.7 million on $20 million in revenues. Since then, things haven’t gotten much better. For its first quarter ended March 31, CM lost $53,000 on revenues of $3.8 million, compared to a $102,000 profit on revenues of $5.7 million for the same period a year ago.
The recession hasn’t helped the cellular phone business, and prices have been steadily declining since cellular phones became widely available in 1984. Dealers paid an average wholesale price of $1,900 for a cellular phone in 1984, but today it’s down to $290, said Steve Huckaby, president of Communications Consultants Co., a Van Nuys cellular phone retailer.
In addition, CM wrote off $435,000 in 1989 and 1990 from a subsidiary that distributed cellular phone carrying kits; the subsidiary ceased operations because phone manufacturers began making similar products. The subsidiary, Cavanah Cellular Products, filed for Chapter 7 bankruptcy liquidation in June.
Dana E. Marlin, president and chief executive of CM, declined to be interviewed. But according to documents the company filed with the Securities and Exchange Commission, CM is trying to survive by shifting from wholesaling other companies’ cellular phones to marketing its own through a chain of retail stores.
The new strategy is critical because CM had only $85,000 in cash on hand as of March 31, down from $364,000 at the end of last year. Also, in March CM was in violation of terms of a bank loan, but the company was trying to negotiate a payment schedule.
The firm’s former strategy was to buy phones from name-brand manufacturers such as Panasonic, Mitsubishi and OKI Telecom, then sell them to other distributors and retailers. Name-brand phones constituted almost all of CM’s sales in 1989 and 70% in 1990.
When the recession sent phone prices downward, CM stopped distributing those brands and is now pinning its hopes on exclusively selling its own Freecom phone at its seven retail outlets. As part of its push, the company bought four retail stores in April in Northern California for $165,000 and assumed $1.46 million in debt.
CM said in an SEC filing that pushing into retail stores and selling its own line of cellular phones will generate enough cash to keep the company going through 1991.
The Freecom phone, made in Hong Kong by Astec International, costs CM less at the wholesale level than the name-brand varieties it once distributed. CM then sells the phones directly to consumers through its outlets and distributes them to other retailers.
Sales of CM’s new line of phones were lower than expected last year because the first shipments arrived late and many units were defective, according to SEC documents.
No longer just a middleman, CM will pocket the money that went to name-brand manufacturers and retailers. As a result, CM’s overall gross profit margin as a percentage of sales increased from 14% in the first quarter last year to 19% this year. CM also hopes to profit from a line of mini hand-held phones scheduled for delivery this summer.
Several cellular phone dealers, who asked not to be identified, said CM seemed to be making smart moves, but expressed doubts about whether it would pay off. “I think they are going after the right market,” said one local dealer. But CM has “done so much in alienating their customers in the past by the way they treated them,” the retailer said. “I referred hundreds of dealers to them to buy products. Invariably they would say, ‘I don’t like dealing with them.’ ”
CM has also been hit by a management shake-up.
The company’s former president, George B. Cavanah Jr. (the “C” in CM), was terminated in January for reasons that neither Cavanah nor other officials would discuss, citing a confidentiality agreement.
Cavanah’s main contribution to the company was his Cavanah Cellular Products subsidiary, which distributed carrying cases and battery packs for using car phones in more than one car or outside the car.
The Cavanah business dried up in 1990 because many phone manufacturers began selling their own carrying kits, and Marlin wanted to concentrate on selling phones, Cavanah said.
As a result of the slowdown, CM’s stock took a nose-dive in the third quarter of 1990, dropping from $6.62 a share to 37.5 cents, and making it the worst-performing over-the-counter stock in a national survey by Media General Financial Services.
Cavanah started a new business in Ventura shortly after leaving CM. His company, BC Select Systems, makes devices similar to cellular phones that transmit data from areas that aren’t connected to land-based phone lines--such as offshore oil platforms.
CM was formed in January, 1989, as a holding company for Marlin Communications, a cellular phone distributor started by Marlin in 1986, and Cavanah Cellular, a phone kit distributor formed by Cavanah in 1987.
