Shop floor shuffle

While the IT retail market is booming across the Middle East, vendors, retail distributors and the retailers themselves are not enjoying the margins they could — and should — be making.

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By  Stuart Wilson Published  March 2, 2004

Shop floor shuffle|~|Leilaweb.gif|~|Leila Fakih, consumer sales manager, HP Middle East|~|The Middle East IT retail channel is ready for a radical structural overhaul. Expect a cleaner separation of distribution activities from retail operations as the market matures. The emergence of regional retail powerhouses will pave the way for closer links with A-brand vendors aimed at improving both sides’ profitability. Let’s go shopping. The retail IT channel consists of two main elements: firstly a product channel of vendors selling to distributors who then sell onto retailers; and secondly - and most vitally - a direct marketing, branding, promotion, rebate and incentive relationship between the vendor and the retailers. To be successful, vendors need to pay attention to both parts of this model. “As a vendor, it is important that you sustain an in-country focused team to work alongside the retailer in planning promotions, setting up stands & hiring in-store promoters,” surmises Leila Fakih, consumer sales manager at HP Middle East. “HP is expanding its network as the market growth justifies it.” It is a view echoed by other vendors selling through IT retailers. “Regardless of the size of a retailer, we see direct engagement as a vital part of the relationship,” explains Philip Ashkar, director sales and marketing at Acer Middle East. “Acer is heavily involved with branding and merchandising activities in stores.” “The financing and logistics of product sold into retail is handled by distributors,” adds Manish Bakshi, director and chief operating officer at BenQ Middle East, “BenQ also works closely with large retailers. We rent shelf spacing in stores like Plug-Ins, use in-store promoters and run back-end rebate schemes for the retailer. These initiatives are often accompanied by special pricing policies to help the retailer's margin.” The power wielded by back-end rebate schemes offered by vendors to retailers has grown in recent years. Often this is the only area where the retailer makes any margin. It is also the only area where vendors can make their brand more compelling to retailers. “The actual purchase price is no longer a real differentiator in the market,” says Ashkar, highlighting a trend that afflicts the entire IT channel and not just retail. “Products from different vendors have similar specifications and similar prices. The way to stand out is through partner engagement, go-to-market models and value-added services. Part of this involves looking carefully at back-end rebates and cash incentives.” “Margins are wafer thin in IT retail,” comments Soni Tolani, executive director at Jacky's Electronics. “Jacky's success is based on the volume of product we sell. Many large global IT retailers are talking about entering the Middle East market and I anticipate a couple starting up. They will need to do their homework and understand that in some countries, it is already a very competitive market.” Competition between vendors to offer retailers the best incentive schemes is intense. Even then, much depends on whether retail managers filter the bottom line benefits of pushing one vendor over another to their shop floor staff. “If we have hired a BenQ promoter, we can offer that person direct back end incentives,” says Bakshi. “Other schemes are run through the store management who make a judgement on whether or not this should be communicated to sales staff on the floor. Vendors can come up with any scheme, but are not allowed to offer it directly to retail staff.” For retailers, keeping a close eye on incentive schemes is a day-to-day task. Most are adamant that vendors are not permitted to directly incentivise shop floor sales staff. “It is something we do not allow,” explains Scott McKay, general manager at Plug-Ins Electronix. “Any monetary reward to sales staff is controlled by management. It is important to be honest with the customer, and whilst we appreciate vendor incentives, we stay in control of sales staff.” “We do not encourage direct incentives for sales staff,” adds Arvind Agrawal, general manager IT group at Jumbo Electronics. “We don’t want our staff to be biased to one vendor and want to drive our own strategy.” Vendors looking to bypass this management control - and there have been instances in the Middle East - are often dealt short shrift by retailers. “If we are made aware that direct incentives are being offered to sales staff without our knowledge, we will discontinue that vendor in our stores,” declares Shaun Sullivan, purchasing director at Plug-Ins. “Honesty, integrity and business ethics are important and we run internal incentive schemes to motivate sales staff.” Whilst most major IT retail chains are adamant that sales staff cannot be incentivised by vendors, it is not a universal truth. “Some retailers accept it but it depends on their business model and policy,” admits Fakih at HP. “For those that do, HP offers regular rebate initiatives but no permanent schemes and only on specific campaigns for a limited time.” “As a vendor you always have to look at different ways to drive the business,” adds Ashkar. “We are in talks with one major retailer about incentives for sales staff. All our competitors are offering similar incentive schemes so it is important that we do as well.” ||**||Cash for ads|~|Jumboweb.gif|~|Arvind Agrawal, general manager IT group, Jumbo|~|Vendor cash talks to retailers in a variety of other ways as well. Marketing funds allocated for joint advertising campaigns and promotions are the spark that keeps the vendor-retailer relationship alive. “HP runs campaigns with the majority of its retailers,” says Fakih at HP. “Most are done on a cost-sharing basis and aim to increase the number of customers visiting stores. Regular promotions fuel the retail business.” Campaigns aimed at the consumer market can be vendor-focused or retailer-focused. “BenQ sometimes runs adverts with lists of its retail stockists underneath,” says Bakshi at BenQ. “This is because there are not many retailers that stock our entire range of products. Sometimes we will do specific adverts that focus on a specific part of the BenQ range in close co-operation with a few retailers.” Gaining access to the honey pot of advertising money held by vendors is vital to a retailer's success. It is also an area that courts controversy in the retail sector. “Vendors that run their own ads may put the names of retailers at the bottom,” says Dikram Tchablakian, CEO at CompuME. “Often you need a microscope to read them. They need to remember the aim is the consumer market and not the corporate customer. The consumer needs to know the product, price and place they can buy it.” McKay at Plug-Ins also draws attention to advertising money supplied by vendors: “One challenge we have is getting access to cash from principal vendors for advertising. Sometimes, it is because we are a pure retailer and not a distributor as well. The concern is that sometimes distributors with a retail chain will use funds allocated to develop their distribution business to promote their retail business. Vendors need to focus more on working with pure retailers on consumer-focused campaigns that drive store traffic.” “Some distributor adverts put their logo, phone number and address on the page,” continues Sullivan. “The advert should connect the consumers to all the retailers that stock the product, not just the distributor's.” Expect companies operating as both distributors and retailers to separate these activities as the IT retail market matures in the Middle East. Jumbo - a major player in both areas - actually sees disadvantages in having both operations welded together. “Jumbo retail does not have an advantage because of Jumbo distribution,” explains Agrawal. “It is constrained by Jumbo's distribution agreements. I would love to put Toshiba in Jumbo retail outlets but this is not possible because of our distribution agreement with vendors like HP and Acer. Jumbo retail cannot undercut the other retailers our distribution arm sells to, so we have to find value-add services that justify our retail prices.” Surprisingly, third party retailers may actually be in a position to negotiate better prices with Jumbo distribution than its own retail arm. “The retail arm helps the distribution arm,” explains Agrawal. “It can position certain products and create demand through its retail marketing machine. Jumbo retail is actually constrained by purchasing only from Jumbo distribution. That is the situation today but may not be in the future and we are discussing the separation of the two arms. With HP, the separation has occurred and Jumbo retail is treated like any other.” Put simply, when Jumbo distribution wants to sell some poorly performing SKUs, Jumbo retail is the logical vehicle to help clear them off the shelves. This is not a beneficial model for the retailer. Longer-term, Jumbo retail could start purchasing from multiple distributors. This separation of distribution from retailers is a classic sign of a maturing IT retail channel. In the Middle East, evolution of IT retail is also evident through the numerous types of IT retailer that now exist. “There's a growing number of retailers and the nature of their business models is also changing,” explains Fakih. “Prominent European retailers have come into the market and are expanding across the region. Existing retailers are also expanding their presence and opening up new franchises.” ||**||Retail choice|~|scottweb.gif|~|Scott McKay, general manager, Plug-Ins Electronix|~|The choice of retail experience is certainly now in place for IT consumers — especially in the UAE: a customer can pick up a PC with groceries at a generalist like Carrefour; pop into a mall-based retailer like Plug-Ins as part of a family day out; visit one of the traditional high street chains; drive to one of CompuME's destination stores, or even check out one of the small independent retailers in Computer Plaza. These categories will be replicated in other countries across the Middle East as markets develop. Expect the generalists, mall-based players and destination stores to make life tough for independents in the future. Each category requires a different form of engagement from vendors. “In a small independent retailer, the owner does not want us to incentivise his sales staff,” says Ashkar at Acer. “He wants bonuses and rebates paid directly to him. When you talk to large retailers you have to be involved with them at every level. Carrefour focuses on a limited number of products at an aggressive price and uses high volumes to offset low margins and supplements this model by upselling accessories.” Tchablakian adds: “CompuME is the only specialist IT retailer. Others are general electronics stores with higher product volumes and a mix of products that allows them to achieve better margins. Many vendors still try and use one channel model to fit all retailers. There has to be a plan whereby vendors work in a manner that serves the specific needs of each retailer. This does require more effort but it will allow vendors to exert more control over pricing through stock control measures.” “Vendors need to focus on working with the right number of retailers who actually add value,” says Agrawal. “In some cases there is over-distribution to retailers not adding value. This is dangerous because it will hurt the players who are adding value. Retail prices for laptops dropped 30% in the fourth quarter in the UAE... There was never enough margin to support such a drop and this is where some vendors have acted irresponsibly. Some started selling loss leaders, other vendors were forced to follow and now it is tough on everyone.” “Retail margins are even lower here than in established markets like Europe,” concludes McKay. “That means there is something wrong with the model. The margin that distributors make will reduce as they evolve from holding houses to logistics experts. Inappropriate advertising spend by vendors may be better spent helping retail margins. Some of the power vendors are having a tough time making money in retail at the moment.” Whilst some A-brands wield considerable brand equity in the retail environment — think Acer, Dell, FujitsuSiemens, HP, Toshiba and Sony in the notebook space for starters — even they are locked in a fierce price battle. For the consumer considering buying an A-brand, they are all roughly equal in his estimation, making brand loyalty a minor factor. “For large retailers, stocking the power brands is still vital because of their reputation,” says Tchablakian. “It also means that without a dominant retailer in the market, there is little to control their channel structure.” New vendors are flocking to the Middle East retail market in droves with large retailers approached every single day. “I change my mobile phone number every month,” quips Sullivan at Plug-Ins referring to the number of vendors wanting to sell into Plug-Ins stores. The crème-de-la-crème of the local assembly market are also starting to make their presence felt in the IT retail space. Local PC vendor DCS is currently in the process of signing deals with major retail chains. “It is difficult for local assemblers to build these channels,” admits Samer Bayrakdar, director at DCS. “There was always an issue about the perception of quality but this is changing.” Merchandising and in-store assistance is one of the main areas where vendors can add value to their retailer partnerships — and help their own retail positioning. “Some vendors come and make sure their products are properly displayed,” says Solani. “This plays a vital role in the stores.” In-store promoters and training sessions for retail sales staff also help vendors build a symbiotic relationship with the shops stocking their kit. All major vendors take a pro-active role in these activities. “How you capture mind share at store level is a vital skill,” says Fakih. “In this sense HP operates like a fast-moving consumer goods company. We're also exploring the store-in-store concept where sections are dedicated to HP products.” Retailers appreciate these efforts, but what they really want is for vendors to focus more on the type of retailer they are dealing with. Rather than emphasising the quantity of retailers their goods are stocked in, a deeper understanding of the quality of the relationship and the margins that can be carved out for both sides is required from vendors. Retail margins should be higher in the Middle East and one way to achieve this is for the power retailers and power vendors to work together more closely. As retail develops, an executive council of power retailers and power vendors is one way for both sides to improve their lot. For vendors, the ability to impose a level of pricing control will prevent loss leaders becoming the norm. The retail land grab has happened; now is the time to build margins. ||**||

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