Shop till you drop

Consumer demand for digital devices and mobile products is driving rapid evolution of the retail channel in the Middle East

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By  Stuart Wilson Published  January 27, 2005

Roaring retail|~|retailnambiar200.jpg|~|J.P. Nambiar, general manager retail operations at Jumbo|~|With Dubai Shopping Festival in full swing, what better time to put the Middle East IT retail channel under the spotlight. The emergence of digital devices as mainstream consumer products, coupled with convergence between home electronics and IT products has spurred the power retailers into action. Independent retail outlets are looking to hold their own in a sector characterised by rapid price erosion and a need for rapid product turnover. The evolution of Middle East IT retail channels stepped up a gear during 2004 and 2005 is shaping up to deliver more of the same. The Middle East IT retail channel consists of much more than the few well-known power retailers that dominate the Dubai scene. Admittedly, these players — think Jumbo, Jacky’s, Plug-Ins and CompuMe for starters — are at the cutting edge of the region’s IT retail development, but they are by no means the only players driving the sector forward. In Saudi Arabia, Jarir Bookstore, Computer Castle and Extra play an equally important role in providing a route-to-market for IT vendors wishing to take their products to the consumer market. In massive IT retail markets such as Iran and Egypt, huge malls — dedicated to technology in all its forms — have been established, playing host to a wide selection of IT retailers. While many of these stores remain independent outlets, it is highly probable that the power retailers of tomorrow will emerge from their ranks. As the retail environment matures, the retail distribution sector is also waking up to the fact that it now needs to provide a range of services and level of value-add that can keep even the most demanding retail chain happy. Jumbo Electronics, one of Dubai’s premier retail powerhouses, also has its own retail distribution arm, which has witnessed rapid growth in recent years. Anshuman Rath, deputy general manager of Jumbo’s IT division explains how the distribution operation has evolved: “We started in the UAE selling to 60 resellers and quickly expanded and started to service power retailers such as Carrefour, Plug-Ins, Jacky’s and Dubai Duty Free. Then we started expanding across the GCC — a move that major vendors such as HP approved of — into markets such as Oman, Bahrain, Qatar and Kuwait. We now have many customers in these countries as well.” As retail distributors reach out to customers across a wider geography, the issue of stocking points needs to be addressed. Retailers — especially those shifting large volumes — want speedy delivery and rapid stock replenishment enabling them to carry a minimal inventory at any point in time. Simultaneously, retail distributors are attempting to balance their own inventory levels against the need for ready availability. This often creates a situation where regional warehouses feed smaller local stocking points. While product availability and speedy delivery top a power retailer’s wish list for distribution partner skills, they are by no means the only factors. J.P. Nambiar, general manager retail operations at Jumbo, explains: “Power retailers want a comfort zone in terms of extended rates, seasonal pick-up, festival support and services. For example Carrefour wants someone to handle the servicing if a customer brings a product back. We also offer promotions, ensure we can give the best prices and co-ordinate vendor back-end rebates where necessary.” ||**||Vendor influence|~|retailashish200.jpg|~|Ashish Panjabi, chief operating officer at retail chain Jacky’s|~|With multiple retail distributors competing for the same customer base, providing these value-add services can make or break success. Retail distribution is a highly competitive arena in the Middle East, and although retail sales to end-users are streaking ahead, the same cannot be said for the margins that the retail channel expects to make. As well as the interaction that exists between retail distributors and their customer base, vendors are also looking to talk directly to retailers and ensure that their products are given the shelf space they believe they deserve. This means developing compelling rebate and incentive schemes that persuade retailers to focus sales efforts where the rewards are best. Ashish Panjabi, chief operating officer at retail chain Jacky’s, explains: “These schemes vary from vendor-to-vendor but most are based on sell out figures not sell in. We are seeing a lot more in terms of product specific rebates coming in. When you are dealing with a major vendor like HP, they do everything and have separate people looking after different categories. One week they ask us to focus on colour LaserJet’s, the next week it is digital cameras and the week after that it is scanners.” With IT vendors frequently offering product specific incentives to retailers, this can present management with a dilemma. If one vendor is offering a particularly juicy back-end rebate for the retailer in order to kick start sales out, do they inform their shop floor staff to push that model over all others and heavily influence the customer’s decision? It is a tough choice that involves prioritising profit or selling the product that best suits each customer. Vendors with advanced supply chain management systems typically request sales out data from both first tier distribution partners and second tier power retailers. While retailers are prepared to share this data with vendors, they do not want it falling into the hands of distributors. Panjabi explains: “Sell out data is sent straight to the vendor. We sometimes buy one vendor’s product from three or four separate distributors. The nature of this market is such that you do not want to give all your figures to distributors — especially if they have a retail operation of their own.” Economies of scale are becoming more important for retailers and retail distributors alike. Selling large quantities allows power retailers to negotiate discounts that independent retailers just cannot match. The volume of product being sold also allows the power retailers to cut their margins to the bone and squeeze their independent brethren even further. ||**||Selling on service|~|retailahmed200.jpg|~|Ahmed Khalil, general manager Middle East and Africa at Toshiba|~|While price is undoubtedly still a major factor for consumers picking where exactly to purchase the latest snazzy notebook from, it is by no means the only consideration. After-sales service is becoming ever more important and an established power retailer can typically offer customers greater peace of mind in this area. It is premature to sound the death knell for independent retailers, but they do need to focus their efforts and develop innovative value-adds and niches that set them apart from the big boys looking to dominate the retail scene in the years ahead. Vendors increasingly see power retailers as a channel that can be used to serve the small office home office (SOHO) segment in addition to the individual consumer market. Ahmed Khalil, general manager Middle East and Africa at Toshiba, says: “For us, the consumer and SOHO segment is purely fulfilled through retail, and professional power retailers are emerging across the region in a big way. Even in Kuwait, chains such as Al Zamin, Eureka and even Virgin Megastore are growing fast. In Saudi Arabia, Carrefour has plans to have 16 stores in two years time. Retail can serve small companies with just three or four employees very well.” For retailers, serving these small SOHOs and selling basic installation and maintenance services on top of the actual kit may be one way for them to offset the relentless margin pressure that continues its inexorable downward spiral for the majority of vendors’ products. It is a trend that has already been witnessed in Europe with major retailers such as PC World (part of the Dixons Group) effectively setting themselves up as a one-stop-shop dealer network for SOHOs and SMBs offering a complete portfolio of hardware, software and services. Several retailers in the Middle East are already starting to replicate this business model. CompuMe, which operates a network of destination stores, now has a business arm offering network solutions and even IT training to its customer base. For retailers, margin is king, and they are keen for vendors to assist them in their quest to restore reasonable profitability in the retail market. Rath at Jumbo explains the predicament: “Some vendors are just fighting for market share as opposed to focusing on making profits. I find this strange in a market where a brand like Sony Vaio is still able to command a healthy premium. Vaio uses recommended retail prices (RRP) and this is something more should consider doing.” In the notebook space, market dynamics make for wafer thin margins. Nambiar explains the issues: “The lifecycle of a notebook has been reduced to a compressed time frame of between 30 and 45 days in some cases. Vendors are in a hurry to push the product through and achieve the sell out; to do that they have to bring the price down. If vendors are buying market share it has a cascading effect on overall margins available throughout the channel.” ||**||Making margin|~|retailrath200.jpg|~|Anshuman Rath, deputy general manager of Jumbo’s IT division |~|This situation occurs frequently with vendors that pursue an open distribution model. By appointing multiple distributors and allowing them to compete fiercely against one another, they are not in a strong position to control channel pricing policy, reducing the brand’s ability to command a premium in the market. Nevertheless many retailers will still clamour to stock the products from the vendors encouraging competition for one simple reason: end user demand. In other words, if the customers want it, the retailers want to stock it. Independent retailers face a tough time in 2005. The IT retail sector will mature into three distinct segments: generalist retailers, destination superstores and mall-based retail powerhouses boasting a large number of outlets. Operating in the IT retail sector is certainly not for the fainthearted and Middle East players can expect competition to intensify as large international players carefully scrutinise the market potential. With hot products like notebooks and LCD monitors flying off retailers’ shelves, top players expect to sustain rapid growth rates during 2005. Consumers in the Middle East are displaying an insatiable appetite for IT kit but retail remains a margin challenge. ||**||

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