Delegates at the recent Digital Consumer Channel (DCC) event held in Fujeirah sank their teeth into the meaty issues affecting retail routes-to-market for IT products in the Middle East. As always, margins forced their way to the top of the agenda as retailers large and small asked vendors to exert more control over pricing policies in the region.

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By  Stuart Wilson Published  May 18, 2005

Delegates at the recent Digital Consumer Channel (DCC) event held in Fujeirah sank their teeth into the meaty issues affecting retail routes-to-market for IT products in the Middle East. As always, margins forced their way to the top of the agenda as retailers large and small asked vendors to exert more control over pricing policies in the region.

With close to 1,000 one-on-one meetings between retailers, retail distributors and the vendors they represent, the busy executives certainly had the opportunity to get to grips with the margin situation in the Middle East.

Summarising the views of both camps is actually pretty simple. From the vendor side the message to retailers was pretty clear: stock and sell more of our stuff, advertise it more and put it in better positions in your shops. From the retailer side the message to vendors was to implement a channel model that offered a reasonable margin to work on and to support them more in terms of marketing and in-store merchandising and promotion.

Sounds pretty simple really, but these basic demands mask the incredible complexity that is created by the diversity of retail operations that exist in the region. For a vendor, dealing with Carrefour in an effective way is far removed from the needs of an independent retailer working in one specific country.

Consolidation is pretty much a given in the IT retail space as the companies with economies of scale push for better pricing from vendors and increase the pressure on their independent counterparts. It is a trend that has already happened in other parts of the world, but anyone expecting a rapid transformation in this region has probably not considered the cultural aspects at play in the Middle East.

In that respect, Dubai represents an exception to the rule. With retailers such as Plug-Ins already gearing up to introduce the big box retail concept into the UAE, this is a market maturing fast. But talking to the owners of independent stores and IT-based malls, it is clear that there is still plenty of life in these retail formats in the Middle East.

The fact remains that there is no such thing as a typical consumer and in emerging markets around the region — and those with a small population or limited spending power — the local retailer maintains some specific advantages. Not only can it operate on lower overheads than many of the power retailers that exist in expensive malls or purpose built stores, it can also engage with the customer on a much more personal level. It also possesses greater flexibility to chop and change the product line-up as it sees fit.

Many of the vendors appeared to have already decided that the power retailers and generalists would soon force independent retailers out of the picture. I am not convinced and the vendors that do believe this need to realise what this means for the balance of power in the channel.

In the developed markets of Western Europe — where consolidation of IT retail is approaching its zenith — the balance of power has undergone a fundamental shift. In the UK — and some would say across Western Europe — the Dixons Group has reached a position of such power in IT retail that it can pretty much dictate terms to vendors wanting shelf space in its stores. In other words, individual vendors need the Dixons Group and all the IT retail chains it owns much more than it needs them.

Bearing this in mind, vendors should be doing everything in their power to preserve the diversity of IT retailers that exist in this region, as opposed to implementing policies that accelerate retail consolidation through pricing advantage for larger chains. That is not to say that the retailers buying in massive bulk should not receive preferential pricing. They should. But these pricing policies need to be implemented in a carefully calculated manner that gives everyone a chance to survive and make a profit.

Which moves us nicely onto margins. Apparently, you can now make a better margin selling a book than a notebook PC from certain A-brand vendors. For some retailers, the PC, notebook or commodity printer is practically a loss leader with the margin coming from related sales of supplies, peripherals and accessories. Some retailers reckon they can make more margin selling a notebook bag than the notebook itself.

Some vendors need to work harder to ensure sufficient margin exists at every step in the retail channel. There’s often a fine line between price fixing and implementing recommended retail pricing but it is something that certain vendors need to address. Much of the margin concern is inextricably linked to the distribution model that a vendor employs to serve its retail customers.

The message from retailers was that over-distribution is already occurring for certain vendors in the Middle East and the result of this supply surplus is zero margin for them. The vendors pursuing this model frequently rely on massive end-user marketing campaigns to build brand awareness to pull the customer in to the store and get them to specify their brand.

Other vendors pursue a closed distribution model with one partner selling to retailers in each country. This does allow better control of the margins but they need to make sure that their distributor is passing on the advantage to the retailers it sells to as opposed to keeping the margin for itself. In reality, the best model probably lies somewhere between these two extremes and it is always a difficult balance for a vendor to obtain.

As one retailer explained: “I stock the over-distributed A-brands and I use their marketing kitty to fund my newspaper advertisements. Once the customer is in the shop the sales staff then steer him or her towards other brands that offer me better margins. That is how the sales staff are incentivised. Each shelf talker has a secret code that shows the sales staff the product that they will be rewarded most for selling.”

There’s certainly more to IT retail than meets the eye. For the vendors it is a case of balancing the push and pull. For push read sustainable channel margins. For pull read end-user demand creation and brand equity. Having one without the other is an exercise in futility that will eventually come back to haunt vendors.

For IT retailers in the Middle East, it probably is a case of get big, get niche or get out, but those sounding the death knell for independent retailers do so prematurely. These guys have the skills, experience, knowledge, cultural understanding and local touch to carve out a niche that will continue to exist for many years to come in the Middle East.

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