Hyper retail demand

Facing unprecedented competition in the Middle East consumer electronics retail sector, many channel partners are being forced to review their commercial strategies in a bid to remain competitive.

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By  Michael Thorne Published  May 8, 2006

|~|hypermarket-pic200.gif|~|Power retailers claim to offer consumers a higher quality in-store experience|~|Competition is heating up in the Middle East consumer electronics retail sector as hypermarkets, power retailers and smaller retailers in souks and high streets vie for market share. While this increased competition spells good news for consumers, it is forcing a shift in power in the channel sector to retailers, who are demanding better deals from their vendor partners, which is in turn leading to diminishing margins. This trend is highly visible in certain market sectors across the Middle East. The UAE, and Dubai in particular, boasts the most developed retail industry in the region, with a heady mix of hypermarkets and consumer electronics power retail chains vying for market share and fighting it out over thinning margins. “Retail prices for consumer electronics goods in the UAE are very competitive, which reflects the trading mentality of retailers operating in the country,” says Jumbo Electronics chief operating officer Arvind Nair. “The business model is characterised by very high volumes and very low margins – much lower than in Europe for example. It works here simply because of the number of times retailers rotate their capital due to demand from tourists and a burgeoning population of ex-pats. Discarding these factors, the margins we operate on would not be economically sustainable.” Other GCC markets, such as Saudi Arabia and Bahrain, are characterised by rapid population growth and a booming construction sector. They also boast a large population of relatively young, tech-savvy consumers. Hypermarket chains presently dominate Saudi Arabia’s retail sector. The country’s consumers have been increasingly drawn to these stores for electronics goods as hypermarket giants Carrefour, Geant and Panda target rapid expansion in a bid to increase their share of the GCC’s largest retail market. “Our most important channel is the hypermarkets,” says Ayman Akel, the general manager of BenQ’s Saudi Arabian distributor, Rodanna Digital. “Hypermarkets have expanded their presence in Saudi Arabia dramatically in recent years. We believe that strategically, our best option is to hitch our fortunes to these retailers. They come to us with big money and place bulk orders for our products – much larger than any other retailers we typically deal with.” The purchasing power of hypermarkets is so significant that it enables them to negotiate better deals with distributors than smaller rivals. However their approach to the business is notoriously aggressive. Nidal Al Zamil, electronic section manager for Al-Asasyah, Sanyo’s exclusive agents in Saudi Arabia, explains that pressure from hypermarkets often forces distributors to reduce their wholesale prices. “If the hypermarkets can turnover enough of our products then this approach is fine,” he says. “When we negotiate with [the hypermarkets] we stipulate that in order for their margins to be satisfactory for our business they need to sell a significant quantity of product in each one of their stores.” Al Zamil explains that margins in Saudi Arabia are generally diminishing as a result of the aggressive strategy of the hypermarkets and the entry of new players into the marketplace. “The business has become very competitive,” he confirms. “Now, when new products are launched on the market they are rarely priced higher than superseded items. This is why we stipulate large stock orders from the hypermarkets in return for meeting their demands on price.” Zamil suggests that distributors at times have to accept unfavourable terms from hypermarket retailers simply to ensure their continued presence in their stores. “For example, if Sanyo’s products are not stocked alongside the competition in a Carrefour outlet, it poses branding and marketing issues for our business,” he says. “So, despite the poor margins, we simply have to compromise to maintain our presence in the sector.” Hypermarket retailers across the region have successfully cornered the market for entry level products, stealing market share from the souks and smaller retail outlets, which traditionally specialised in these items. However, these retailers are also increasingly targeting the mid-range market for consumer electronics products, bringing them into direct competition with power retailers. The hypermarkets emphasise price whereas the power retailers refer to value in their sales pitch. Branding, value-added services and quality in-store experiences are the major areas where power retailers seek to define their position in the marketplace.||**||Power retailers remain defiant|~|Nair,-Arvind-------JUMBO-EL.gif|~|Arvind Nair, COO of UAE based Jumbo Electronics|~|“There is definitely space in the market for organised multi-brand retailers, hypermarkets, distributor outlets and resellers. If you are buying a juicer or blender for US$15, then you may not mind buying it from a hypermarket since it is not a high tech product,” says Jacky’s Electronics COO Ashish Panjabi. “This is different if you are buying the latest LCD television and you are looking to spend US$2,750. You may be able to buy the same product at a hypermarket but you may not be guaranteed the same level of service as that provided by a specialist retailer. As a multi-brand retailer we also offer different payment options as well as a higher level of after-sales service,” he says. Jumbo Electronics’ Nair remains defiant in the face of the hypermarket challenge, claiming that the two retail concepts target very different segments of the market and that the presence of hypermarkets in major shopping malls has been beneficial in drawing customers into power retail outlets. “The hypermarket influence has been positive for us as they have been successfully drawing price-sensitive buyers from the high street into the malls,” he says. “Whereas in the past these customers would have visited souks or standalone retail outlets, they are now drawn to the big malls. We feed off this demand and enjoy increased footfall traffic as a result. We target a completely separate consumer demographic to the hypermarkets. Our core clientele are consumers that seek premium products and demand high-quality service standards, and wouldn’t generally factor hypermarkets into the equation. Our belief is that you can’t sell tomatoes and a US$2,700 digital camera in the same outlet.” Sherif Tawfic, marketing manager for Saudi-based power retailer, eXtra, agrees with these sentiments. “We do not consider hypermarkets to be strategic competitors – our competitors are specialised retailers that have focused commercial strategies and ensure respectable profit margins for their channel partners,” he says. The trend highlighted by power retailers that claim to have cornered the premium sector of the market is supported by their ongoing commercial expansion across the region. Jumbo Electronics recently announced that it planned to expand its retail presence in Oman, Bahrain, Kuwait and Sudan, while eXtra plans to expand its retail footprint in Saudi Arabia from three to eight stores over the coming 12 months, with as many as 30 outlets set to open in the near future. It has also stated a desire to launch stores in Egypt, the UAE and Lebanon within the next three years. “There are a lot of new channels opening for consumer electronics goods both in the form of hypermarkets and power retail outlets,” says Sony’s chief representative in Saudi Arabia, Takuzo Fujimoto. “We are looking to work with both retail channels to increase our business. Our channel management strategy centres on specific consumer demand and this is how we decide what products to sell to different channel partners,” he explains. Fujimoto says that Sony pursues a targeted approach to its retail partnerships, supplying power retailers with mid- to high-end products, and hypermarkets with mid- to low-end goods to match the preferences of each sector’s consumer base. “We have so far achieved great sales results with power retailers but our business through hypermarkets remains limited,” he says. “We are looking to develop relationships with hypermarket retailers as a result of their expansion plans in major regional markets such as Saudi Arabia. “However, we also don’t want to be associated with the lower-end, predominantly Chinese products that are sold in many of these stores, as it could potentially reflect poorly on our brand,” he explains. With a buoyant market for consumer electronics in the Middle East and a host of under-serviced consumer markets in various countries across the region, there is plenty of room for competition. Although the commercial threat posed by hypermarkets is played down by many in the consumer electronics retail sector, they are undoubtedly making an impact, which is forcing specialised retailers to focus their efforts on providing value-added services. As they continue their march across the Middle East, hypermarket retailers will increasingly dominate the market for basic consumer electronics goods, leaving power retailers to fight it out for consumer attention in the specialised market for premium products and services.||**||

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