Maintaining the rage

With its ideal geographical location, impressive logistical infrastructure and proliferation of free trade zones, the UAE is often described as the gateway to the Middle East consumer electronics market.

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By  Ronan Shields Published  December 7, 2006

|~|Mall-of-Emirates.200.jpg|~|Dubai's Mall of the Emirates draws consumers from across the region.|~|With its ideal geographical location, impressive logistical infrastructure and proliferation of free trade zones, the UAE is often described as the gateway to the Middle East consumer electronics market. However, economic pressures impacting the country’s consumer sector have resulted in increased government intervention in the form of new trade agency agreements, which aim to liberalise certain markets, including the consumer electronics sector. The new rulings, titled resolution no. 381/2006, stipulate that principal companies can deregister trade agency agreements if they feel their local partners are failing to meet their expectations. As reported in last month’s ECN, disgruntled vendors are contemplating taking advantage of the opportunities provided by the new laws. An industry source told ECN: “Many vendors have long claimed the situation was stifling commercial opportunities for their businesses. “Some South Korean vendors have been actively working to reduce their dependency on their local partners in recent years.” However, not all regional distributors fear the ruling - publicly at least. Jihad El Eit, vice president of mobile handset and accessories distributor i2, maintains the move will liberate the country’s consumer electronics sector. “The legislation will encourage more vendors to enter the UAE market without fear of being tied to distribution agencies that are not up to standard,” he claims. Deepak Babani, chief executive officer of Eros Group, believes the move reflects the UAE government’s shift away from its traditional protectionist stance. “The new regulations are part of a process that has been evolving for a number of years now,” he says. “I believe the government realised the former policy was not necessarily helpful to the investment climate in the UAE.” Arvind Nair, chief executive officer of Jumbo Electronics, believes increased competition will benefit the market overall. “Trade agency regulations, similar to resolution no. 381/2006, will help moderate the market,” he says. Nair claims that the new regulations will play a key role in stimulating demand for consumer electronics products in the UAE. “The increased competition will benefit the industry as a whole. Every segment of the channel will benefit in terms of the greater commercial opportunities these new regulations provide,” he says. However, Nair also points out that the new regulations could reduce profit margins for local players as they compete for the attention of international vendors. “The increased degree of competition could result in UAE-based distributors and retailers slashing their margins in a bid to maintain market share,” he warns. “The premiums charged for retail rental space in Dubai are much higher than the rest of the country but as the new [mall] developments reach the market prices should even out. Combined with rising operational costs in the country, this will test many local businesses.” Nair says increased competition in the country’s consumer electronics channel sector is forcing key partners to forge even closer business ties in order to consolidate their presence in the marketplace. “Distributors and vendors were previously focused on the ‘box-pushing’ model of trade. Now vendors have to invest heavily in ‘brand building’ with initiatives such as warranties and after-sales service,” says Nair. He also asserts that many retailers have been forced to enhance their levels of customer service in order to meet the growing sophistication of the country’s consumers. “Jumbo is now focusing its efforts on educating its sales staff about its product portfolio and is implementing a range of customer service initiatives,” he adds. “It’s important for retailers to show a product in the best possible light and have staff that can speak knowledgably about the portfolio of goods on offer.” Eros’ Babani concedes that rising operational costs could force retailers and distributors to renegotiate existing contracts with channel partners. “Rapidly rising mall rental costs are a concern for vendors but I’m confident of the market’s ability to meet these challenges,” says Babani. “The key channel stakeholders recognise the potential of the UAE market and appreciate that if they don’t work together the current rate of growth that we are enjoying will slow quickly.” However, a recent study by Dubai-based market analysts GRMC Advisory Services reported a 36% hike in retail rental prices in Dubai’s shopping malls between 2003 and 2005 and predicted a further rise over the next 12 months. Nair asserts that the influx of tourists looking for cheap consumer electronics goods in Dubai ensures stock turnover remains higher than other markets in the region, which in turn ensures the market can absorb higher than average operational costs. “Sales volumes compensate for low margins [in Dubai],” he says. “In this respect, Dubai is uniquely positioned as the most dynamic consumer electronics market in the Middle East.” Dubai’s world-class infrastructure and wealth of shopping destinations also draws residents from across the UAE and neighbouring countries such as Saudi Arabia and Oman. “Consumers will travel to Dubai from Abu Dhabi and Sharjah to hunt for bargains, even if there are outlets closer to home,” says Nair. ||**||Changing technology boosts consumer demand|~|PLUG-INS.200.jpg|~|Rising mall rents are forcing power retailers to develop stand-alone outlets. |~|Ashish Punjabi, chief operating officer of Jacky’s Electronics, claims that UAE retail outlets also face the challenge of facilitating the high product turnover typically associated with early adoption markets. “When most of our stores were originally designed, many products, such as MP3 players and LCD screens, had not been launched on the market,” he says. “This means retailers must constantly re-evaluate, and regularly update, their in-store designs.” Dubai’s reputation as a global shopping destination and a hub for the regional distribution of consumer electronics products shadows the slower rate of progress the country’s remaining emirates. However, if rising rental costs are indicative of strong growth in the consumer electronics sector, then Abu Dhabi is showing signs of catching its upstart counterpart in the north. A recent report published by Standard Chartered Bank found that retail rental prices in Abu Dhabi had risen by 36% in 2006 compared to 2005, while prices only rose by 16% in Dubai during the same period. Meanwhile, Sharjah’s comparatively cheap rental costs and booming population has led Emax to establish the Middle East’s largest consumer electronics store in the emirate. With 135,000 square feet of floorspace, the Emax ‘big box’ outlet, which is scheduled to open this month, marks a major departure from the the souk-style retail model that traditionally characterises the emirate. Neelesh Bhatnagar, chief executive officer of Emax’s parent company Landmark, says the move reflects consumer trends in Sharjah. “Given the highly competitive retail market in the UAE, we are basing our growth strategy on customer trends,” he claims. “We believe there is a growing consumer demand across the GCC for retail outlets that stock a huge range of products under one roof.” Despite the changing dynamics of the UAE retail sector, Dubai’s significant edge over its poorer neighbours extends to the logistics market. While the UAE boasts seven free trade zones in total and is recognised as one of the world’s top three re-export countries, Dubai steals much of the glory, thanks largely to the fact that in Jebel Ali Free Zone (JAFZ), it houses the world’s largest man-made port and the region’s largest logistics base. JAFZ also provides distributors servicing the region with a tax-free base where they can source goods in demand-specific shipments at short notice. “Instead of putting goods straight into the market and paying upfront we can hold them in JAFZ and pay duty on them as and when required,” says Manohar Punjabi, executive director of UAE distributor Jacky’s L.L.C. “The consumer electronics market in the Middle East is so vibrant that you can rarely predict at any given point what goods will be consumed locally and which ones will be exported.” However, this liberal trading environment described by Punjabi that distinguishes JAFZ is also responsible for one of the greatest challenges facing local distributors: parallel imports. “Parallel imports are a major factor impacting the UAE consumer electronics industry,” claims Nair. “This is due to the UAE’s low barriers - embodied by Dubai’s free trade zones. Analysis of trading-orientated markets shows that parallel imports are a lot more common in these markets. “Larger nations with high import duties and stronger barriers to trade typically do not encounter this problem on the same scale, as the mechanisms are in place to control what enters the country.” BenQ Mobile vice president Najib Ashraf Kazi echoes these sentiments, adding that his company had to alter the terms of its distribution partnerships as a direct result of grey market imports. “The re-export channel fosters grey market trade, which is something we have struggled with,” he says. “BenQ Mobile stopped working with a number of distributors because they were focusing on the re-export market. We now stipulate in our contracts that distributors can only sell goods intended for the market which they have been assigned.” Channel players also point out that the UAE’s legal loopholes allow grey market trade to thrive. “Many offenders are getting away with this crime due to lax industry regulations,” Nair. “If a parallel importer is successfully prosecuted and stripped of its import licence, it need only change its trading name to apply for a new one. “The problem with grey market trade is that we [distributors] are constantly chasing shadows. “As long as parallel imports account for less than 10% of the total market then they’re not really worth the price of investigation.” The UAE’s rapid domestic growth has also opened it up to opportunists, including counterfeit goods traders, claims M.P. Sharma, the president of Nokia accessories distributor, Techmart. “Assembly and customisation of mobile accessories is occurring in Ajman. Sub-standard accessories are being imported from China and then modified there,” he told ECN in an earlier investigation. “This process effectively circumvents customs, because there is no law against importing unbranded accessories into the country.” ||**||Fake goods rife in UAE|~|Masaru.200.jpg|~|Sony Gulf MD Masaru Tamagawa describes the UAE CE market is a regional 'trend setter'.|~|He also believes that sales of fake mobile phone accessories equal those of genuine goods in the UAE. Other sources also identify JAFZ and Sharjah as key bases for counterfeit goods traders. The Brand Owner’s Protection Group (BPG) leads the fight against counterfeit goods in Dubai, by ensuring customs officials are adequately briefed on counterfeit goods shipments landing at JAFZ. The BPG is currently assessing the financial impact of counterfeit goods on the CE industry. The findings will be published in the coming months, with the group estimating that the trade costs the electronics industry tens-of-millions of dollars each year. With consumer demand for electronics goods at an all-time high, industry stakeholders are looking to other sectors of the UAE economy to play a role in ensuring continued growth. Retailers report that the UAE’s maturing freehold property market is generating unprecedented consumer demand for household appliances and ‘smart’ home networking technologies. “The freehold properties that have been under construction for the last three years, particularly in Dubai, are now nearing completion and should stimulate the household appliance market for at least the next two years,” claims Punjabi. “UAE homeowners are now demanding higher quality appliances which is stimulating demand in the premium product categories.” Other sources point out that the UAE market is the veritable yardstick for the Middle East’s consumer electronics industry, which ensures its continued vibrancy. “The UAE leads the way in terms of consumer electronics retail sales in the Middle East,” says Masaru Tamagawa, managing director of Sony Gulf. “If you were to draw a trend chart for the key consumer electronics categories, the UAE is the favourite testing ground for international consumer electronics vendors in terms of new product launches destined for the entire region.” Eros’ Babani agrees with this assertion.“Our retail division has seen consumer demand for LCD and plasma TVs more than double in 2006 alone,” he says. “This is largely due to the increased availability of highly-specified goods in the UAE.” Dubai’s growing image as a millionaire’s playground internationally also means that the emirate’s consumer electronics industry has to live up to this legend, resulting in extravagant sales bonanzas being held with near-monotonous regularity. Last month’s GITEX Shopper and Consumer Electronics Expo, which showcased bargain-priced IT and consumer electronics goods from more than 150 retailers, generated US$23 million worth of sales over the course of seven days. However, the underlying fact remains that many retailers involved in the event suffer diminished margins as a result of it’s ‘bargain basement’ reputation. “The event grows year-after-year and it’s necessary to maintain a presence here to ensure consumers identify with our retail brand,” says Bradley Bennett, Plug-Ins Electronix divisional manager. “The event is so important that we reduce our typical profit expectations by more than two-thirds,” he claims. “It does however provide us with the opportunity to shift huge stock volumes and introduce our customers to new product lines. “Consumers visit GITEX Shopper specifically to purchase products – not just to browse. The Plug-Ins stand was 30% larger this year compared to last year, which resulted in our sales turnover increasing by around 40% compared to 2005.” The annual Dubai Summer Surprises and Dubai Shopping Festival events also bolster sales for the emirate’s retailers, says Nair. “During the shopping festivals, our returns can rise by almost 50% compared to typical months,” he says. “Consumers travel to Dubai from across the region to take advantage of the deals on offer. In a sense, the business generated by both events adds a thirteenth month to our financial year.” However, despite the overwhelming positives, the UAE’s consumer electronics industry may soon find itself at a crossroad, as extensive market liberalisation across the GCC exposes it to increasing levels of competition. As rival GCC countries open the floodgates to foreign investment and enviously eye the huge commercial gains made by the UAE in the past decade, UAE authorities must ensure that the country does not gradually price itself out of contention for future foreign investment opportunities. The UAE consumer electronics channel sector is also threatened by the very thing that has facilitated its exponential growth – the country’s low trade barriers – as counterfeit and grey market goods eat into the already slim margins available to legitimate vendors, distributors and retailers. The industry’s ability to deal with these challenges will play a key role in determining whether it can sustain the incredible growth rate it has enjoyed for much of the past decade. ||**||

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