Tension and turbulence…it must be the retail channel

The annual Digital Consumer Channel event saw vendors and retailers clash over the future for the Middle East retail channel

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By  Andrew Seymour Published  May 23, 2009

What does the future hold for the Middle East retail channel? That was a question which featured prominently in discussions between leading market executives last week, although the answer remains anything but conclusive in the current climate.

As much as the different tiers of the retail channel community are invariably working towards the same outcome, a ‘them and us’ attitude has always existed between principals and retailers, threatening to undermine the relationship between the two parties in the process.

That tension was very much evident during spells of last week’s annual Digital Consumer Channel event in Fujairah, an occasion that brought together the entire retail channel fraternity for the first time since the downturn spread to the region.

Whether or not the friction has been exacerbated by the changing economic circumstances — and my hunch is that it has — vendors and retailers are still clashing over each other’s level of accountability.

Vendors, frustrated perhaps by the prevalence of listing fees and other auxiliary costs that have slowly crept into the business over recent years, argue that there is considerably more retailers can do to move product off the shelves, starting with better category management, improved SKU selection and a concerted effort to demonstrate clear differentiation.

Retailers, meanwhile, generally seem to feel that vendors could go to greater lengths to support them, arguing that while many are fond of pronouncing their commitment to the channel, the reality is often completely different. Rudimentary elements, such as giving adequate stock allocation or establishing basic RMA policies, frequently fall short of expectations, while promises of margin enrichment are rarely delivered.

It is unreasonable to expect vendors and retailers to operate in a perfectly harmonious way, of course. Like any commercial partnership between independent parties, there will always be disputes and disagreements that place relationships under stress.

But when you have retailers warning that they will close stores or even exit markets entirely if greater compromise with vendors can’t be reached, you know there is a problem that needs fixing, or at the very least addressing.

Indeed, one theme that emerged from last week’s DCC event was the need for both parties to collectively work more closely to understand the pain points felt by one another. Don’t get me wrong, I’m not suggesting vendors and retailers are universally at loggerheads, but senior executives from both camps repeatedly raised the point that reducing the current level of discord would benefit everybody.

One complaint from retailers is that vendors do not pass on satisfactory margin to the channel, perhaps because they fail to realise the true costs of running a retail operation. Conversely, there is a valid argument that a lack of transparency among retailers doesn’t do them any favours and that they need to be more financially open if they truly wish to draw attention to the perils they claim to face.

One point the industry has to bear in mind is that during difficult times companies naturally begin questioning things they would normally leave unchallenged. There is also a tendency to want to find scapegoats or direct the blame on factors beyond their own immediate control. In good times, however, when business is booming, the same frustrations inevitably get swept aside, even if they are noticed.

UAE retailers appear to be most in need of support at the moment, their woes linked as much to broader economic challenges as pressures within the industry. In Dubai, especially, electronics retailers say that a decline in tourist numbers — a key weekday buying audience — has left them wondering how they will compensate for less foot traffic when the local population is only a million people or so.

The predicament facing UAE retailers is further amplified by the sheer number of players operating in the market. At least one vendor at DCC accused some retailers of making a rod for their own backs by following an obsession with opening new stores or developing outlets that are supposedly ‘bigger and better’ than anything else in the market.

Speculation that the market could see casualties still remains strong although retail veterans insist it is an unlikely scenario, especially in the organised retail scene where many mall-based chains are tied to multi-year leases.

It is not all doom and gloom, however. Countless retailers are confident of witnessing a spike in business once the end of the third quarter comes around, while upcoming product launches and greater bundling opportunities available to them has also given cause for optimism. In addition, some believe that reforms to allow 100% foreign ownership of businesses in the UAE will lead to a surge of investment in the local market that would revive IT spending if they go through.

It is also clear that the anxieties felt by UAE IT retailers aren’t necessarily mirrored elsewhere in the region. Representatives from Egyptian and Lebanese retail outfits, for instance, said they had seen no real change in conditions this year, citing usual operational challenges as more of a threat to their business than the global crisis.

Those elsewhere in the Gulf did admit to feeling the chill, albeit slightly. Bahraini retailers acknowledged life had become more difficult in recent months, while Kuwaiti counterparts estimated local sales would be down by more than 15% this year.

One Kuwait-based IT chain said it had resisted headcount reductions so far, but admitted to cutting expenses elsewhere in the business. In a similar vein to its peers, it has also started focusing particularly hard on its top 30 vendors — tightening up agreements and trying to ensure that no stone is left unturned in its quest to lure consumers.

Tension in the market is inevitable as the Middle East channel continues to feel pressures that it hasn’t had to face before, but vendors and their partners will need to manage it carefully and collectively if they are to keep the pain to a minimum.

Andrew Seymour is the editor of Channel Middle East English.

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