Bruised and battered

How did the Middle East IT retail channel get in such a mess?

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Bruised and battered The shutters are down on mobile phone retailer Cellucom's stores in the UAE. (ITP Images)
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By  Andrew Seymour Published  April 11, 2010

Confirmation this week that Cellucom's majority shareholder is awaiting verdict on an application for its liquidation is just the tip of the iceberg as far as the beleaguered IT and electronics retail channel is concerned.

Cellucom, a mobile phone and accessories supplier that once laid claim to several hundred stores across the GCC, began its decline last year as the good old days of endless growth in the consumer channel came crashing to an abrupt and painful end.

Many of the factors that contributed to Cellucom's failure are likely to be unique to its own situation, but its departure from the market is certainly not an isolated case. If you consider the bigger picture then the retail landscape in the Middle East - and more specifically the UAE - has seen the channel equivalent of a hurricane sweep through it in the past year.

Along with Cellucom, you can add RadioShack and Telefonika to the list of names that have disappeared from parts of the Gulf market, their owners choosing to pursue other interests after deciding the electronics business was no longer the game to be in. Like it or not, the stark reality is that IT and accessories trail a distant second to categories such as fashion when it comes to the financial returns that can be generated from retail.

Self-styled ‘smart home pioneer' Eon also left the market, while i2 wound down its operations in Saudi Arabia and closed many of its unprofitable smaller stores in the UAE.

I am positive that more retailers would also be shutting outlets if it wasn't for the fact they don't want to be seen downsizing their business right now and have deep enough pockets to support that stance.

Then you have Intertel Electronics, the old Virgin Megastore concessionaire partner that unveiled bold plans to launch its own network of ‘Tango' stores last year. What surely would have been its flagship outlet at the gigantic Dubai Mall remains padlocked, identifiable only by the white partitions that now mask its showroom window with the message ‘opening soon'.

The Pragma Group, its one-time owner, claims it "does not have any connection with Intertel anymore". Calls to an alternative number provided by Pragma go unanswered.

What all these developments indicate, if it wasn't already clear enough, is that the Middle East retail channel is a long way from being the picture of health that many like to make out.  

But what are the reasons for this? After all, we are constantly told by suppliers that retail is a stronger bet than the commercial market at the moment, while announcements from retailers publicising new and better stores remain a frequent occurrence.

Well, each case must be taken on its own merits, but it is impossible to survey the carnage that has unfolded in the past year without questioning whether retailers have simply refused to accept that the market was never actually large enough to support so many players, especially when the vast majority are selling more or less the same thing.

The global financial crisis might have been the pin that burst the retail balloon, but something was always going to have to give sooner or later because the sheer quantity of retail outlets surely exceeded the real size of the market.

Some retailers are now paying a heavy price for expanding too quickly and too recklessly. I'd even go as far as saying that their willingness to let greed obscure basic business principles caused them to overlook something as simple as the actual sustainability of their strategies.

It is inevitable that an over-exposure to certain vendors or brands also gets thrown into the spotlight during times like these. If relationships between companies or people change then it can alter the course of a business overnight. It's no coincidence that some of the changes in the mobile phone channel come after a huge overhaul of Nokia's distribution and support set-up in the Middle East, for instance.

Other retailers, meanwhile, have been guilty of falling for what one channel executive described this week as the "lemmings approach" - following their competitors into new malls or opening units for the sake of it just because they see other companies in the sector doing the same.

The problem Middle East retailers face is that unlike their counterparts in other markets a significant chunk of sales is not generated online. This creates its own anomaly, namely that they are saddled with huge operating expenses due to the burden of costly rental agreements.

Ask any mall-based IT retailer to discuss the main drag on their income and what usually follows is a tirade against their landlord, particularly if they are tied into a multi-year lease. According to the boss of one major computer chain this week, if IT retailers are to realise any sort of satisfactory return from a mall location then rental rates have to be 50% of what they are today.

Combine the high operating costs with excessive competition and it is not hard to see why retailers are unhappy, especially those that feel the value proposition they have built up over a period of years is being eroded by players who are only in the market for temporary gain.

The boss of one IT retailer in the UAE claims that vendors have a lot to answer for by widening their distribution channels for credit availability purposes during the downturn, which then had the effect of heaping additional pressure on the second-tier channel to absorb surplus stock.

He also accuses them of encouraging retailers to expand at unrealistic rates just to satisfy their own desire to meet short term sales targets. "The vendors have got to turn around to these companies and say, ‘There is no room, we will not support you.' Instead their attitude is, ‘Oh great, this means we will sell more,'" lamented the retailer.  

I have to agree that there is an argument for vendors to take more collective responsibility for the fortunes of their retail partners. After all, it is in their interests as much as anybody else's to oversee a vibrant retail community.

That said, there are two sides to every story, and it is certainly true that distributors and vendors can find themselves equally compromised by the actions of some retailers at times.

As one distributor explained this week: "Nobody asks these retailers to go and open hundreds of showrooms so why are they doing this and how are they doing this? Basically they try to pass on all the expenses back to the distributor and vendor by putting a gun to our heads - there is no real business planning or due diligence. They will come to us and say they want US$30,000 to open two new stores and they will then do the same for the other top 20 or 30 vendors they work with.

"This was the only source of income for a lot of retailers, but what has happened is that the money has dried up in the last 12 months because a lot of vendors have said it is not sustainable at the moment. This branding money or opening fee money is what a lot of retailers have been surviving on."

It is easy to see why the subject of transactional margin - or rather its insufficiency - also remains an issue that continues to drive a wedge between different tiers of the supply chain. Until the broader situation shows any signs of improvement however, it is impossible to expect the finger-pointing to stop.

Perhaps the retail channel in the Middle East enjoyed too much of a good thing too quickly. Perhaps the allure of being seen as the standard-bearer in an overcrowded market proved too deceiving. Whatever the reasons for the shake-up of the retail landscape, the instability that threatens to undermine the health of the business is likely to persist for a good while yet.

We can only hope that it is part of the process that gets the market back to a more level footing later down the line.

2777 days ago
Rohit Bachani

Dear Andrew Spot on again as usual, you always show you have a great eye and nose for the right stories, And this is one of your better well researched articles from the hundreds of great articles you have already written. A lot of vendors and retail outlets are going through the exact sentiment which you have explained so well. Just hope market sense prevails and we can come back to normalcy. As you said this is just the tip of the iceberg and this could be the start of a house of cards for the the whole IT Retail sector waiting to fall down. Luckily there are a few IT Retail Outlets who still do business the old fashioned way, cutting costs, increasing margins in downturns and following high school economics and basic business principles. And Thank God a few IT Retail stores like this still exist. The Reason they have this attitude is they are here since the 90s and have the experience to weather such storms as increased costs. Most of the retailers closing shop had come at the height of boom who thought there is no end to the good times, which make you think The IT Retail stores opened recently may be the first to exit in this already over crowded Market ?? . Rohit Bachani Merlin Digital

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