Breaking the mould

Intense competition in the GCC's established markets has prompted consumer electronics companies to invest in the region's ‘emerging' economies to bolster returns generated by their Middle East operations. Ronan Shields reports.

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By  Ronan Shields Published  February 1, 2007

The continuing boom in demand for consumer electronics goods in the Middle East has largely been seen in the flourishing economies of the GCC region, namely the UAE and Saudi Arabia. Both countries offer channel players enhanced infrastructure and easy access to consumer markets, which are characterised by considerable spending power. However, profit margins have significantly diminished in recent a year, which has forced some companies to re-evaluate their commercial strategies.

Forward-thinking companies are increasingly turning to ‘emerging' markets in the GCC to provide healthier returns on their investments as the consumer electronics markets of Bahrain, Kuwait, Oman, Qatar and Yemen offer potentially larger profits.

Governments across the region have embraced globalisation and are increasingly abandoning their protectionist policies, which is providing consumer electronics vendors with new commercial opportunities.

Distribution companies in Bahrain have hailed the government's market liberalisation policies for transforming the dynamics of the country's consumer electronics sector.

"We have enjoyed 20% to 30% annual growth in our business in recent years," reports Hassan Al Mahroos, managing director of Manama-based home appliances distributor Al Mahroos.

Al Mahroos says the company, which boasts German-based cleaning appliances vendor Kärcher among its clients, has revisited its sales strategy in recent times in a bid to tap demand for high-end goods coming from Bahrain's increasing pool of middle class expat residents.

"Bahrain's expatriate population is largely drawn from Europe and the Far East, contrasting starkly with other countries in the region where expats are largely nationals from countries like India and Pakistan," says Al Mahroos.

"The dearth of cheap labour has limited the ability of channel players to provide low-cost, value-added services in areas such as home installation.

"This has promoted a ‘DIY' mentality among Bahrain's consumers. As a result, we have seen a surge in demand for domestic devices such as power drills, kitchen appliances and cleaning equipment," he adds.

"In a manner of speaking this phenomenon has led to the creation of a new ‘product market' as opposed to a new ‘market trend'."

Sandeep Saighal, retail sales and marketing manager for Samsung Gulf, Mobile Division, says the company relies heavily on market data when developing its sales strategy in the GCC.

"We work hard to develop new ways of spreading our message to consumers in emerging markets," he says. "It's important to develop a strong presence initially as research has shown there is significant brand-loyalty among consumers in these markets."

The race to win favour with the region's purportedly ‘impressionable' consumers has prompted some channel players to slash profit margins in an attempt tap into growing consumer demand.

US-based mobile handset vendor Motorola recently introduced a raft of cut-price handsets designed for the region's emerging markets, specifically identifying Yemen as a key market.

In an earlier interview with ECN, Motorola Middle East, North Africa and Turkey area sales manager Harout Bedrossian explained the company was leveraging its low-cost handset strategy in a bid to gain market share in emerging markets and in the long-term, garner brand loyalty among consumers.

He did concede that the limited infrastructure that afflicted some of these markets posed significant challenges to commercial expansion.

"Yemen, for example, has a population of around 22 million, of which 60% reside in remote regions of the country. As a result, we have had to re-evaluate our strategy for this market, given the lack of infrastructure and diffused population," he explains.

Vendors also point to other salient factors influencing their enthusiasm for developing a strong market presence in the region's emerging markets.

Manish Bakshi, general manager of BenQ Middle East, describes Kuwait as one of the company's most profitable markets in the region.

He attributes this to the company's strong partnership with local distributor Xpresscell.

"Our success over the last 18 months is the result of our strategy of teaming up with established channel partners," adds Bakshi.

"Small scale retail outlets account for only 20% of our turnover in Kuwait while more organised stores provide 40% of market share in terms of revenues."

However, he notes that such impressive returns, in terms of market share, come at a cost.

"The comparative lack of infrastructure in emerging markets leads to higher operational costs resulting in diminished returns," he explains.

"Kuwait-based distributors typically work towards 15% profit margins compared to six-to-seven percent margins in the UAE."

Figures published by the Hong Kong Trade Development Council (HKTDC) assert that the median age of Kuwaiti consumers is 23, with 52% of the Kuwaiti population aged 20 to 44.

"With such a young population, Kuwait offers major commercial potential in the long-term for our handheld devices business," says Makarand Phadke, sales and marketing manager for Samsung Digital Media Business, AV division.

The relative lack of brand loyalty in these markets has created a more even playing field among consumer electronics vendors. Many industry pundits claim this offers a window of opportunity for entry-level vendors to steal a march on higher profile brands.

South Korea's Hyundai Corporation has recognised this trend and recently launched its consumer electronics range in the Qatar. Partnering exclusively with Doha-based Universal Business Systems (UBS), Hyundai is aiming for 20% market share by 2010.

"Hyundai is keen to develop its multimedia and home appliances businesses. There is a large consumer market segment for Hyundai-branded products in this region," says UBS managing director NMR Siraj.

Hyundai claims Qatar's massive expatriate population, amounting to 75% of the nation's inhabitants, and emerging market dynamics could see it emulate the success of the UAE.

"Price-sensitive markets such as Qatar offer an alternative route to success in the Middle East," claims Ahmad Thanveer, senior marketing manager, Hyundai Corporation Middle East.

Thanveer also notes that Chinese brands have been quick to capitalise on this factor in the GCC. "The majority of GCC consumers are cost-sensitive, causing many traders to opt for cheaper Chinese products or established brands with manufacturing facilities in China."

Thanveer suggests that by leveraging the reputation of South Korean brands in this region and investing in value-added services, Hyundai will win favour with the region's burgeoning ‘middle classes', avoiding a futile price war with its Chinese counterparts.

"South Korean brands are well-respected in the Middle East. By offering our channel partners decent margins and premium after-sales service support we are aiming to project a strong brand image," he says.

"We believe that making our products available in hypermarkets will also enable us to achieve the volumes necessary to meet our targets."

The GCC region's developing retail sector has encouraged consumer electronics power retailer Emax to pursue a strategy of establishing ‘big-box' outlets across the region. Emax currently operates mall-based retail outlets in Bahrain, Kuwait, Oman and Qatar.

The company is relying on its ‘big box' retail concept stores to drive its regional expansion strategy.

"We have observed how competition in the consumer electronics retail sector has inflated mall rental prices to a point where both retailers and consumers are ultimately losing out," says Deepak Srivastava, concept head of Emax.

"We are aware of the disparities that impact various consumer markets across the GCC region, but we are also confident that our ‘big box' retail concept will head-off competition from rivals in these countries."

The company is targeting 20% share of the total GCC retail market within the next two years and is confident its new retail concept will steal customers away from hypermarkets and mall-based power retail outlets.

"By introducing the concept in Bahrain, Oman and Qatar, we hope to compensate for the lack of mall space in these countries, as well as bypassing the challenges power retailers have experienced in countries such as Saudi Arabia and the UAE," says Srivastava.

"The concept will enable us to offer improved service standards to our customers and access to a huge array of products under one roof at affordable prices."

An analysis of market trends suggest that channel distribution companies stand to gain significantly from the rush to emerging markets, as a general lack of infrastructure means vendors will be heavily reliant on their ability to service each market effectively on their behalf.

The effects of globalisation may moderate this trend but this will rely heavily on foreign investment and the increasing influx of Western expat workers.

While countries such as Bahrain, Kuwait, Oman and Qatar seem close to emulating this trend, Yemen still lags significantly behind.

As the GCC region's developed markets approach maturity, its emerging markets present huge commercial opportunities for vendors willing to accept the inherent logistical challenges of operating in these territories.

The industry's ability to deal with the diverse challenges presented by these countries will play a key role in determining its ability to exploit each market.

Emerging markets

Bahrain

Population

698,585 (235,000 non-nationals).

GDP

US$15.9 billion (2005).

Since assuming power in the early-1990s, Bahrain’s leader Sheikh Hamad bin Isa Al Khalifa has instituted a series of reforms aimed at modernising the country’s economy. Bahrain was the first Gulf state to establish a free trade agreement (FTA) with the USA. Highly developed communication and transport facilities have led to massive growth in foreign investment in the country.

Kuwait

Population

2.4 million (1.2 million non-nationals).

GDP

US$47.36 billion (2005).

Kuwait’s population has a median age of just 25, and the country itself boasts around 10% of the world’s proven oil reserves, which accounts for 80% of GDP. Its booming economy has attracted economic migrants from the Indian sub-continent and various countries in Southeast Asia. These workers account for more than 80% of Kuwait’s total workforce of 1.67 million.

Oman

Population

3.1 million (577,000 non-nationals).

GDP

US$40.39 billion

Historically a regional trading hub, Oman has leveraged its close ties with the UK government to implement a programme of trade reforms, before becoming a member of the World Trade Organisation in 2000. Oman’s consumer electronics and mobile phone industries have benefited from an influx of highly-skilled migrants contributing to the country’s 3.28% year-on-year population growth.

Qatar

Population

885,000 (716,000 non-nationals).

GDP

US$24.46 billion

Qatar’s vast oil and gas reserves assures it of one of the highest per-capita incomes in the world, despite low-wage migrants from the subcontinent accounting for 36% of the country’s population. Although Qatar has high rates of mobile phone penetration, with over 720,000 subscribers, its internet subscription base is comparatively low at just 219,000 connections.

Yemen

Population

21.4 million (265,000 non-nationals).

GDP

US$19.36 billion

The poorest country in the GCC region has experienced meagre economic growth since unification in 1990, with unemployment rates exceeding 35%, and 45.2% of the population living below the poverty line. The country’s economy has not been aided by periodic civil unrest. Less than 10% of the population own mobile phones and only 220,000 homes boast internet access.

“It’s important to develop a strong presence initially as research shows there is significant brand loyalty among consumers [in the Middle East]. - Sandeep Saighal, retail sales and marketing manager for Samsung Gulf, Mobile Division.”

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