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 diminished 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 frequency in which retailers turnover their capital due to demand from tourists and a burgeoning population of expats. Discarding these factors, the margins we operate to would make our businesses economically unviable." 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."

Industry identities agree that 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 for certain products.

"If the hypermarkets sell 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 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 company," he says.

"Hence, and despite the poor margins, we have no choice but 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.