By Andy Tillett
High-value devices with limited life span, rapid innovation cycles and decent margins. It sounds too good to be true.
Digital lifestyle|~|05Brad_bennett2.jpg|~|Bradley Bennett, area sales manager at retail chain Plug-Ins Electronix|~|The digital lifestyle is now a reality. A plethora of devices including MP3 players, PDAs, smartphones and digital cameras have become embedded in the day-to-day routine of millions of people across the Middle East. Globally, the spike in digital device sales is phenomenal, with industry analysts predicting that a staggering 370 million camera phones will be sold globally in 2005 alone.
With an opportunity this large, little wonder that vendors, distributors and retailers are flocking to the sector to try and grab a slice of the action. Marketing and brand equity development have become a pre-requisite for tapping into the consumer mindset as IT vendors pit their wits against the traditional giants of the consumer electronics space. Channels are blurring as digital devices come of age.
The phrase ‘digital device’ actually means many different things to many different people. A glut of products purporting to be digital devices have flooded the market in recent years ranging from digital cameras and MP3 players through to portable flash storage devices, portable hard drives, PDAs and even LCD monitors.
These digitally converged technologies have created an emerging channel to market and further blurred the line between consumer electronics and IT. With so many vendors chasing the market, branding and retail presence have never been so important.
“When customers come in to our stores they will say they want brand ‘X’. We will then show them the alternatives from other brands based on the criteria they describe. In our stores we have to work with a customer to narrow down from 20 brands to five and then to two before they make a choice,” says Bradley Bennett, area sales manager at retail chain Plug-Ins Electronix.
It is not just bits and bytes that impress your average digital device buyer. He or she may be just as interested in looks and ease-of-use, preferring style over substance if owning a particular brand means joining the cool crowd. The onus falls on distributors and retailers to present and promote the products to the buyer in an appealing way.
For the traditional IT vendors and distributors, taking on the might and muscle of the consumer electronics giants is not a simple task. Convergence is definitely happening but the traditional consumer electronics players have the upper hand in terms of experience. Nevertheless, retailers are welcoming the IT vendors with open arms.
“I see convergence as the saviour of consumer electronics. It was a very dead category and not a very smart industry. Margins eroded and profitability became a very big question. New technologies add a new character and vibrance into the category. As a result, consumer interest is heightened and overall demand has grown,” says J.P. Nambiar, general manager of retail operations at Jumbo Electronics, which now operates over 26 GCC stores.
||**||Emerging sector |~|01jpnambiarjumbo2.jpg|~|J.P. Nambiar, general manager of retail operations at Jumbo Electronics|~|IT vendors may face an uphill struggle to rebrand themselves in the consumer marketplace, but they have proven that they can fight and win. Many IT vendors stole a march on the giants of the photography space when digital cameras became a consumer reality. Traditional film photography vendors, worried about cannibalising their existing revenues, understandably made a more cautious entry into this new arena — a reticence that IT vendors such as HP were quick to capitalise on.
One of the definining trends in the digital device arena is the pace of product evolution with lifecycles in some cases as short as three months. This puts intense pressure on vendors and channel partners to build a lightning fast route-to-market combining effective push and pull activities. Vendors need to guarantee the sell out of their products and want distributors with specific skills. Retail specialists like ITE Distribution, which recently signed with palmOne, are carving out a niche as digital device and retail channel experts.
“If you look at palmOne as a product line, it doesn’t fit into what we normally define as our product strengths. palmOne is really lifestyle products and mobile phones. It doesn’t even fall into the general IT distribution sphere, but palmOne saw our strengths and approached us to become a distributor. We’re moving closer to the retail segment simply because of the demand that currently exists in the market for this channel,” explains Murtuza Bathia, account manager at ITE Distribution.
The importance of the retail market to IT sales in the Middle East is growing fast. K.V. Narayanan, sales manager digital IT division at Samsung Gulf Electronics, reckons Samsung’s current Gulf business breaks down as 40% reseller, 25% retail and 35% corporate sales. Distributors ITE and Delta say retail now accounts for 35% and 20% of their overall business respectively, and both point out that this has doubled year-on-year.
“It has grown from practically nothing, and I think it will eventually account for as high as 35% to 40% of the total market,” says Govinda K. Siddartha, managing director at Delta Business Products, a distributor with a strong retail reputation.
Retail distributors play a vital role for the vendors that they represent. “Our distributors help us a lot; they are more than just logistics partners. They implement channel development activities and they help with the specifics of promotions. They are our right hand in the retail industry, to help us build and strengthen our retail channel,” explains Leila Fakih consumer sales manager at HP Middle East.
The niche is there for distributors that are prepared to dedicate resources to introducing or building a brand in the retail sector. “Our main vendors depend on us to promote them in the market. There are two types of distributors: ones that are purely a logistics operation and then value added distributors like us that create awareness of the brand. The learning curve has to be there for us as an IT distributor morphing into this consumer sector. Because we moved into this market early we are taking advantage of this and growing more confident in the converged space,” explains Bathia at ITE Distribution.
||**||Partnering up |~|02murtuzaite2.jpg|~|Murtuza Bathia, account manager at ITE Distribution|~|Vendors claim that despite the demand from their side, there remains a lack of distributors willing to provide the levels of service and dedication they crave. Mobile phone accessory vendor Jabra is looking for more skilled distribution partners in the Middle East and Africa region.
“What we look for is a dedicated product manager — a person who will be trained by us and can in turn train their organisation and the retailers. Our second expectation is a brand builder who will partner Jabra with heart. To be honest we have found a lack of these in the Middle East, but with our existing partners, who have invested over the last two years, we are breaking into the market together,” says Vincent Peña, regional manager Middle East at Jabra.
Vendors have two options: those with a large presence on the ground in the Middle East can easily co-ordinate their own branding exercises; vendors who don’t have that presence — particularly smaller outfits who are still emerging in the market — are much more reliant on the branding and promotion skills that they can obtain through retail distributors.
Ashish Panjabi, chief operating officer at retail chain Jacky’s says that vendors can do much more than a distributor. “Vendors only have their products to focus on, rather than the distributors, who have a portfolio. Vendors work more clearly with us. A lot of marketing support and merchandising support comes directly from them,” he says.
Samsung changed its channel strategy in 2004, implementing partner segmentation and spreading its portfolio across several distributors, each taking specific markets. K.V. Narayanan says that even a strong brand is responsible for its image: “It is up to the vendor to take control of the branding and make sure the product is promoted in the marketplace. We have annual budget meetings with distributors to work out the branding and we allocate funds on a case-by-case basis from the proposals given to us by distributors.”
Digital device vendor BenQ set up its Middle East operation three-and-a-half years ago and has always targeted the retail market. “For the first year we were doing as much branding as we could through every form of media to reach as many people as possible. Slowly the channel and the resellers started incorporating us,” claims Manish Bakshi, general manger for the Middle East and Africa at BenQ.
||**||‘Buying in’ to retail |~|03Bakshi,-Manish---BenQ2.jpg|~|Manish Bakshi, general manger for the Middle East and Africa at BenQ|~|Distributors have a stark choice: to become one of the crowd, distributing low margin major brand products or to take a risk and partner with less well known vendors. There is an increased risk of the lesser-known product failing, but by helping to build a brand from scratch, distributors can win favour and make decent margins. Both ITE Distribution and Delta claim that their recipe for success is working with brands that have something new to offer in the market and are not already over-exposed.
Dealing with the retail sector may be safer than dealing with resellers, but it can also mean sacrificing some of the all-important margin. “For retailers to be able to continue to invest in good locations, staff training and retention of good sales and marketing personnel, they need to make about 10% margin.
Distributors that are supplying retailers have to work on a low-cost, efficient system and margins here still remain modest. A retail distributor is needed to supply retail outlets and also to remain neutral by not competing with its customers,” says Rajeev Mukul, Middle East and Africa general manager at hard drive vendor Maxtor.
Large retail stores take each brand very seriously and often have dedicated mangers for each vendor. Probir Mukherjee, VP Sony division at Jumbo Electronics, says that retailers themselves also have to be very cautious about how they plan which brands to stock. “We use very high end ERP systems — that is the level of sophistication that we need to invest in managing our supply chain.”
Retailers remain the direct link to consumers and if vendors don’t have retail ‘buy-in’, they will struggle to sell their products and build their brand. “Until the resellers make some money they won’t touch your product. We introduce all our new products through the retail channel. We use techniques such as in store promotions and strategic merchandising. We put a great emphasis on training salespeople; we need to have an understanding with the retailers and they need to be making decent margins out of your products to want to promote them and make our brand even more successful,” says Bakshi at BenQ.
Another group of vendors looking to cash in on the digital device explosion are the components vendors — hard drive companies in particular. On one hand they sell mini hard drives to digital device manufacturers, and on the other hand they also have their own rapidly emerging retail channel for external storage devices.
“This year we are focusing on the external hard drive market, and have formed a separate team that is driving this business. This team comes from a completely retail background. Storage is needed on a whole new range of products that it wasn’t before. We are also targeting the companies that are making digital devices and know that we need to get into the consumer electronics space. This is where the development is,” says Hafeez Khawaja, senior regional director, Middle East, Africa and South Asia at hard drive giant Western Digital.
||**||Storing the future |~|04hafeez2.jpg|~|Hafeez Khawaja, senior regional director, Middle East, Africa and South Asia at Western Digital|~|The importance of storage is also viewed as the way forward for PDA and smartphone vendor palmOne. The company is putting a large investment into its new product, the LifeDrive, and citing personal storage as a key area for future growth.
“The LifeDrive is a product for a digital lifestyle. It is aimed at users who want to store, view and organise movies, MP3s, pictures or photos on a portable device. If you are going on holiday you don’t need to take your laptop, you can take a smaller product like the LifeDrive. We have found that even with products like multi-function phones with cameras and MP3 players built into them, people are just using these functions casually and still buying cameras and suchlike. The most important component for the future in the digital device space is the memory capacity,” says Stuart Maughan, manager Middle East and Africa at device vendor palmOne.
A pivotal point for the digital device market is education of the customers. The Middle East may be a hot spot for early adopters, but it is still an emerging market and customer education levels in some countries remain low. How much a customer knows about what they want plays a key role when he walks into a store.
“Over 50% of the decision making process is made in store. The salesperson, showroom, store layout and the client themselves are the most important things in retail; if all of these are correct customers are far more likely to buy products. It is important not only to equip the staff with the right information about the products but the right skills. We have a whole team dedicated to training retailers,” says Fakih at HP.
||**||In the know |~|052Stuart-Muaghan---palmOne.jpg|~|Stuart Maughan, manager Middle East and Africa at device vendor palmOne|~|“Customers who have access to the internet are generally better focused on what they want. Other customers come in totally at the mercy of the salesperson and simply describe a product. I’d say at Plug-Ins it’s a 60:40 split in favour of the people who have good information about the product, but this is skewed by the number of foreign tourists that visit us,” says Bennett at Plug-Ins Electronix.
Although this makes customers appear vulnerable to retail sales staff, distributors say this lack of knowledge can be frustrating, and can lead to brands not gaining the exposure they deserve. “There’s still people walking into a shop with no clue what they want to buy. The vendors are not promoting the technologies as they should. They are essentially still looking at the digital device market as an IT market, where the consumer knows exactly what he wants and when he wants it and at what cost. This is not true anymore, and the education has to be there in the store. There need to be more trained salespeople in stores,” concludes Bathia.
Vendors are also confusing customers by offering too many different formats. “Consumers are being bombarded with so many different technologies and so many different formats, it’s not funny. This can easily be overcome by communication from the vendors, it is a key selling point for us to provide a multi memory card reading slot in our products,” says Makarand Phadke, marketing and sales manger consumer electronics division at Samsung Gulf.
The digital device channel is a vendor battleground complicated by the complex power politics that exist at a retailer level. Power retailers can exert greater pressure over vendors than their independent counterparts. This dynamic ensures that the digital device channel will continue to evolve in the Middle East