Channel economics

The Middle East has a financial challenge, like everywhere else, and it does sometimes face currency fluctuations, although you certainly couldn’t say there was a currency crisis. Looking at the situation, the most important thing is that the Middle East still has consumers who strongly believe that tomorrow could be difficult but certainly don’t expect it to be a catastrophe.

What trends do you see when you look at other markets around the globe? Are the same trends prevalent everywhere?

Nobody can deny that the start of 2009 has been tough and we see across the globe that the trends have slowed down. Nevertheless, in the middle of February we saw a pick-up in many economies, such as China where the majority of the demand was for PCs and TVs. In fact, South-East Asia has recovered extremely quickly. Europe is a totally different beast though. Why? Because you have got two massive blocks. One is Western Europe, where demand restarted in the third or fourth week of March, and the other is Eastern Europe, which still faces difficulties.

Are such difficulties linked entirely to the global economic crisis?

They are essentially linked to three factors, the most important one being the currency exchange in countries such as Russia, the Ukraine and Poland. That has created massive difficulties for the channel because stock was often paid in US dollars, but also for the consumer because there is no mystery – at some point somebody has got to pay for the purchase.

The second factor is clearly the financial crisis, which has hit the investment capacity of these countries. It is more difficult to get export credit, export insurance and stock payments. Basically, it is more difficult to do business. The third dimension, on top of all that, is that you have got consumers which are extremely worried about their futures.

So looking at the retail landscape as a whole then, the Middle East hasn’t suffered as badly as Europe…

No, we definitely see a significant slowdown in the Middle East – people are not dancing on the tables at the moment! Nevertheless, we see that the demand is unbelievably resilient. What is most interesting is that if you look at the type of products purchased, it is not by definition the first equipment that the customer has bought, it is also renewal and upgrade business. I wouldn’t say the market is sound because you always hope it could be better, but there are definitely a lot of opportunities.

Are you observing many differences between the various markets around the Middle East?

Absolutely. First and foremost, you have obviously got different structures between markets. Whether you take Egypt, KSA or Kuwait, the public is not the same, the consumer is not the same and the geography is not the same. You have also got extremely different and differentiated business habits in each country.

You can have the same store format, same products – you could even sell the same brands – but you would still have to do it differently in each country. In these difficult times, people can actually benefit from their understanding of local markets greatly. One of the key lessons is that there is no magic recipe. You cannot buy a business model of X,Y or Z off the shelf and apply it anywhere else in the world, it simply doesn’t work like that.

When a market is going through difficulties do you see a change in the price points that stimulate end-user sales? Or is it just the case that overall demand across all categories slows down?

I think what we have started to observe, and what has been accelerated by this slowdown, is a high market concentration around price points. It does not mean there is a price slide or massive fire-sale driven by panic, but people will insist on much lower price points than before. What we have seen is the concentration of the market around three or four critical price points, whereas formerly you probably had five or 10. How does that alter things?

This market concentration completely changes the rules. The average selling price of a market is still important – and the basis of the business of course – but it has a taken a completely new direction in the fact that the price is the actual background to the real competition. And the real competition now goes within the price point towards differentiation, usage, value add by the channel and value add by the manufacturer. That is a totally different ball game than simply offering a technical spec bundle at a new price point. It changes the rules of engagement for everybody.

Are there any industries that the IT retail market could learn from?

Definitely. As strange as it may seem, the IT industry could look at the white goods industry for products such as refrigerators and washing machines. It is an extremely established market place where real differentiation happens and there is very strong positioning in terms of both price and performance.

Is there a common mistake that you see IT retailers making?

At the moment there is a high risk that we have got a lemmings race. This is the time to stay solid on consistent positioning. Trying to duplicate your next-door neighbour’s strategies is a sure-fire recipe for failure. At this moment, cloning is not an option.

Do you see a change in the way that vendors are engaging with the channel?

The vendors are a lot more visible in-store because I think everybody realises that when there are difficulties it is time to pull together. At store level I clearly see them not just engaging with rack jobbing, but store display, maximisation of retailer investment and making sure that together every piece of the business is brought to its optimum in terms of efficiency. This is a trend that is just as noticeable in the Middle East as Western Europe. It is not a case of new countries and old countries, it is really across the board that we see a very strong push from the vendors at shop level to assist the retailers.

Has there been any particular trends that have surprised you this year?

Yes, if you think about the product purchase that you could delay the most then my first thought would be, “I can make this TV last one or two more years.” But that has not happened at all. If you look at LCD trends during the first quarter then, off the top of my head, the UAE was plus-16%, Saudi Arabia was plus-74%, Egypt was plus-96% and Algeria was plus-300%.

This proves once again that this digital convergence revolution has penetrated the minds of consumers. You would not spend money if you were uncertain about your future or not absolutely sure that you needed that product. That, for me, is why for this flat-screen TV trend has been surprising.