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 years, which has forced some companies to reevaluate their commercial strategies in the Middle East. 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 greater profits.
Governments across the region have embraced globalisation and are increasingly abandoning economic 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 that country’s consumer electronics sector.
“We have enjoyed 20% to 30% annual growth in our business in recent years,” claims 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 consumer electronics and domestic appliances,” 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 for 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 brand-loyalty holds sway 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 growing consumer demand.
Mobile handset vendor Motorola recently introduced a raft of cut-price handsets designed for the region’s emerging markets.
Motorola Middle East, North Africa and Turkey area sales manager Harout Bedrossian explains the company is 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 reevaluate our strategy for this market, given the lack of telecommunications 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 economies.
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 BenQ’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, such as Xpresscell,” he says. “Small scale retail outlets account for only 20% of our turnover in Kuwait, while more organised retailers 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 country’s 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 Samsung Gulf’s Makarand Phadke.
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 Qatar. Partnering with Doha-based Universal Business Systems (UBS), Hyundai is aiming for a 20% share of the country’s consumer electronics market 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 expat population, amounting to 75% of the nation’s inhabitants, and emerging market dynamics, could see it emulate the UAE as a major market for consumer electronics sales.
“Price-sensitive markets such as Qatar offer an alternative route to success in the Middle East,” claims Hyundai Corporation’s Ahmad Thanveer.
Thanveer also notes that Chinese brands have been quick to capitalise on this factor in the GCC. “The majority of GCC consumers are price-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 the 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.
“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, COO 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.”
Srivastava says the company is targeting 20% share of the total GCC CE retail market by 2008.
“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 nullifying the issues power retailers have faced in countries such as Saudi Arabia and the UAE,” he explains. “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.”
Channel distribution companies stand to gain significantly from the rush by vendors to embrace emerging markets, as a general lack of infrastructure in these countries means vendors will be heavily reliant on the channel sector 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 will continue to present huge commercial opportunities for vendors willing to confront the inherent logistical challenges associated with working in these territories.
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