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Thu 13 Sep 2007 10:17 AM

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Real deal

The notebook market in the Middle East has become synonymous with soaring growth rates during recent years, but that has also brought with it a number of major challenges for resellers, not least the issue of making a healthy margin. Channel Middle East reveals what resellers should be doing to ensure that selling mobile PCs remains a profitable business.

The not-quite-so delicious irony of the laptop channel is that as the size of the market dramatically expands so too does the prospect of margins getting squeezed to uncomfortably low levels in the reseller space. It goes without saying that the Middle East channel for mobile PCs is enjoying a spectacular run of form that has so far displayed no sign of abating. More than 1.25 million laptops were sold in the Gulf region last year, representing a jump of 61% and crowning notebooks as the dominant form factor. Every country belonging to the GCC achieved shipment growth in excess of 50%, while Qatar performed so strongly that the market doubled in size.

But any seasoned reseller with a long-term eye on the market will know that the golden days won't last forever, and even if they do then the pricing pressure is likely to be so intense that they will need to find ways of earning extra margin to augment the hardware sale. Sources insist prices are declining at a rate of 15% a year, particularly in the low-end segment where the fight between resellers and retailers is characteristically fierce.

The introduction of notebooks without operating systems in the corporate segment has merely exacerbated this trend by playing into the hands of resellers motivated by low price points. "Resellers are going for the cheapest price point and then later they realise they are ruining their image and are not able to increase their year-on-year revenue," said one channel source. "The prices are dropping so they are just moving boxes. That is why there are a lot of fly-by-night operators. They invest a lot of money, get stuck with stock, sell it at half the price and then just vanish."

It depends on the model, as the margin can drop 2% on very fast moving products if the bulk justifies it, while it can go to two-digit if it is a high-end product with a level of value addition.

Sascha Haake, director SME and channel at Fujitsu Siemens Middle East, suggests the reason for declining price points is partly to do with the fact that notebooks are no longer the "wow product" that everybody wants but can't afford. "Parts of the notebook market have become a commodity like the standard desktop," he observed. "Entry-level products are still a huge segment and vendors are focusing there because of the huge supply and demand, but prices are dropping." This has led some parties to sell laptops at absolutely no margin in an effort to achieve volume even though it means undercutting market prices and potentially devaluing the brand at the same time. Bradley Bennett, divisional manager at retailer Plug-Ins Electronix, believes this issue is largely caused by the computer trading community rather than the power retail sector and calls on vendors to address the issue. "The power retailers have all identified that to go and sell something at no profit is not worth it," said Bennett. "I think it is definitely the vendor's responsibility to maintain price parity in the market and the vendors should be taking action against people who are breaking prices by restricting product to them." On the other hand, some channel players believe the price-cutting culture is actually becoming less aggressive than in the past. Amer Khreino, general manager at Acer and HP distributor Emitac, reckons resellers are more selective about the margins they make and this has restored some stability to the market. "If you go to [Dubai] Computer Plaza you'll find most of the resellers advertising at the same price and I believe nobody would be interested below the 8% bracket when it comes to retail," he suggested. "It depends on the model of course, as the margin can drop 2% on very fast moving products if the bulk justifies it, while it can go to two-digit if it is a high-end product with a level of value addition."

While notebook vendors operating in the Middle East can still afford the luxury of pushing stock into the channel and seeing it move without much resistance, many acknowledge the importance of forging closer ties with resellers who are spoilt for choice in terms of brand availability. Toshiba recently hired country managers to engage with partners in markets such as the UAE, Oman, Kuwait and Saudi, citing the level of competition as its reason for getting closer to the channel. "You need to position your product within the reseller segment so that they promote your product and it all boils down to how much money they are making and the return on investment," explained Santosh Varghese, general manager at Toshiba's Middle East and Africa operation.

While the temptation to exploit the current upwards growth trend by catering to all categories of notebook users remains strong, vendors insist prosperous resellers will be the ones capable of developing a clear focus that involves taking account of their positioning in the market and defining their strengths. It doesn't necessarily mean resellers must neglect certain parts of the business, simply that they need to exploit their assets. At the same time, it is also clear that introducing an element of differentiation is one method of standing out from those who are just shifting boxes. This can be achieved by cultivating a services portfolio, according to Sameh El Deeb, client PC product manager at Dell Middle East.

He draws comparisons with the auto market where certain brands are more popular because of the quality of service associated with them. "Taking that analogy, SMB resellers need to develop the services portfolio that they offer around the box, especially as the reality is that a lot of SMBs don't have an IP infrastructure. They need a solution, they don't need a product," advised El Deeb.

Indeed, the array of services that can be offered around a laptop sale are not as constrained as they initially may seem, particularly in the SMB segment where customers increasingly require installation, wireless infrastructure, data migration and back-up support. Knowing what the customer needs to aid their business is a precious quality to possess.

"I think the successful resellers out there really understand the business," said Mark Prosser, product marketing manager at Acer Middle East. "As a reseller, if you are able to address every customers' needs in terms of their individual requirements, rather than trying to push a particular SKU, there are opportunities to then up-sell additional support features. That makes a successful reseller versus a mainstream reseller," he said.

This point is particularly pertinent in the corporate space, where efficient sales cycle planning and account management remain key factors in being recognised as an expert.

"When you are addressing mid to large-sized business customers you need to be specialised in what you are doing," said Serdar Urcar, general manager of HP's Personal Systems Group in the Middle East. "You've got to know their mobility needs or the things attached to mobility, like security and manageability, so you can talk about it and create the perception that you are on top of these technological aspects."

Khreino at Emitac insists resellers need to be proactive with their customers in terms of service and concentrate on up-selling products such as network connectivity devices for SMBs or models with additional access points and wireless routers. "There is room to grow in the market, but how much depends on the innovation being driven from the retailers' side because there is a lot of complementary solutions and products in the market today."

In the midrange segment and above, the ability of dealers to articulate the benefits of the product to the end-customer is arguably more influential than the price because corporates want assurances that they are making the right investment.

"Businesses want to know where they are spending the money and why they are spending the money," explained Acer's Prosser. "So if I'm going in there for security features it's not so much about whether the notebook has got fingerprint security or a smart card system. It's about the benefit of that to the customer. We are all about selling the benefits, not the features."
El Deeb at rival PC vendor Dell concurs, emphasising the need for resellers in the Middle East to ensure their employees are up to speed on the latest technologies. "It needs investment in the sales force and specific explaining because selling an extended warranty or upgrading the service level requires a specific skill set than just highlighting the technology features in a box. But there is definitely an ROI for him," he said.

Attaching additional product to a notebook sale in the form of accessories or external devices remains the classic way of enhancing margin. Warranties are increasingly cited as one area that resellers need to give more consideration to, often providing a better margin return than the hardware itself.

Carrying the full portfolio and trying to go into different segments, rather than just focusing on one of the commodity products, brings a value add that I think clients are willing to pay more for.

Yet there is a consensus that many resellers are still not aggressive enough when it comes to pushing the benefits of extended warranties because they are too focused on selling the boxes. Some vendors are attempting to change that by advertising their warranty offerings to end-users so that it builds awareness prior to the customer visiting the shop.

PC giant HP has channel programmes in place to encourage resellers to focus on attaching accessories to the sale and highlights products such as travel batteries for business customers as ideal margin-making opportunities. "They also have the option of providing docking stations, an additional keyboard, optical mice and other products," said Urcar. "These are the things which are important for a healthier and more productive way of working and if our channel which covers our business customers can focus on these accessories they can create additional demand and margin."

If there is one piece of advice consistent among vendors it is that resellers must take portfolio management seriously. They stress that the only way to gain more margin is by balancing the array of goods they offer. "I think we are one of the few vendors carrying a full balanced portfolio and that is what I always try to explain," said Haake at Fujitsu Siemens. "Carrying the full portfolio and trying to go into different segments - rather than just focusing on one of the commodity products -brings a value add that I think clients are willing to pay a little bit more for."

Urcar at HP also deems portfolio management a vital component for any reseller with aspirations of running a successful notebook business. "In any kind of business with different product lines and categories there will be different products with different profitability," he explained. "If you can manage a healthy mix you can create both traffic and profitability with niche and value product lines. For us, the retail portfolio would be different than a portfolio for Preferred Partners, which are project resellers, while the portfolio for a small reseller or retailer would be different again," he said.

This emphasis on product mix is also something that Toshiba continues to give more weight to. The vendor is working on launching a programme in the UAE, Saudi and Kuwait - and eventually other markets - which only awards partners a quarterly rebate if they have sold an assortment of products. "The range of products is the only way we can make sure that resellers are going to make money. If they are only going to move boxes then ultimately they go bust," said Vargese, adding that the system would also reduce the risk of them using the rebate to drop the end-user price.

The Middle East notebook market might be surfing the crest of a wave, but resellers must be prepared to adapt their business as the demographics of the market change. With the penetration rates increasing, the next generation of laptop buyers will have more sophisticated requirements than those buying today. Resellers who fail to make allowances for that risk losing out to more accomplished competitors. "In the Middle East today there is already a lot of second-time buyers for notebooks," commented El Deeb at Dell. "These customers will definitely look beyond the box for value added services because they already have an experience that is three or four years old from when they bought their first laptop."

Catching the consumer waveOne of the strongest catalysts for regional notebook growth remains the fervent level of activity taking place in the retail sector, but at the same time it continues to be a highly demanding arena. The spiralling cost of rental in certain territories and the increasing number of transactions involving credit cards forces retailers to bear extra expenses that eat into their profit. Like the reseller market, building additional margin from laptop sales largely comes down to the level of external products that can be sold around the hardware.

Plug-Ins Electronix operates an attachment scheme that encourages sales staff to inform customers about complementary products such as web cams, travel accessories, cases and headphones. "We merchandise around the laptop so the customer sees the solution while he's buying," explained Bradley Bennett, divisional manager at the company. "The webcam is attached to the laptop, the keyboard and mouse is there for the customer to use, so they can see how all of these attachments work. We try to do a solution-based sale, not just a hardware sale."

In parallel with many other retailers, and indeed resellers, Plug-Ins acknowledges that while the market is currently demand-generated it will eventually transition to an environment where the customer will be attracted to the value they are going to get from the purchase. "As the market matures, the customer is going to come in and say ‘what are you going to give me and what value am I getting out of this transaction?'" said Bennett. "That is where the salesman's experience comes in and why we go through the accessory vendors and get them to do a lot of intensive training at shop floor level so that the sales guys are equipped to explain the benefit of the attachment to the customer." Sameh El Deeb, client PC product manager at Dell, believes extended warranty, migration services and break-fix services are all areas that can earn retailers extra margin. "A lot of people, especially in the consumer space, will buy notebooks for their multimedia capabilities," he said. "And if you are a retailer you really need to showcase these capabilities, not just stack the notebooks on a nice stand."

Although many retailers are profiting from selling high volume entry-level models, it is the market for second- and third-time buyers that is becoming increasingly significant. PC vendor Acer says that retailers that want to tap into this sector must have the technical understanding to address this market. "They are going to need to provide answers to the sort of questions the customers are going to be asking," said product marketing manager Mark Prosser. "They have the opportunity to pick these customers up from an SMB or SOHO reseller, but to do that they need to keep them in the retail store, which means being able to answer questions correctly and sell them on the technology specifications."

One of the potential advantages of developing such capabilities is that retailers may eventually get to a position where they can command premiums. This is the case in mature markets where certain retailers charge a a higher mark-up because customers go there for the best service. "It's time that retailers create a brand for themselves and really start to think about how they are going to add value, rather than focusing on entry-level," said Santosh Varghese, general manager at Toshiba. "Today it is only Jarir Bookstore in Saudi which is a brand in retail. Customers go there and buy, even if the product is 4% or 5% higher than the market price. But I don't see that anywhere else, apart from maybe Al Ghanim Electronics in Kuwait, which is doing well."

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