Emerging Markets II – PC Distribution

Disruptions and Competition Shake up the PC Distribution Environment

This examination of the market sought to understand PC distribution and product availability. The proxy for this was to look at Microsoft Windows and Office which are at the center of the PC infrastructure and the same applies in the countries visited. What this reporting sought was to better understand the market dynamics around these products in multiple countries.

Retail Environments

Evaluating the markets for Microsoft Windows and Office is about examining the purchase of PCs. We saw no indication of upgrade purchases of either product so our assessment will focus on the sales of new PCs, with one exception, Kosovo. A few stores had Windows and Office retail packages on the shelf but this was the exception.

The product space consists of:

• Desktops – custom built PCs
• Notebooks and
• Netbooks

The general rules were:

The less developed the market the more the system builders.

The less developed the market the more piracy.

Piracy was open via the system builder channel but it was stated that there are many ways to get “unlicensed” copies of either Windows or Office – on the street, over the Internet or from friends.

Netbook sales in nearly all markets exceeded notebook sales;

Netbooks have become the computer of choice in a number of the markets;

Desktop sales are on the decline and some markets virtually stopped and

The system builder channel is fading.

In terms of the OS loaded on netbooks, and even some notebooks, Windows XP remains and has a strong following. In fact, some of the netbooks are selling with no OS, but this was in the minority. In fact, one store said Windows XP is preferred over Windows 7 due to driver availability issues. There was an overall positive response to Windows 7 and this is increasingly present on mobile computers.

In general, netbooks were not in the system builder channel but in the malls, converged retail and large retail outlets – managed retail. A number of system builders stated they do not like netbooks because the margins are so low, 5% to 15%. One system builder in Tunis, Tunisia cited how Carrefour was selling virtually the same Dell notebook at his cost.

These managed retail stores provide a clean well organized environment to see, touch and buy a computer. A large mall, with the possible exception of Kosovo, was present in every country we evaluated. Thus, the ecosystem is shifting away from the system builder. We have seen this in Taiwan, which, like Hong Kong, was the ultimate system builder environment, as the streets in the PC market areas became populated with notebook stores while the system builders disappeared.

We asked system builders how they are responding to this challenge. The response was uniform: We provide support that the large volume sellers do not. Service is the cornerstone of the business. Yet, many conceded there ranks are being thinned. One system builder in Serbia stated that his store count had gone from 13 to 3 and he expected more to close.

More insights came from an interview with a small system builder in Tunis, Tunisia.
This operation has their own brand for PCs and other products. It has mouse and other products made in China directly for them which provides lower cost and better quality. The individual stated that he goes to China to buy products and supervises the build and quality. But the system builder business is small margin.
Everyone needs a PC here – the old to the young. The internet is everywhere. The iPhone is everywhere but not authorized. This is a tough business.

The limits of a market were demonstrated in Beirut, Lebanon. A PC store opened one year ago in an upper class area of the city with high expectations. Here is what we learned.
The target market was A A+ buyers. We sought to bring the latest technology to the city. Shipments came direct from US and our prices were competitive if not low. For example, we were the first in Lebanon to have the Intel Core I7 processors. We also had gaming stations in the lower level where gamers could try before they bought. We had location, store objectives, target market and products.

BUT this was largely a failure.

Buyers would not spend money. Some came to the shop – looked from the outside and said – I cannot afford this and never came in. The situation was compounded by the down economy and the war here. We were way ahead of the market. So now the stock level is way below what is was when we opened.

There were many examples of the large stores which sold PCs, a few visited during this assessment include:
Media Markt, Budapest, Hungary – superb product depth and selection
Big Bang, Ljubljana, Slovenia – Unique in its sale of Office – Home and Student Edition. Extensive product mix including Apple computers
Carrefour, Tunis, Tunisia – The shopping draw of in all of Tunis
City Centre, Erbil, Iraq – One of a kind in opening a new market.

The power of the hypermarket was very evident in Kuwait City, Kuwait. We went to two: City Centre and Carrefour in the Avenue Mall. This latter was a massive store with an extensive selection of CE products including PCs. Windows retail was on sale but no Microsoft Office. Consumers told us that this is the place to go, especially where there are sales.

There is another significant shift in retail distribution in what we call “Converged Retail.” Generally these are small stores where the anchor products are cell phones and the product mix varied by store. Here is a sample of the spectrum of stores based on size and products carried:

Cellular Carrier – with Netbooks and/or Notebooks for sale or on contract
Small cell phone shop – selling Netbooks, cameras and more.
Large on street store – emphasis on home appliances but including computers, cell phones and televisions

The key distinguishing factor in converged retail is the area of the store – these are far smaller than the large retail outlets in hypermarkets and malls.

When it comes to portable computing we saw an unusual store in Zagreb, Croatia, Mikronis, which only sells notebooks and netbooks. It had a selection that Fry’s would have difficulty in challenging. They had the latest computers, all the major brands and an extensive product mix in a very well laid out environment.

Another anomaly in the retail setting was Dell. There were Dell branded shops in:
Budapest, Hungary
Skopje, Macedonia

These stores were striking when compared to the typical PC store or system builder. They had a strong brand image and the color schemes which fit a Dell look. These were the only PC retail outlets which came close to matching the Apple retail presence.

Retail vs. Internet Shopping

Internet shopping surfaced in a number of countries. This is enabled by:
Credit card availability which can be used for online purchases
Note that some countries require special cards which can be used for non-physical presence purchases.
Confidence in this channel and
Product knowledge and confidence in personal need.

But even if these factors are present the following was stated, many times, as the reasons for in-store purchasing
Customers want to touch, feel, try and talk about what they are considering buying.

Yet it was the youth who are migrating to Internet shopping.

Role of the Internet

The use of the term “Internet Shopping” first surfaced in Riga, Latvia and then appeared in Beirut, Lebanon and Zagreb, Croatia. Two consumers in Riga said:

We do not buy from the retail stores here, it is just too expensive. Virtually all the shopping is done online –“ Internet Shops”. There is an excellent comparison site in Latvia : www.salidzini.lv. Given all this, the major buying is done on eBay where we can buy from any location in the world. A key criteria used, in addition to product and reputation, is free shipping.

This is important, because in the ecosystem model, discussed in issue V, such distribution completely disrupts the Sales Presence and Delivery from most markets. It is difficult to find these buyers because their location of purchase cannot be readily found, and even the consumers may not know.

In Kuwait this form of shopping has become so prevalent that the government has levied a 5% Internet Shopping Customs fee.

There are three factors which support this disruption in the market:
High In-Country prices for goods
Availability of credit cards which can be used for international purchases and
Confidence in on-line buying

Lebanon has some unique culture issues: goods were only delivered by the postal service to PO boxes and banks must issue special credit cards that can be used for non-present purchases. But we spoke to those who have developed ways to circumvent these. However, the VAT, customs duties and fees are making it difficult to gain a net cost advantage over local purchases.

A consumer provided a glimpse of the ends to which individuals will go to accomplish Internet shopping in Kuwait.
I buy off eBay with an account which looks like a US account. To do this I have a US P.O. Box address using Aramex. This company will take anything shipped to this address and reship it to anywhere. I have an American Express card with a Kuwait address but this has been changed to the US address. Now there is a verified PayPal address with payment. As a result I was able to buy and iPhone from Australia, which by law must be unlocked, and got it here to Kuwait faster via Aramex than if there was direct shipping from Australia to Kuwait. This only took 2-3 weeks and I can track the shipment. I also love Amazon.

Credit availability plays a central role in Internet shopping. An interesting cultural context surfaced in Zagreb, Croatia.

Internet buying is done by youth BUT only the older have credit cards. The result is that the children ask to use the credit cards on-line and the parents usually say no. Yet, in the stores most purchases are made with a credit card.

A large retailer in Ljubljana, Slovenia with an extensive stock of computers, stated that Internet shopping has taken off in the last 2 – 3 years and it has become hard for the large retail outlets to compete. The prices are lower because the Internet shops have lower overhead.

From an Ecosystem model perspective we have the following in process:

Large managed retail is decimating the ranks of the system builders:
Cell phone retail is now selling PCs with an impact TBD; and
Internet shopping is decimating brick and mortar retail.

Pristina, Kosovo

Pristina was different. We found no malls and the location reminiscent of Kathmandu in the 1980’s. This was rough hewn but exciting. People were walking everywhere and the streets packed with cars. The only public transportation was by bus. Our first stop was in a computer store which looked very different from those we have been seeing. It was.
Only used computers were being sold. These were shipped from Switzerland and they had 1,000 or more in stock. The computers were name brand late model units which ranged from notebooks to systems to servers and printers. We were told that there was another similar store in Pristina. The dominant market here is in used computers. These machines are completely recycled with an OS which matches the license on the computer.

We found another store which sold just the opposite – new products. They described their business as follows:
We meet the needs of buyers of new computers. These are not the same buyers as those who buy used computers. We build systems but also sell portable systems. Netbooks are selling very well.

Internet is readily available in Kosovo. One can get 60 television channels and broadband Internet for 20 € a month.

Kosovo has the lowest PPP, 3.9, of any of those visited and it is not surprising given its political situation. In spite of these limitations we found the PC sales creative and reflective of the dynamics in Kosovo.

Piracy

The question to ask was – will you install an unlicensed copy of Microsoft Windows? In Baku, Azerbaijan, Tbilisi, Georgia and Chisinau, Moldova we got an affirmative from system builders. But many conceded that pirated software is readily available on the street, the Internet or friends. A tip off was also the sale of a PC without an OS loaded. An interesting anti-piracy effort surfaced in Serbia, where in a few months, it will be illegal to sell PCs without an OS loaded. But even in the mobile space netbooks are being sold without an OS. When asked, with an unlicensed copy, what happens when the customer wants to update the software? The response was – what updates? In these markets they are not concerned about updating the software – if it is compromised just load pirated another version.

A system builder in Tunis, Tunisia stated it succinctly
The problem is that Microsoft is not offering products at a price the market can afford. If this happened their products would sell and we would not see the current levels of piracy. The price range should be between $20 – $50 for each of Microsoft Windows and Office.

Competition

Apple

As we walked the streets of these capital cities Apple Premium Reseller stores were found. They provided rich insights on the market conditions, for the PC, Apple and iPhone. As the market assessment continued an effort was made to include these stores. The discussions provided an excellent perspective on the state of competition.

There were three consistent messages coming from the Apple Stores:
“Switchers,” dominate the new Mac buyers. These have left Windows for the Mac.
Typically this was 60% but some cited numbers as low as 40% to 50%. One store in Tunis stated, that after 2 – 3 months of Mac usage the buyers stated they would never go back to Windows.
Windows Vista helped Mac sales.
As one retailer in Riga, Latvia stated “We love Vista – it drove our Mac sales.”
Over the last 2 – 3 years the buyers of Macs have increasingly been populated by consumers.
The decline of the traditional base of artistic professionals is related to the current economic environment, but increasingly the buyers are now the public at large.

Similar to the iPhone, which has a cult like following, the Mac notebooks are also being bought as a fashion statement. In Zagreb, Croatia the store personnel had an interesting observation:
In Croatia it is all about style, personal looks and what you own. Many individuals are heavily in debt and live way beyond means. The iPhone fits this style. One customer purchased an iPod with 16 small monthly payments but the net cost, due to bank fees and interest, was 2X the price of the unit.

Apple drives a consistent look in its stores, this was especially noted in the Premium Releasers. One even stated, Apple sent us pictures on how the store should look.

The Apple resellers loved accessories. In many stores there were literally walls devoted to accessories. Their love was linked to the excellent gross margins.

But it was not all upbeat for these sellers. Some of the issues they cited included:
Lack of support for the needs of the resellers, one in Georgia stated the CIS countries get poor support from Apple. This one cited they were unable to get Apple promotional posters and paid $500 on eBay to get what they needed.
Another stated that the warranty support was poor. It typically takes 2 – 3 months to get a computer repaired and they had to provide loaner machines.
Many cited the slow flow of products and the frustration of keeping new and rapidly selling products in stock.

But they all shared one characteristic – they love apple products. One put it succinctly– Apple products just work.

We found one large retail store in Ljubljana, Slovenia which had both PCs and Macs. The buyers, who get a Microsoft Windows machine are typically those with no computer experience. They seek a computer like most own, which means a Windows PC.