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Russia: challenges and opportunities in 2015

by Stuart Wilson, Friday 13 March 2015

The Russian market for technology and consumer electronics products is a challenging place to do business. Despite the current geopolitical and economic issues, there is no escaping the fact that the Russian market represents a significant volume opportunity for vendors. At last month’s DISTREE EMEA event, Igor Snytko, executive director at Russia-based consultancy group Ocean Solutions, led a session exploring the challenges and opportunities facing the market. Channel EMEA went along to find out more.

During 2014, while the overall value of the Russian market declined in US dollar terms, it actually increased in Russian rouble terms. Currency fluctuations continue to create extra levels of complexity for vendors looking to do business in Russia.

Snytko commented: “During 2014 the Russian tablet market became increasingly saturated with 9 million units sold – up 33% year-on-year. But this growth was much slower than 2013, when the total volume was more than double the 2012 total.”

During 2014 a number of major Russian retailers underwent ownership changes. While sales were generally weak during, there was a clear spike during the fourth quarter. The peaks and troughs of demand for consumer technology products were driven by fluctuations in the rouble. The consumer activity curve pattern in 2014 was totally different from those of previous years.

Snytko explained: “In mid-March 2014 there was a peak in retail foot traffic and spending due to the first devaluation phase of the rouble. In the summer months from July to September there was a significant drop in traffic and spending after economic sanctions and counter-sanctions took place; and there was no visible back-to-school peak, traditionally observed in late August and September. However, in November and December 2014, there was another peak coming after the drastic rouble devaluation that took place in October 2014.”

Russian consumers also displayed a greater propensity to spend on consumer electronics and technology products in the sales peaks after devaluation. Purchasing these products took priority over spending on other sectors such as clothes and gifts.

Local factors

As we enter 2015, Snytko contends that the current Russian market scenario is different to previous problems, with no clear hot product or category to act as a catalyst for driving consumption.

“The economic crisis is local and driven by local factors such as dependence on oil prices, sanctions and the structure of the Russian economy,” explained Snytko. “There is an opportunity for some vendors to take advantage of the current situation by deploying more resources in Russia.”

“The current ‘crisis’ is defined by geopolitical reasons to a great extent – and that is why it is so difficult to predict how the situation will evolve. Even when the Russian market does start to stabilise, it will be a different market characterised by different consumption patterns,” he added.

Vendors should expect to see a drop of between 20% and 40% in consumer and corporate purchasing activity in Russia in 2014. This decline, coupled with the fluctuations of the Russian rouble, will make business planning even more challenging.

“No fast recovery is expected, so prudent mid-term planning is required for a two to three year timescale,” added Snytko. “Only well prepared players can afford to take such an approach.”

There are clear impacts on each part of the value chain according to Ocean Solutions.

“Vendors can expect to see volumes drop and business slowing down. FOREX risks increase as do collection risks. Profits drop as the vendor’s portfolio is realigned to meet demand for lower price points,” explained Snytko. “Distributor risks include FOREX losses, managing inventory levels and more challenges with accounts receivable from channel partners who may be struggling.”

Retailers also face a series of challenges in Russia as sales drop due to macroeconomic factors including a decline in disposable incomes and decreased availability of consumer financing. Some retailers may also be susceptible to cost increases due to rents payable in US dollars, although these are increasingly being converted to Russian roubles.

What can vendors do?

Looking ahead, there remains myriad challenges and issues. In addition to geopolitical, economic and currency issues, the technology and consumer electronics channel should prepare itself for government authorities’ controls becoming stricter. Vendors need to prepare accordingly to mitigate risk and maximise their opportunities in Russia for 2015.

“FOREX risk control and active hedging where possible to minimise risk is important,” explained Snytko. “Vendors should also tighten their assessment of channel partners to mitigate risks related to accounts receivables. Attention needs to be paid to the inventories and planned pricing to prudentially evaluate assets. Also look closely at a distributor’s own levels of credit extended to its channel customer base.”

“Vendors should look to clean their Russian inventories as soon as possible – it could become more expensive later on. With regards to new supply it’s critical to adjust the product portfolio offered to Russia to align with consumers’ expectations. And there is also a need to implement creative promotions to drive appeal and demand in the market,” he continued.

Hearing about all the risks and uncertainties that exist in the Russian market may be enough for some vendors to scale back their in-country activities. However, it should not detract from the fact that the Russian market is one of the biggest single country markets in EMEA. On top of this, Russia is often utilised by vendors as a gateway for sales into Belarus and Kazakhstan. Where some see challenges, others can see opportunities.

From a product perspective, Russian distributors and retailers are looking to stock affordable products that allow them to maintain certain consumer price points in roubles. In the business-to-business channels, the origin of products is becoming increasingly important.

Hidden benefits

Given the current rouble situation the cost of entering the Russian market (in US dollars) is actually lower than it previously was as a percentage of revenues. Similarly, the cost of marketing and promotional launches in Russia also costs less in real terms in US dollars.

“The prices for media slots are still priced in roubles and have not inflated,” explained Snytko. “We are also seeing a jobs market where supply exceeds demand, making it easier for vendors to source higher quality employees within Russia.”

“In terms of the competitive landscape, the rivalry is expected to decline in some categories such as tablets as some brands decide to withdraw from the market,” he added. “New brands entering the market actually have an advantage in the fact they have none of the liabilities that the incumbent players have.”

“Newcomers have zero inventory in the channel and zero worries about accounts receivable from channel partners. This can actually be a strong starting position given the uncertainties and fluctuations in the market,” claimed Snytko.

There are of course risks for vendors looking to enter the Russian market, but an understanding of the channel, economic factors and geopolitical concerns can go a long way to mitigating this. Snytko believes vendors need to become more flexible in terms of supply terms, implement careful inventory planning and also adjust their portfolio composition to reflect Russian market demand.

He continued: “Vendors need to find ways to hedge currency risks across the value chain – not just shift all the risk to partners, because that is a strategy that will backfire one day.”

“Vendors must not overload the market and need to be very careful how they approach the e-tail channel. Some of the smaller channel players are struggling against larger rivals with omni-channel models proving very effective, so vendors need to be aware of this,” he added.

Snytko concluded: “The crisis is different this time and needs to be managed carefully by all channel players – vendors, distributors, resellers and retailers. Cooperation across the value chain and long-term thinking is of paramount importance. There are still clear opportunities in Russia for smart vendors.”

Ocean Solutions will run an exclusive Strategy Forum at DISTREE Russia & CIS 2015 in June, uniting vendors with senior executives from the region’s leading distributors, retailers and e-tailers.

DISTREE Russia & CIS 2015

DISTREE Russia & CIS is the region’s premier annual channel event for vendors looking to manage, build or launch channels in this strategically important market. Leading retailers, resellers and distributors from across Russia & CIS attend the event, allowing vendors to accelerate their channel development and drive business success across Russia & CIS.

DISTREE Russia & CIS, which takes place from June 24-26th in St. Petersburg, Russia, operates a unique business model based on an ‘invitation only’ event format, offering a compelling mix of pre-scheduled one-on-one meetings, keynotes, awards and networking opportunities for vendors and channel executives operating in the Russia & CIS region. For more information, visit www.distree-russia.com

Media Partnership

We are pleased to confirm that Channel EMEA is an official Media Partner for all DISTREE events in 2015, including DISTREE Russia & CIS. Readers requiring more information about DISTREE events in 2015 should contact events@channelemea.com.

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