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A New World of Sales
U.S. retailers have a spotty track record of making it overseas. Competition from incumbent retailers, miles of foreign government red tape, shallow consumer pockets, cultural differences, political upheaval, a lack of preparation or just plain bad timing have helped stymie efforts to extend a reach overseas. Still, the idea of doing business abroad is back in vogue.
 Best Buy's announced foray into China, along with Wal-Mart's expansion of its consumer electronics product mix and its own moves to step up operations abroad, are among a number of factors that have raised the prospect of expanded overseas operations for U.S. CE retailers. Also tantalizing for U.S.-based CE retailers is the faster pace with which consumers in emerging markets are embracing technological advances.
CE retailers have another reason to look overseas-the sheer number of stores selling electronics in the U.S. market. "Is it saturated? If you mean that everyone has bought most of the stuff they're going to buy for a while, I don't necessarily buy that," says Danielle Levitas, analyst with research firm International Data Corp. "But if you mean the number of locations that people can buy stuff, then I'd say yes."
Best Buy's plans to buy a majority stake in Jiangsu Five Star Appliance Co. for $180 million, among a flood of dollars flowing into China from a host of industries, puts the spotlight on the potential of emerging versus mature markets. Further, the move highlights a frequent debate in the financial community over foreign investment in such developing markets: where to go-China or India?
Eyes on India
The consensus among analysts is that China's vast population and its fast-growing economy make the country the first choice for CE retailers eyeing overseas markets. But some of the same analysts say India is no slouch and cannot be ignored, at least for its possibilities.
 "You're seeing a rise in the middle and upper middle class that has more disposable income to spend on CE, which is a continuation of the shift to the capitalistic economies since the collapse of the Soviet Union."--Chris Crotty, iSuppli's Senior Analyst for Consumer Electronics
Taking much of the sheen off India's allure as a CE retail market is an Indian law that prohibits foreign direct investment in the retail sector, other than in single-brand stores. But China also had restrictions before allowing direct foreign investment in 1992. Retailers and analysts eyeing the Indian market, with the second-largest population and consumer market, after China, are optimistic that India, too, will show more liberal foreign investment policies to stimulate growth. Lifting the wall on foreign investment (up to 51 percent ownership) in single-brand stores was a breakthrough that came just this year.
Some of the optimism about India is owed to Wal-Mart reportedly kicking tires in the country by setting up a Bangalore operation for retail market research. Further, India touts a growing middle class and a burgeoning CE market, forecast to grow at an 11 percent compound annual rate through 2010, to $5.8 billion, observed iSuppli, an El Segundo, Calif., research firm. The industry grew to $3.4 billion in 2005, up more than 13 percent from $3 billion in 2004.
Although there is some hand wringing over India's foreign retail investment policy, the country has been proactive on hastening its Internet infrastructure. Under a 2004 policy, India provides tax incentives to companies that offer Internet services and broadband networks. And a study by AMI-Partners identified a robust small business IT market in India.
Still, while India tops a 2006 index of viable general-merchandise retail markets identified by A.T. Kearney, it does not even make the top five in the consulting firm's CE retail index for developing countries. China holds the top spot on the firm's CE emerging-markets retail list, followed by South Korea, Taiwan, Brazil and the Czech Republic. "India is just lagging China a bit in terms of maturity of the market," says analyst Laura Gurski. The CE retail index was put together based on the size of appliance and entertainment software markets, among others.
Ironically, software and other intellectual property piracy in China may have helped that country's CE growth exceed that of India, observes Chris Crotty, iSuppli's senior analyst for consumer electronics. "India has demonstrated a much higher level of respect for intellectual property," Crotty says.
Brazil's position among the A.T. Kearney top-ranked emerging CE markets and the strengthening positions of Chile and Mexico signal an economic rebound for Latin America, according to the consulting firm. In Brazil, a decline in urban unemployment, growing household income and interest rate reductions have buoyed consumer demand for more home appliances and mobile phones, among other goods, Bloomberg News reported. Unemployment fell last year to a record low 8.3 percent, while inflation-adjusted household income rose five percent last year.
New Wealth in Eastern Europe
Elsewhere, the Czech Republic's appearance among the top markets on the firm's CE retail index underscores what many observers say is a ripening Eastern European CE market. "You're seeing a rise in the middle and upper middle class that has more disposable income to spend on CE, which is a continuation of the shift to the capitalistic economies since the collapse of the Soviet Union," observes iSuppli analyst Crotty. "First everyone had to fulfill their bio-basic needs in the new market economy, and now that that's worked out, there is this growing class that can look beyond those bio-basic needs and enjoy the same luxuries that consumers in the so-called Western world have been enjoying."
Crotty sees CE markets partly through the prism of how well consumers embrace the convergence of CE products and functionality. Now that Eastern European consumers as well as Russia are tasting some wealth, Crotty is carefully watching the locations for trends on consumer spending on convergent products versus spending on the best in class products, whether they fuse functionality or not.
"There are psychological issues-how do people feel about having everything in one device? Are they going to trust that? What if they lose it or break it?" Crotty says. "There are sociological issues, particularly status."
In the United States, for instance, consumers are more likely to embrace "the best" cell phone or digital camera, while in some Asian and European markets consumers place a higher premium on the best converged devices, Crotty says. "In Japan, because of the history, society and culture, people are more frugal and respectful of resources. They're willing to accept a device that combines these multiple functions," even though better standalone devices may be available.
 "The product available in the market is much better than what was available in the United States in the early to mid-90s, or even late-80s."--Brian Fravel, Director of Marketing for Intel's Sales and Marketing Group
The newfound wealth of consumers in emerging markets may only be limited wealth, meaning they may lean toward cost-saving converged CE devices, Crotty observes. On the other hand, he adds, people who come into new wealth historically spend to achieve status. "You have to wonder if newly wealthy consumers in these developing countries are going to try to emulate consumers in the U.S. versus in Japan," Crotty says. "It's up for grabs right now."
In Russia, however, signs abound that consumers might emulate American behavior. A cost-of-living survey by Mercer Consulting recently pegged Moscow as the world's most expensive city, edging out Tokyo, on the strength of a property boom. The broader Russian economy is in its fourth consecutive year of six percent annual growth, unemployment has been roughly halved and inflation is under control.
Straight to Notebooks
Another sign of a potentially robust CE industry is the fast pace of adoption of notebook computers as Russian consumers bypass desktop purchases, says Brian Fravel, director of marketing for Intel's sales and marketing group. "The product available in the market is much better than what was available in the United States in the early to mid-90s, or even late-80s," Fravel says.
But Russia lags in some other technology arenas. While most European cellular operators began providing third-generation mobile services four years ago, the Russian market is behind in 3G, with just one test license issued so far, as of July, reported Cellular-News, a London-based online industry publication.
 "Services are definitely a way to get close to customers and up-sell them, no matter where they are."--Danielle Levitas, International Data Corp., VP, Consumer and Broadband Markets
A healthy CE product mix won't necessarily make or break a retailer in an overseas market, but it can help strengthen a retailer's position.
Jim Okamura, senior partner at J.C. Williams Group, a Toronto-based retail consulting firm, says a robust CE mix could have helped Wal-Mart in South Korea, a market the retail giant pulled out of, but would not have prevented the exit.
"It would have helped but it really wouldn't have addressed fundamental issues that were not based in the electronics department," Okamura says. "The overall need to drive a higher frequency of shopping and electronics is trending toward higher ticket items but a lower frequency of foot traffic."
For all the attention trained on emerging CE markets these days, some observers remain convinced there is still plenty of opportunity in more mature CE markets. One area that U.S.-based CE retailers have a leg up on their overseas counterparts is in selling services, such as Best Buy's Geek Squad, says Levitas, the International Data Corp. analyst.
"The concept of selling services in retail is new here [in the U.S.], but newer in other parts of the world, whether that's an electronics set-up or consumer assistance along the lines of Geek Squad," Levitas says. "Services are definitely a way to get close to customers and to upsell them, no matter where they are." V
By Allan Richter
September/October 2006
Sources of Useful Information in China:
China Council for the Promotion of International Trade, China Business Guide: www.ccpit.org/servlet/infosystem.ServletGoToInfosystemIndexEn
U.S. Commercial Services website for China: www.buyusa.gov/china/en/
World Trade Organization, 2006 Trade Policy Review for China: www.wto.org/English/tratop_e/tpr_e/tp262_e.htm
Shanghai Foreign Investment Service Center: www.sfisc.com/
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