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Crisis on the Russian mobile market. Facts and conclusions

Now the central mass media has highlighted and discussed the events started on the 15 of August much. The hysteria about this theme raised and greatly increased the first effect making the situation even harder for everybody. The victims are companies trading mobile phones, their bailees, logistic centers and, finally, usual customers who did not expect fast price growth on all the models of mobile phones. This is the first such all-consuming crisis on the Russian market. And now we decided not to write about the reasons of the crisis, its presuppositions and not to bring fuss in this very painful question. Much has been said, and in 95 percent all the written and spoken doesn't represent the facts, these are only allusions, but at the same there is no lack of information, and usual people are oriented in the happening things "rightly" and understand who "was stealing" and "is guilty". And now it doesn't matter who initiated this (these people are most likely to be found, since too much is staked), but the crisis is developing by its own rules and got out of control - too many power is involved in it. No doubts, the consequences will reduce the volume of the Russian mobile market and will tell upon subscriptions to our mobile networks. Both this will negatively influence companies' turnover and the national treasury, less taxes will be collected (the government will lose at least 50-80 million USD in September). Let's evaluate the first and the most valuable aspect, namely the crisis' influence on the retail market in Russia and the process on it.

Presuppositions:

The seizure of mobile phones and accessories at the Russian customs, the total cargo cost is valued of 10 million USD (50 tones);
The following searches and impressments of phones and accessories in the warehouses of Moscow distributors (250 tones;
The omitted phones are valued at 55 million USD (400000 pcs);
The number of omitted phones is a bit less than a weekly market need, which reaches 550-600 thousand items in our valuation;
The omitted devices were to be realized both through wholesale and retail channels (own companies' retail);
From May to August we observed deficiency for a line of products, and demand was outgrowing supply several times. Motorola RAZR V3, Nokia 8800, Samsung E530, Samsung D500, Sony Ericsson K700 and K750 are typical examples of such models. As a result the price for them either was fixed and couldn't fall or even was growing. A good example is the RAZR which grew 10 per cent in price in the middle of July (both colour solutions);
The customs work caused troubles from May to August, and the distributors couldn't supply the market with models in enough quantities, which shortened the warehouse stocks all over the country;
For the 15 of August the warehouse stock of mobile phones formed about 2.3 million terminals, which gives about 2-3 weeks of normal retail functioning (the left-over structure is not flat and fully depends on the manufacturer shortening the market firmness);

The presuppositions given above show if the market had not been functioning calmly then it anyway was not experiencing starvation rations till the 15 of August. The impressments of the phones were painful for the companies figuring in this deal, but they form only about 50 per cent of the Russian market. The number is quite significant but not crucial for the whole business. The crisis happened was the indicator of the fragmentation of some players and their incapability of getting consolidated for solving problems common for the whole industry.

The victim companies are the market leaders and they form a guiding line for the others. It's an open secret all the companies trace the price changes in big retail networks (and wholesale channels as well) and form their price policy reasoning from this. And what happened after August, the 15?

First, that was a shock, the weekly supply loss instantly influenced the wholesale, and the life came to a standstill in this segment. And this concerned only Moscow region, all the others lived in normal mode, since this supply delay could have influenced them only in a week or 10 days - shipping takes time and the products delivered earlier before the crisis moved to the destination points. Another important factor for big companies is nobody maintains a centralized warehouse with all the goods for the whole country. The majority of the companies prefer making regional warehouses in node points, which is better for logistics needs. So, the crisis hasn't affected these ones and their mobile phone stocks.

But this information was not taken into account, since no data about the solving of the situation was available, and the market started its pique. The situation was forced, and the prices really grew in the huge networks first. The reason is average sale time is shorter in big networks (the turnover is higher), and the stock is consumed faster. The price correction by Svyaznoy and Euroset was a sign for the market, and all the companies took similar steps. The first day gave the growth of 10 per cent, and then it reached 15-20 per cent; in some networks the growth even formed 25 per cent with some positions exceeding the original price several times. For instance, in Svyaznoy the price for Nokia 8800 grew to 88999 rubles from 49999. And it's even more prestigious to buy Nokia Vertu for this money; its price has not changed.

And what is the price growth conditioned on? There is no commercial presupposition for the price growth except for the two hugest players. The speed of the products going out is crucial for them and soon they come to starvation rations. And that's why the decision to increase the price in a group was made elegantly and smoothly. The rivals excitedly told about Euroset representatives buying phones in short supply in their retail networks. The underlying theme is clear: "We are alright, we haven't suffered, and Euroset is evidently in difficulties". They still have not understood that on the opposite make good climate for both Euroset and Svyaznoy by their statements. A curious fact is Euroset has truly managed to buy some models that had the most obvious potential for price growth and were in short supply before. Against the background of rapidly growing prices they provided adequate margin and allowed the company to minimize the influence of the total price fall. And also the company finally got an essential breathing-space: while the retail sales reduce (from 30 to 60 per cent depending on the network after the price correction), the company will restore warehouse stock and normalize the situation. The same concerns Svyaznoy, both players are in the same situation with only one difference, at the crisis start Svyaznoy entered the market with small warehouses. This negatively influenced the network, the assortment is low, the most popular models are lacking and there is no place to get them in corresponding quantities.

And once again we'll point out the majority of the game players still have warehouse stocks and products in retail nodes, and that will help them functioning normally for 2-3 weeks. The price growth is caused by the market unclearness, the law machinery rousing negative spirits (what would their statements about the rapid sale of the forfeit products cost when no court decision was made). This unsolved situation causes the price growth, which brings instability and prevents from foreseeing approximate dates of term for possible legal cases. If the market got information telling all forfeit products would be sold to the third party players, deleted, sent to Mongolia or something else, this unclearness would disappear and the companies would work like in a normal mode. While the situation is not solved, we can't expect the market current situation to improve, which is the only and the most negative factor for today.

Speaking frankly, not all the companies increased the prices, in some non-network shops and small networks phones cost the same. The occurrence is temporary, and these networks will not stand even the next days and will raise the prices like the others. The price correction will reach 15-20 per cent of the before the crisis since the 22 of August. The further price growth is not just possible but is caused by a moderate deficiency on the market, and it may grow. Total cost growth can reach 40-50 per cent.

Unfortunately, Russia will no longer be a country with one of the most attractive mobile phone markets and low prices. The total price growth will form about 30-35 per cent even after the current crisis is solved, and it'll be caused by the companies' wish to get rid of wholesale direction and compensate the losses caused by the seizure (and by the way these companies control half of the market). The grey market will inevitably grow, and we should understand this will be "trunk" carting. Today the retail price for Sony Ericsson K750i forms $320 in Germany and in Moscow at the same time it costs about 550-650 USD. And now calculating we can expect even selling for $420 the carrier won't end up losing. And it won't make any trouble bringing 10 phones in your suitcase, many people practiced this ten year ago. And here is in proper how the market will survive. The "trunk" carting volume can form about 20 per cent of the total market in September with the current situation preserved, and that is very much!

The price growth will influence the sales volume, as well as the growing number of the companies oriented on only retail. We will observe the market growth slowing down, this year it can form 30-31 million terminals and not 32-34 predicted earlier. An entry ticket for ones having no phone now will also increase, which will negatively influence the operators' indexes (though will not press greatly, since the main resource is already selected). A curious and quite a logical thing is growing prices on the used hardware market. The crisis will touch even the Commonwealth of Independent States market, and first that will be the Ukraine. At the beginning no market changes will be noticeable, and then the market will even out on higher price levels.

We think now customers should either postpone buying a mobile phone or hurry up and find a shop with old prices today. Further the price for some interesting models may reduce, but we should understand the market is unlikely to lower greatly. The new devices expected in August will appear in September and will cost much, since the sellers will make money on them.

And in the end, I'd like to note the market lives and the crisis can't destroy it despite all the seriousness. The possible changes may influence the companies' turnovers, though their profit will increase. So, you need find positive points in negative things.

P.S. After the situation solves or at first signs of it, we'll write about the crisis in all the details and aspects. Now we are not going to increase the present hysteria on the market.

Eldar Murtazin ([email protected])
Translated by Maria Mitina ([email protected])

Published - 22 August 2005

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