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Euroset and Samsung cooperate - for how long?

The dispute between Euroset and Samsung was up for quite a while and in fact proceeded with a number of amusing situations – for instance, the distributor officially declared numerous times that he saw obvious drawbacks and distress of the manufacturer, basically it’s only a drop in the ocean of criticism. Though all this occurred against the background of major rising of Samsung’s market share – eventually this brand managed to claim the leadership in sales rates in Russia. A distributor of Euroset’s grade could ignore this fact on no account, therefore Samsung branded handsets began to appear on the shelves bit by bit, yet purchase amount was minor and commonly the company received the phones at second hand. This provoked assaults on the manufacturer and its Russian division in particular, which was blamed for incompetence, unwillingness to work etc. And after a year of massive propaganda, the company gave up and decided to re-establish full-scale business relations and strategic partnership with the distributor. The corresponding meeting, which involved representatives of both companies, took place on Friday, April 14. The final contact is to be made public on Wednesday, April 19. Such dramatic changes in the manufacturer’s strategy became possible due to several milestones, occurred over the very recent time.

The first prerequisite of the renewed partnership was change of managers in the Russian department, thus both companies obtained new ways to develop their relations in – actually from that point on representatives of the sides could just sit down and discuss any up-to-date issues without rolling down to arguing about past nuisances and lose face. The latter factor, which contributed much to making this announcement a reality, is Samsung’s plan, implying the rate not less than 10 mln. of sold handsets on the Russian market – the companies insiders have even hung a poster telling everyone about this goal. At the moment of making up the plan for 2006, this rate of 10 mln. units was hard to accomplish, though still reachable. However, as the time passed by, the results of the first quarter clearly displayed that in conditions of sales stagnation it was impossible to fulfill. So that was the key moment, which forced Samsung Russia to turn to any sources and retailers which could help them in achieving their objective. Otherwise they were running risks to arise a simple and natural question in Korea, where the manufacturer’s headquarters are located in: why the new management cannot keep up with our general strategy and sales forecast and performs worse than those, who were replaced by them? In fact questions of this kind cause at least nervousness, so it becomes more about politics rather than personal image within the company’s walls.

Having clarified the reasons, driving Samsung, should we look closer at factors, making Euroset more persuadable and able to establish long-term partnership? No doubts the directors clearly realized the goals Samsung was to achieve and consequences of a failure. Exactly! Here Euroset is riding high and can even dictate its own terms, of course within the bounds of rationality, and that’s what the distributor actually practices. I would have revealed no secret if I told you that Euroset’s management has a good nose when it comes to maneuvering in conditions of ever-changing market conjecture and manufacturers’ attractions. But I bet you’ve already head of almost the same story – a year ago, on April 6, 2005 at the press-conference held in Moscow, Euroset announced its partnership with Nokia. The manufacturer had seemed to ignore the Russian distributor by not letting it have exclusive contract. Here is a snippet taken from the statement made by Euroset’s representatives after signing the contact: “Over the recent times negotiations between our companies have made a qualitative leap towards mutual understanding, what resulted in signing the contact and establishing partnership on terms, satisfying both sides” – said Chairman of board of directors, Evgeniy Chichvarkin – “We predict growth of NOKIA handsets’ sales in our outlets after signing the contact to 18-20%, as to Nokia’s share on the Russian market, it can be extended by 3% in the first six months already“.

And from the direction of Nokia, the commentary was more consistent: “We have just signed a contact with Euroset, one of the leading retailers in Russia. We hope to make up a good sales program in cooperation with the Euroset and expect high sales rates of our handsets, distributed via its outlets. We count on effective cooperation built on the basis of mutual respect. We are going to do business with Euroset on terms, equal to those we apply to all other Russian partners of ours.», – said Kenneth Jonsson, Director-general of Nokia Customer and Market Operations in CIS.

In only a single year Nokia’s share was significantly extended, though not only Euroset should be given a credit of this achievement – a lot of other players contributed to this success, as Nokia’s expansion was extremely aggressive, since initially it was aiming for regaining lost positions. The culmination of this takeover was the first place according to results of the last quarter of 2005, yet after first three months of 2006 the company brings up the rear of TOP3, even though the gap between the leading manufacturers is miserable (MRG’s data). Nevertheless it seems Euroset begins loosing interest in full-scale partnership with Nokia against the background of strictly limited advertising and BTL-budgets, so it is evident that the company is trying to bring a new favorite to the market, namely Samsung. Noteworthy that at this point one may obtain an illusion about the current situation on the market – de-facto Samsung is the leader, how can even the largest distributor make it even more prime? Euroset uses its own calculations of market’s value as a very effective instrument of influence on partners and manufacturers. Over the entire 2005, the company stated nearly in every single report than its sales alone made all the difference in final sales rates and determined leaders of the market. Nonetheless Samsung has proven it is not so. But in the last material we can point out the following phrase: «Considerable gap in retail sales rate in the first quarter of 2006 between NOKIA and SAMSUNG in favor of the former one was defined by distribution of handsets retail sales in outlets of Euroset”.

In the end it becomes almost obvious: should you partner up with Euroset and provide the required resources, you will instantly claim the leading position on the market, or be on top of the company’s sales reports. As a matter of fact this is a perfect way for manufacturers to render an account to their headquarters. As for minor companies and hardly recognizable brands, partnership with Euroset as a rule results in great benefit, because the sales are constantly being increased and occupy a considerable share in the overall statistics. At the same time world-wide known brands, in other words manufacturers residing in the TOP3 cannot rely on the same treatment and profit – in reality these labels are familiar to majority of consumers and no doubt are in great demand without any addition efforts on distributor’s part. After all, in spite of exposed dislike, Euroset was ought to provide several Samsung’s models in order to supply the demand, you may rightfully ask what about all those official statements? Pure PR moves, attracting wide audiences attention to the dispute, and management of the company in particular.

No need in being the smartest man in the world to predict what statements will be said at the press-conference and how Euroset’s reports on current situation observed on Russian market will look like. For example we are at liberty to expect the following: “Например, это может быть такая фраза: «Sudden extension of Samsung’s market share is determined by the recently established partnership with Euroset and wide range of products, offered in the outlets of the distributor. On the other hand, reduction of Nokia’s activity on the market is the result of faulty strategy, and not paying attention to its major partners». No matter which form the main point will be shrouded in, the outcome remains the same – all hail Samsung, the new favorite on the market!

Now what Samsung will pay for this? It’s obvious that the company is not the one to dictate terms, but a manufacturer which needs to fulfill the confirmed plan no matter what. Thus Euroset will get the following benefits within the limits of strategic partnership:

The longest possible Letter of Credit with maturity date of 45 days;
The entire product line without any serious limitations;
Exclusive models, including those, specially adjusted for Euroset (September, October);
The highest ratio of indemnity in case of cooperative ad company (70 to 30);
Promotion back-up and participation in all special offers.

But, more importantly, what Samsung loses in its turn?

A certain amount of sales in regional companies and large distributors. The same scenario appeared when Nokia introduced its phones into Euroset’s retail stores – one can hardly compete with this player, as it possesses the best wholesale terms, while the same may go to 2 or 3 companies at best. As a result minor players and regional distributors have reassigned their offers towards models, which are not in demand in Euroset’s stores. One of the companies benefited from expansion of Nokia’s products was the same Samsung, whose sales increased by 15% at worst at once. As you know, the same but reversed situation may occur now as well – we shall see, as the indexes won’t be significantly affected by these actions until the fall;
The company’s image is going to be bound up with Euroset – certainly this will cause loss of some consumers, but won’t have any negative impact on sales in general. Samsung’s devices are more likely to be the central characters of various spectacular promotions, thefefore the overall image of the company may alter a bit in course of the time.

Thus we can witness a very complicated situation, where Samsung has to run high risks of not accomplishing the set goals – in light of the fact it pursues short-term goals and increases sales over one, or at best two quarters, but faces reduction after summing up financial results of the following periods, and in this situation Euroset alone cannot interfere much, as it is not capable of saving the day all alone and replacing sales of numerous smaller distributors. Considering low loyalty indexes to Samsung brand on the Russian market, fall of interest from the side of potential partners may turn out to be a major problem in future. At that I can hardly imagine how the level of 10 mln. sold handsets may be achieved even if the situation develops according to the best possible scenario.

This contract will also have several indirect consequences for “replacing” products, this will affect Pantech and LG brands most of all. Prior to announcing partnership with Samsung, representatives of Euroset held meetings with both companies and laid down quite unfavorable terms. For example, the negotiations with Pantech lasted for 5 hours and ended up with dissatisfaction of the manufacturer’s managements with the described perspectives. During the first quarter LG could not keep up even with its own predictions, since it managed to sell three times less phones, than it had been planned. That’s why both of these manufacturers will be put enormous pressure upon them and agree on any concessions (like providing any credit lines etc.) in order to keep the current situation as long as possible, yet it will be extremely hard to accomplish.

The capacities of Euroset, like of any other retailer, are not limitless, so to increase sales of a single brand, they will need to sacrifice a line-up or two by other manufacturers. Besides the two abovementioned Korean companies, repressions will also concern Nokia’s solutions, actually this will eventually transform into a powerful method of influence on the Finnish manufacturer. But… you know what the purpose of this is? In only a year’s time, in spring of 2007, the company will announce that the positions of Nokia are strengthening owing to reasonable strategy aimed at productive cooperation with the largest retailer, Euroset. Really, this scheme has worked fine so far, and I see no reasons why the company should refuse using it even further.

The example of Euroset clearly demonstrates how one should behave himself when it comes to negotiating with manufacturers – to tell the truth majority of distributors have still much to learn from Euroset. Even though this experience cannot be directly put into practice, but on the whole is an object for deep examination. Samsung was forced to accept the terms due to internal needs and if you look at this case from the long-term point of view, this contract will prove to be an embarrassing factor for the manufacturer. Even though all traditions and customs were followed step by step – after achieving fundamental agreement within the walls of Euroset’s office, the Samsung’s delegate asked to peel off the sticky tape from the conditioners mounted in the room in his presence, as in reality it concealed the brand of his company.

The contract between Samsung and Euroset is one of the most significant events in this year, which will affect market shares of all manufacturers for sure, though this will hardly do with the TOP3, and rather have an effect on smaller companies; furthermore this partnership will have impact on forming retail market and offer from the direction of independent players.

Eldar Murtazin ([email protected])
Translated by Oleg Kononosov ([email protected])

Published - 18 April 2006

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