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Russian Digital Accessories Market Booms while Handset Sales Slide

Real opportunities emerge for Hong Kong suppliers in country's burgeoning smartphone and tablet accessories' sector.

Photo: Eldorado: Anticipating a slump in smartphone sales.
Eldorado: Anticipating a slump in smartphone sales.
Photo: Eldorado: Anticipating a slump in smartphone sales.
Eldorado: Anticipating a slump in smartphone sales.

With demand for mobile and smartphones set to fall throughout Russia, a consequence of the economic slowdown, retailers are having to contend with smaller and smaller margins. By contrast, however, the markup on accessories related to the sector continues to grow.

This has led to a clear demarcation in profitability, with those mobile operators with their own retail distribution networks suffering in comparison to those chains offering contracts on behalf of a number of different operators, while also supplying a variety of handsets and accessories.

Throughout 2015, MTS, Russia's largest cellular operator, has cut its mobile phone charges several times. This has seen prices drop by some 30%, a consequence of the fluctuation in the Rouble exchange rate over the spring and summer period. According to some analysts, the company has been selling certain items at below cost price, with this seen as a bid to preserve market share and maintain the company's lead position in the sector. Overall, it is estimated that that company has subisdised sales by as much as US$80 million since the beginning of 2015.

With the number of mobile users approaching saturation point, growth can now only be achieved by consumers adopting additional devices, such as tablets or second phones. Consequently, operators are selling such devices at minuscule – or even negative – profit levels, while looking for additional revenue in the form of subscription fees and other service charges. It is not unusual for a typical Russian city dweller to now utilise three SIM-card enabled devices on a daily basis – a tablet computer, a smart phone and a more basic mobile phone (as a means of saving the smartphone's battery while making local calls).

According to Eldorado and M-Video, two of Russia's leading consumer electronics chains, sales of new mobile digital devices are now set to drop, in line with the fall in income in real terms for many consumers and the difficulty of securing bank loans at acceptable rates. It is expected that sector will drop by some 10% in terms of volume, while revenue will drop by 35%. Overall, it is anticipated that only 25.5 million smartphones will be sold in Russia in 2015, compared to 26.1 million in 2014.

Although the mark-up on handsets and tablets is now as low as 10%, the profit margin on accessories remains as high as 90%. Unsurprisingly, then, the accessories sector now accounts for approximately 15% of the profits of both operators and non-affiliated retail chains. This has also spurred the growth of a number of small specialist operators, while also prompting the appearance of "sales islands" within shopping malls, offering smartphone and tablet accessories direct from independent traders or other more established retailers.

The emergence of this niche sector offers a real opportunity for those Hong Kong suppliers interested in the Russian market. At present, entry costs remain noticeably low, while there's little brand loyalty in the accessories sector. Suppliers should also consider the e-channel route into the sector, with both AliExpress and JD having made substantial inroads into the Russian market. It is also worth noting that Russian consumers only pay tax on weekly e-commerce purchases in excess of €250 (US$275) per person, per week.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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