The Russian handsets market: current situation and trends

The first companies selling mobile phones in Russia appeared in the mid-nineties. Then, a mobile connection was a luxury beyond the means of most. In 1999 only 1% of Russians had a mobile phone, but the market began its spectacular growth as soon as 2002. At present there are about 80 mobile phones for every 100 Russians. The mobile density is much higher in large cities, in Moscow, for instance, it is close to 130 (many people already have more than one SIM card).

 

In 2004 the growth in total sales of mobile phones amounted to 95% – from €1.9bn in 2003 to €3.7bn in 2004. In 2005 the growth rate is estimated to reach 25%.

The key difference between the Russian and western European markets is that the mobile handset market in Russia is not dominated by network operators. All three of the largest operators: VimpelCom, MTS and Megafone: have their own retail chains, but these are small when compared to the chains of independent retailers which sell handsets and operate as dealers for network providers.

The market is not only growing but also concentrating very fast. A few years ago mobile phones were sold by a large number of small companies. Moreover, an important shopping venue for handsets were open-air markets selling home electronics from the South-Eastern Asia. Such markets still exist but they are quickly losing their importance and market share to organised chain retailers, as are small retailers independent of the chains.

At the moment the 10 largest players (including franchisees) control 80% of the market. Among these players are Euroset, famous for its aggressive market strategy and semi-obscene commercials, Svyzanoy, Dixis, and Divizion and Tsifrograd, which have only franchise stores.

The chains are growing locally, but they are also expanding outside their places of origin. This trend has two directions. The chains from Moscow are conquering regional markets, and regional players establishing presences in Moscow and St. Petersburg. Every method is used to accelerate expansion, from organic development and acquisition of weaker competitors to selling franchises. In several cases there have been later mergers with franchises.

Until recently the most striking feature of the mobile market was its half-legal character. Up to 90% of phones were imported using “black” and “grey” schemes. “Black” import means that particular goods (not necessary phones) are imported as some other goods which have a lower customs value. “Grey” import, in regard to mobile phones, means that expensive high-end models are imported as cheap low-end ones. That gives a significant saving on import tax and VAT. As a result, mobile phones in Russia used to be on average much cheaper than in Europe. The situation changed abruptly in August 2005 when the Internal Affairs Ministry in one move arrested a huge stock of phones and demanded that importers submit official price lists. Some of the largest players immediately announced that they were now importing directly from producers. As a result the share of “grey” import phones dropped significantly, but prices, especially for high-end models, increased almost by half.

Though at present the mobile phone market keeps growing, at some point it will be saturated. Moreover, competition pushes down retailers’ margins. Mobile retailers are therefore looking for new income sources. The most popular method nowadays is to broaden the assortment carried by stores. Retailers are adding various kinds of portable digital equipment: cameras, MP3 players, dictaphones and even laptops: to the range of mobiles. Some retailers expand their traditional service of processing payments to mobile operators by introducing other payment services, in particular fixed-line telephone and energy bill payments. The second largest retailer, the Svyaznoy chain, also distributes obligatory third-party car insurance policies through its outlets. As a result, the structure of retailers’ revenues in 2005 is roughly as follows: mobile phone sales account for 45% of total revenues, 32% comes from connection fees and payments processing, 15% from sales of phones accessories and 7% from selling other portable equipment.

 

 

As has already been mentioned, organised chain retail now dominates the mobile handset market in Russia. In the regions the share of chain retailers is close to 60%, in Moscow almost 100%. The largest, though not the oldest, player in the market is Euroset, which had 2,257 stores as at 1 October 2005. It operates in the Ukraine, Belarus and Kazakhstan as well as Russia. Euroset's share in the Russia market is estimated to be 20%. It also has an online presence, having opened three online stores in Moscow, St. Petersburg and Ekaterinburg. 

Euroset positions itself as a discounter selling mostly low-end models. Euroset’s 2004 sales amounted to €806.7m. The forecast for 2005 is close to €2bn. The Moscow-based chain started regional expansion in 2003. It also leads the mobile retailers’ international expansion. Euroset’s chain in the Ukraine consists of 109 stores, 46 of them have recently been added through acquiring the Mobilka chain in the Donetsk region (the eastern Ukraine). In Kazakhstan Euroset has 67 stores. Euroset is the only Russian retailer that has had the courage to enter the risky Belarusian market, where its first stores opened in October 2005. Another close target is Kirgizia: news of of the company's beginning operations there appeared in October 2005. In the future Euroset intends to penetrate all the CIS markets, and the markets of the Baltic states.

Until October 2005 Euroset had been consistent in rejecting franchising as a means of expansion. Having acquired the bankrupt Moscow chain Techmarket, it has announced its decision to retain the brand and to use it for a franchising programme. The Techmarket stores are to be positioned in a higher market segment and will offer a wider assortment of digital equipment than Euroset itself does.

The second player in the market is Svyaznoy, though with 820 stores it is far behind Euroset in terms of the number of outlets. Svyaznoy’s estimated market share is 12.5%. Its sales are expected to be around €1bn in 2005: in 2004 they were €552m. The chain, part of the Maxus group of companies, was founded in 1995 but retail operations were launched only in 2002. Besides its retail business, Maxus also has a recently-launched content provider, Svyaznoy-Zagruzka. Maxus used to have a wholesale division but it was recently terminated, probably due to the declining profitability of wholesale operations in the mobile phone market in Russia.

Svyaznoy operates only own stores. In 2004 the company launched a special project, a chain of “digital technology galleries” Svyznoy 3. The galleries are much larger than the usual Svyaznoy outlets, and offer a greater variety of digital devices.

If Euroset (with exeption of Techmarket) and Svyaznoy totally dismiss the idea of franchising as an efficient way to expand, the third largest player in the mobile market by market share, Dixis, follows a combined scheme of opening both own and franchising stores. Founded in 1996 with 100% private capital, the Dixis retail chain is part of the Dixis Group. The company was the first of the mobile retailers to start a franchising project. Its first franchise store was opened in Novosibirsk in 2002. The chain currently consists of 600 stores with an estimated 7% market share. Its 2005 sales were about €0.5bn.

The two other large players in the market are purely franchising chains owned by wholesale distributors of mobile phones. Tsifrograd, belonging to Severen company, is the elder of the two. The first Tsifrograd store appeared in Ekaterinburg in 2003. In 2005 the number of Tsifrograd stores reached 950, which makes it the second largest chain after Euroset in these terms.

Till 2004 the chain developed only in the regions. The number of outlets at the end of 2004 was less than 300. Total 2004 sales were €63m. However, in 2005 the company made a fast move in the direction of the largest markets, Moscow and St. Petersburg. In the summer 2005 Tsifrograd sold its franchise to the Moscow-based Anarion chain which has 140 outlets located not only in the Moscow region but also in Kazan, Voronezh and Perm. It also found a partner in St. Petersburg: the Technosvyaz chain, with 70 outlets.

Divizon is another franchise-only project started by a wholesale distributor. In 2004 the Megaphone (not to be confused with the 3rd largest mobile operator) wholesaler offered its regional partners the opportunity of joining the new chain. By the end of 2005 Divizion had managed to increase the number of its outlets to 500 and to become one of the five largest mobile phone retailers in Russia.

The significant number of strong players notwithstanding, new ones are emerging in attempt to win a place in the market. Expert-Mobile managed to open 30 outlets in co-operation with Tsifrograd’s owner Severen company. After broking relations with the partner, Expert-Mobile did not give up its intention to build a 200-outlet chain by the end of 2005 and signed an agreement with another chain – a 170-outlet Telephonica.ru.

There has been much talk about another project which has yet to get off the ground, Eldorado Svyaz. Market players have been expecting the advent of a new player since August 2005. Eldorado is the largest home appliances retailer in the country. Early in 2005 it signed an option with the Dixons group of the UK. Given that Dixons has its own mobile chain, The Link, speculation that Eldorado will use Dixon’s experience to build a strong chain is not groundless. However, Eldorado itself has not commented on the project.

 

The power that mobile retailers have recently gained gives them leverage for arguments with network providers. In addition to their core activity, retail chains act also as middlemen in the distribution of mobile services. A significant part of the SIM cards activated in domestic mobile networks is sold through the mobile phone chains. Therefore, any argument with a large retailer can cost an operator a good number of new subscribers. One example is the recent attempt of MTS, the mobile operator, to punish its dealers for low-quality subscribers. According to MTS, the total spending of such subscribers was less than the cost of acquiring them, including dealer commissions. MTS fined Euroset, Svyaznoy, and Dixis a total of €0.7m. The retailers’ response was immediate. They increased the price of MTS’s most popular tariff package “Jeans” almost threefold, and connection sales dropped dramatically.

Growing quantitatively and diversifying their services, mobile retailers are attempting to enter a totally new field where they may also become a threat to operators. This year Divizion and Euroset announced plans to launch virtual operators (MVNO). Divizion started its project in April 2005, but later froze it. Euroset is still working with mobile providers Tele 2 and SMARTS (the Volga region) on developing an operator of this kind. The retailer will invest €17m in the project.

We may well expect that the same trends of market growth, consolidation of the chains and their expansion in the regions and increasing competition will be observable this year. Although the market is growing more slowly there is still room for growth, since network penetration in the regions is far from 100%. As far as expansion is concerned, the future will show which way is more efficient: organic growth, acquisition or franchising.

Undoubtedly, the process of the taking-over of small local retailers by national players will go on. Though local retailers are attempting organised resistance – this year they founded the Inter-regional Association of Mobile Technology, with 179 participants in 800 cities – their chances of survival are fairly small.

It is also possible that foreign telecom companies and phone retailers will finally decide to enter the Russian market, possibly through the takeover of some large local chain.

Ekaterina Lenskaya

 

Pawel Olszynka