electronics sector in lebanon

Consumer Electronics & Home Appliances in Lebanon _________________________________________________________________

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CONSUMER ELECTRONICS & HOME APPLIANCES IN LEBANON

SECTOR OVERVIEW

A study presented to Lebanon & Gulf Bank

September , 2010


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TABLE OF CONTENTS

1- Electronics & Home Appliances; A Description 3

2- Lebanon Economy; An Overview 5

3- Lebanon Electronics & Appliances Sector Overview 8

4- Demand and Supply 11

5- Electronics' Sector Competitive Landscape 12

5.1- Barriers to New Entrants 12 5.2- Customer Power 13

5.3- Threats of Substitutes 13

5.4- Supplier Power 14

5.5- Rivalry Amongst Competitors 14

6- Electronics Sector SWOT Analysis 15

6.1- Strengths 15

6.2- Weaknesses 15 6.3- Opportunities 15

6.4- Threats 15

7- General Observations on Electronics Risks & Financing 16


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1- Consumer Electronics & Home Appliances - A Description

Appliances may be divided into categories called "white goods" and

"black goods" and are electrical/mechanical equipment that

accomplish household functions and intended for everyday use.

The White Goods comprise major household appliances and may

include:

• Air Conditioners

• Dishwashers

• Clothes dryers

• Drying cabinets

• Freezers

• Refrigerators

• Kitchen stoves

• Water heaters

• Washing machines

• Microwave oven

• Induction cookers

The Black Goods which could as well be tagged as consumer

electronics comprise small household electrical entertainment

appliances such as:

• CD and DVD players

• Camcorders

• Still cameras

• Video games consoles

• HiFi and home cinema

• Telephones

In addition to household electrical entertainment appliances, the

consumer electronics include as well personal computer, mobile

phones, MP3 players, GPS automotive navigation systems.

Consumer Electronics Market

Currently, the global consumer electronics industry is mainly

dominated by Japanese, South Korean and American companies.

Increasingly, these products have become based on digital

technologies, and have largely merged with the computer industry

in what is increasingly referred to as the consumerization of

information technology.


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According to several reports, the consumer electronics worldwide

industry has witnessed a phenomenal growth over the past few

years and reached more than $ 700 billion1 in 2009. This growth

can be attributed to:

• The increasing effect of state of the art electronic devices on the

market.

• The consumer electronics industry is ushering in the dawn of

Convergence. It is the confluence and merging of hitherto

separated markets of digital-based audio, video and information

technology, removing entry barriers across the market and

industry boundaries

• Falling prices for many durable products – arising from rapid

advances in production technology and the effects

of globalization which means that we can now import many of

these durables more cheaply from overseas

• Low interest rates which have encouraged people to spend more

on “big ticket items” – there has been a surge in demand for

consumer credit

• Strong consumer confidence and borrowing levels. The demand

for consumer durables is more income elastic than for non-

durables which are usually staple items in people’s monthly

budget.

1 According to recent studies conducted by the Consumer Electronics Association


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2 - Lebanon Economy; An Overview

The state of the economy and its growth is a key indicator of the

consumer behavior and directly affect the household consumption,

trade in general and imports.

Accordingly, the imports and household consumptions of home

appliances and consumer electronics are correlated with the

economy.

Below is an a general overview of the Lebanese economy since

2005 with some forecast through 2011 by the Economist

Intelligence Unit.

Following several years of political unrest marked by a sluggish

economic growth, Lebanon appears to be swimming against the

tide. In 2006, at a time when the global GDP was growing at 5%,

Lebanon suffered from the July war and ended the year with zero

percent economic growth rates. After three years, developed

countries were going through their worst recession since the great

depression of the 30’s while Lebanon was having one of its best

years since the end of the civil war.

Against all odds, Lebanon benefited from the global financial crisis.

First, when the crisis erupted, customers lost confidence in the

world’s financial institutions and turned towards banks that did not

invest in complex financial instruments. Second, the crisis led

central banks across the globe to drastically decrease interest rates,

while stock markets were depressed, thus pushing investors to look

at higher returns elsewhere. Finally, Lebanon had already elected a

president in 2008 and was enjoying a period of politico-security

stability. The combination of the high differential in interest rates

between Lebanon and developed countries, the strength of its

banking sector, and the political stability, led to large capital inflows

to Lebanon in the aftermath of the crisis. These capital inflows put

downward pressure on interest rates and partly went to investment

in the real estate sector. However, economic growth in Lebanon was

and is still closely correlated with trends across the Middle East, as

services exports typically account for at least half of the small and

open economy's GDP.

According to the Economic Intelligence Unit, the economic growth

forecast for 2010 and 2011 is 6.2% and 5.8%, as a modest pick-up


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in regional growth boost investment and demand for Lebanon

exports, especially tourism.

Table 1: Lebanon Main Economic Indicators

a Actual, b EIU estimates, c EIU forecasts

Source: IMF, EIU, International Financial Statistics

We note that tourism, banking and construction will remain the key

drivers of growth. In fact the strong performance in these sectors is

the main reason behind official estimates that the economy

expanded by 6.9% in 2009, which was a record year for tourism,

with arrivals increasing by 64% year on year to 1.9m. Tourism may

indirectly support over one-quarter of the country's jobs and

generates much of the demand that supports the booming real

estate sector. Banking is vital to the economy and has also been

protected by strong inflows of deposits and interest income from

government debt. The main risks stem from the political and

security situation, which will also deter the long-term investment in

a broader range of economic activities that is required to ensure a

more balanced growth path.

Following is a risk assessment on Lebanon main economic indicators

as per the Economic Intelligence Unit.

Sovereign risk

Stable. Lebanon has one of the world's highest public debt/GDP

ratios, estimated at 155% of GDP at the end of 2009. Large fiscal

deficits will push the debt up further, but the government is

expected to remain able to finance it, largely by selling Eurobonds

to local banks.

Currency risk

2005a

2006a

2007a

2008a

2009b

2010c

2011c

GDP

Nominal GDP (US$ m) 21,861 22,438 25,057 29,932 32,996 36,000 40,841

Real GDP growth (%) 1 0.6 7.5 9.3 6.9 6.2 5.8

Expenditure on GDP (% real change)

Private consumption -2.3 -2.1 6.6 9.5 7.1 5.9 6.2

Government consumption 2.9 2.6 4.5 8.6 5.1 2.1 3.9

Gross fixed investment 3.4 2.8 20.3 18 6 9.3 7.1

Population and income

Population (m) 4.1 4.1 4.2 4.2 4.2 4.3 4.3

GDP per head (US$ at PPP) 9,761 10,017 10,997 12,188 13,012 13,861 14,700

International reserves (US$ m)

Total international reserves 16,624 19,184 20,550 28,276 39,165 41,570 45,097


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Stable. Ample foreign reserves—which stood at US$39.2bn

(including gold), or 17 months of import cover, at end-2009, and

which would probably be topped up by regional allies in the event of

a crisis—should enable Banque du Liban (the central bank) to

maintain the currency peg to the US dollar.

Banking sector risk

Stable. Immediate risks to the banking sector remain limited and

deposits have been rising, but the banks' dependence on both

foreign depositors and the government's debt-servicing capacity is a

long-term vulnerability.

Political risk

The formation of a new government in late 2009, and the

overwhelming vote of confidence in its (admittedly vague) policy

platform, has slightly reduced political risk, but the lengthy time

taken to form the cabinet suggests that the prime minister will

struggle to push through economic and political reforms.

Economic structure risk

Lebanon has a massive public debt stock, which drives up the fiscal

deficit, and a large structural trade deficit, making it dependent on

volatile capital inflows.


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3- Lebanon Electronics & Appliances Sector Overview

The total business of Home Appliances in Lebanon was 300 M USD

in 20092.

The market is highly concentrated with the largest five key players

holding more than 60% of total sales;

Chart 1- Market Share of Main Distributors of Electronics & Appliances

Source: The Association of Electronics Importers

The above illustration shows that Khoury Home is taking the lead,

and is somehow out of the competition. This is confirmed by the

fact that Khoury Home was nominated the number one retailer in

the Levant.

Following are general market trends and info bites:

• Although the five main distributors have different branches

across Lebanon, Beirut sales represents around 65% of the total

market sales3.

• The market is witnessing some mergers and acquisitions, with

the example of Hkayem acquiring Home Line being the recent

related transaction.

2 According to the association of electronics importers in Lebanon


28%

12%

10%8%

5%

37%

Khoury Home Abed Tahan Hkayem BHV Home Line All Others


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• The service sector of the consumer electronics industry is playing

an ever more substantial role, not only in revenues, but more

importantly in brand differentiation and after-sales service.

• The importance of service is adding to the super-store

phenomena sweeping Lebanon as smaller, more traditional

consumer electronics outlets are less capable of offering the

same level of customer relationship and after-sales follow up and

support.

• 99%4 of all imported electronics and appliances are from the far

east.

• The market has witnessed a Compounded Annual Growth Rate of

10 %5 since 2000 in terms of sales value.

• The agents of electronics and appliances brands have but very

limited number of outlets and rely heavily on other parties' show

rooms such as the ones listed in the above chart.

• Market intelligence indicates that the TV segment is as well

highly concentrated with Sony being the leader

Chart 2- Market Share of Main Brands of Televisions

Source: The Association of Electronics Importers



40%

30%

14%

16%

Sony Samsung Panasonic Other


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• The success of brand names, with regards to the offered services

and support, is viewed as a reason that third tier consumer

electronics and home appliances brands did not persevere in the

market.

• The Lebanese market is still seeing rapid growth which is

attracting the attention of all major electronics and appliances

brands. This is confirmed by the recent appointment of new LG

agent; SEALCO, the opening of new offices by Panasonic and

Philips' recent appointment of brand general manager.

• In addition the sales trend of the Home Appliances business

follow the real estate market and in specific, the residential

sector.

• Consumer electronics growth in Lebanon can also be seen as a

consequence of increasing income per capita, the emergence of a

tech-savvy middle class demographic and the relatively young

population.

• The concentrated market, the increasing competition and

sector's growth have encouraged the main showrooms to create

innovative long term credit facilities in close collaboration with

commercial banks and credit card servicing companies/

departments.


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4- Demand & Supply

Data obtained from the National Accounts indicates that expenditure

on electronics and home appliances vary between 2 to 4% of total

household consumptions.

Table 2 - Expenditure on Electronics & Home Appliances (in LBP billion)

Sources: Central Administration of Statistics

On the import side, information from various sources including the

customs indicates a compound annual growth rate of 15% since

2004.

Imports exceeds the market year consumption capacity by 20%

since 2000.

All imports and distribution to major showrooms are carried out by

the brand representatives who manage the inventories that would

cover the market needs.

In brief, the electronics and home appliances imports and

expenditures growth are linked to the economic growth which has

proven to be robust throughout the last instable years and

projected to grow at a healthy rate6 during the coming couple of

years.

6 Economist Intelligence Unit

Durable Goods 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Home Apllianeces 555 571 482 440 455 476 462 537 478 482 504

Electronics 194 207 198 192 216 204 216 252 217 209 255

Total 749 778 680 632 671 680 678 789 695 691 759

Total Domestic Consumption 21,393 21,832 22,105 22,418 22,943 24,698 26,460 28,816 28,885 29,213 32,521

% of Domestic Consumption 4% 4% 3% 3% 3% 3% 3% 3% 2% 2% 2%


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5.0 - Consumer Electronics Industry Analysis

Although the Lebanese Consumer electronics market is highly

competitive, the high growth rates that it promises make it a good

industry to enter.

5.1- Barrier to Entry

Capital Requirements and Economies of Scale:

In the case of retail stores, there is a high concentration, a good

distribution network, knowledge of consumer buying patterns and

advanced customer support and service infrastructure.

The industry is renowned for its low margins and high volume

business model which can only bge supported by well established

network of showrooms.

Economies of scale is required in as there are large fixed costs

associated with setting up large show rooms.

Accordingly not only it is extremely difficult for new entrants to

invest in this sector, all small operators are at risk of closure.

Supply Chain Issues:

The supply chain of main brands is carried out by the brand

representatives. Their supply chain involves imports, warehousing

and distribution to retail outlets.


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Sales, delivery and after sales services are all handled by the retail

outlets and main show rooms.

Product Differentiation:

Though the awareness is increasing amongst the Lebanese

consumers, retailers and brand representatives are unable to

increase brand loyalty. The Indian consumer is very price sensitive

and hence he keeps hoping from one place to another, hunting for

good deals.

Switching costs vary amongst the electronic categories. For

instance, the switching costs in mobile phones are high, as

consumers who are used to one brand find it difficult to use another

brand. However, for televisions, cameras, and even laptops,

consumers are ready to try new brands based on price for features

offered and service quality or reputation of the brand.

5.2- Bargaining Power of Buyers

Although the emergence of new channels like the internet, and

auction sites are offering the general consumer (buyers) who

usually purchase electronic goods from electronic retailers, hyper

marts, music and book stores, a medium to compare prices and go

for the best deals in town, the abundance and concentration of

show rooms in some areas are providing as well the upper hand to

the consumer while negotiating and looking for the best price.

Though the better brands can command a higher price, buyers are

constantly comparing prices, service quality and product features

and hence commands a high power in this industry.

Large chain stores like Khoury Home, Hkayem and Tahan have

distinct advantage over the smaller stand alone stores as they can

demand good discounts suppliers. and forward the same to the

consumers.

5.3- Bargaining power of suppliers

Sales are highly concentrated with the large chain stores who

exhibit all brands. Consumers entering into large chain stores will

have a large choice of brands, products and price range. The

priority of sales team is to ensure that the consumer ends buying

from their store regardless of the brand.


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Accordingly the brand representatives have very low bargaining

power.

5.4- Intensity of Rivalry amongst existing players

There are few key players in the consumer electronic market, but as

they are part of big Lebanese business groups, they have a lot of

muscle power and hence the intensity of rivalry can be placed at a

mid to high level. Though factors such as high transport and

storage costs, lack of differentiation, large investments, and low

switching costs tend to intensify the rivalry, the fact that the market

is only at the nascent stage with promises of high growth rates of

10 to 15 % coupled with the diverse needs of customer groups, and

an untapped rural market; the existing players seem to be enjoying

a relatively low rivalry at large but a very acute one between each

other.

5.6- Threat of Substitutes

The threat of substitutes for the manufacturers of these electronic

goods is medium to high unlike the case of white goods. As new

technology enters the market at increasing pace, the manufacturers

and retailers need to understand the consumer needs. For instance

the VCR was replaced by the DVD player which will soon be

replaced by a Blue Ray Player. The incorporation of camera in the

mobile phones is definitely a threat to the camera market. Hence

product innovations in this segment are very high and players in

this industry need to mindful of this.


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6- SWOT Analysis

6.1- Strengths

• Presence of well established distribution networks

• Presence of a large network of the main players' showrooms

across Lebanon

• Presence of all the well-known brands

• In recent years, organized sector has increased its share in the

market vis a vis the unorganized sector

• Product features and capabilities are increasingly having

significant influence on purchase over price.

• Brand awareness

6.2- Weaknesses

• Demand is seasoned and is high during festive season

• Demand is affected by political uncertainty and security

instability

• Low disposable income

• High competitive market and tight margins

6.3- Opportunities

• Growth in residential sector and the accessibility to low interest

home loans

• Innovative credit facilities and consumer finance products

developed by banks, credit cards and show rooms

• Economic growth and increase in income per capita

• Decrease in price gaps between products sold in Lebanon and

the region; namely UAE, KSA and Kuwait.

• Young and tech-savvy population

• Propensity to consume

• Value for money pricing leads consumers to upgrade

• Increase in brand and product choice

• Slow shift from seasonal buying to year round purchasing

6.4- Threats

• Imports duties

• Rapid product innovation and rapid transition from one

technology to another

• Significant time to market pressure

• Increase in applicable interest rates could affect the sales trend


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7- General Observations on Electronics Risks & Financing

Bank exposure to the sector is through three different types of

entities:

1. The brand representatives

2. The main show rooms

3. The consumers

Financing to all three categories include the following:

• Trade finance - offered to brand representatives

• Working capital - offered to show rooms

• Consumer financing - offered to end users

Different risks are associated with the above three financing types,

however they are all risk adverse to the overall economy status.

Trade Finance

Risks associated with trade finance include the following:

• Changing of brand representative, like we have witnessed with

LG, SONY and Panasonic

• Brand loyalty - exposure to brands that are not tier one is riskier

• Product innovation and quick turnaround could result in idle

inventories and accordingly affect the representatives capability

to settle outstanding facilities

• Relationship between brand representatives and large chain

stores which represent the main sales point for all agents

Risks mitigation suggestions could include the adoption of the

following procedures:

• Adequate cash or property collaterals

• Review of agency agreements

• Provide financing to only tier one brands representatives

• Analyze historical inventory levels and sales strategies

• Analyze historical relationship between the large chain stores and

the brand representative; including payment terms

Working Capital Facilities

Risks associated with working capital include the following:


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• High competitive market and tight margins which is leading small

showrooms to get out of the business and a consolidation

between major players (Hkayem and Home Line)

• Customer preference and loyalty which could lead to decrease in

sales in case the shift is made to the competition

• Over stretching of consumer financing



• Adequate cash or property collaterals

• Analysis of the main showrooms' consumer finance portfolio

• Review and analyze the service and sales policies and level of the

showrooms' team

Consumer Finance

Risks associated with working include the following:

• Increase in applicable interest rates could affect the capability of

repayment

• Lack or minimal due diligence on applicants



• Adequate guarantees

• Strict and well defined due diligence process

electronics sector in lebanon

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