Consumer Electronics Market in Spain

Consumer Electronics Market in Spain-Dissertation Writing Help

Executive Summary

the Market of Consumer Electronics Shows Signs of Stagnation

The market for consumer electronics experienced lower growth in 2007 than in 2006 in volume terms, whereas in value terms the sector’s sales suffered a significant decline, which was mainly due to the generalised fall in unit prices. Value sales increased, however, in the case of portable consumer electronics,  which again reflected the influence of low prices.

Immigrants and Young People, Main Targets of the Industry

The increase in sales and household penetration of products that have recently entered the market, such as digital cameras or portable mp3 players, are encouraging leading companies to pay greater attention to new population segments in order to maintain dynamism in the sector. On the one hand, it is expected that the incomes of those immigrants that have arrived to Spain in the last few years will increase in the medium term and that they will begin to adopt the consumption habits of other Spaniards. On the other hand, young people – with rising levels of consumption and increasing purchasing power – are a more significant target segment.

Portable Multimedia Players and Laptops Push the Sector

The incorporation of video playback into portable media players has been one of the factors making the greatest impact in 2007, which has led to spectacular growth in the volume sales of multimedia players. Sales of laptops have grown very significantly in 2007, approaching the level of desktop computers in value terms and maintaining the prospect of rapid growth. These two subsectors are set to dominate the portable media players and computers sectors respectively.

Market Maturity Favours Concentration

The maturity of most sectors of the market for consumer electronics, especially those whose prices have fallen the most and with shorter projected life cycles, is leading many players that had previously based their strategy on low prices to abandon the sector, since they are unable to respond to competitors that base their strategies on innovation and the development of new products. The increasing maturity of the Spanish consumer electronics market will affect those companies that remain, who will have to opt for products with higher added value in order to survive. In the long term, the abandonment of the sector by those companies that are technologically less active will lead to its concentration in the hands of just a few companies.

Consolidation and Stability of the Market in the Coming Years

Minimal growth of sales in volume terms and its stabilisation in value terms, with slight declines in some subsectors, are predicted to characterise the consumer electronics sector in Spain. After a period of profound changes, both in technology and in consumption and leisure habits, related to the Internet and to new audio and video formats, the market is expected to remain one in which competitiveness is largely based on technological innovation.

Key Trends and Developments

Macroeconomic Trends

The Spanish economy remains one of the most dynamic in the EU. In 2006, the Spanish GDP grew by 3.9%, while consumer expenditure increased by 3.8%, 2 percentage points more than the other countries in the Eurozone. This is partly explained by the growth of Spaniards’ real disposable income, which increased by 2.9% in 2006.

The sectors that benefited the most from the growth in sales of consumer electronics have been HD-ready flat-screen TVs, portable media players – especially portable multimedia players – laptops and navigation systems, which still have a substantial potential market despite the growth in their sales since 2003. Also, mobile phones remain the largest sector in the market, in both volume and value terms, as they acquire new functionalities and reach all-time-high penetration rates.

Outlook

Although growth predictions for the Spanish economy remain the highest in the EU, the high interest rates, the increasing burden of mortgage payments on Spaniards’ incomes and the crisis in the real estate sector may adversely affect families’ private consumption in the medium term. If the economy deteriorates, the market for consumer electronics may be affected negatively, since its performance is intimately related to leisure consumption and, as such, is especially sensitive to variations in disposable income.

The most mature sectors and those with longer replacement cycles – such as digital cameras and camcorders – are the most threatened by a drop in consumer expenditure. In these circumstances, manufacturers are expected to respond with general price reductions, in a struggle to gain market share, rather than by offering innovative products with added value.

Current impact

The sectors displaying the strongest sales growth have been flat-screen TVs, portable multimedia players and navigation systems. Flat-screen TVs and navigation systems have also witnessed the most remarkable decreases of average unit prices. This partly account for the strong growth in their sales, as they have become mass market products.

Because of the increase in competition and the general decline in prices, which reflects in particular the entry of Asian brands, the more traditional manufacturers are launching new products that incorporate a high degree of innovation and are targeted at more mature consumers, who are more concerned with quality and functionality than with price. As a result, the market for consumer electronics as a whole has grown in value terms, since sectors such as portable multimedia players, laptops, photo printers and navigation systems are experiencing a greater level of innovation, while the most mature sectors – such as portable mp3 players, digital cameras and camcorders – are seeing their value sales decrease – even though their volume sales are increasing – due to increasing competition and the decline in prices.

Future impact

The market for consumer electronics will be characterised in general by the stabilisation around a more moderate long-term growth path, reflecting the maturity of most of the sectors under analysis. The concentration of most sectors on a star product – which has contributed to the homogenisation of markets and the abandoning of obsolete technologies – seems to be one of the key features expected for the period 2007–2012. This trend is demonstrated by the almost complete absence of points of sale offering portable cassette players, analogue cameras and camcorders, or VCRs.

In most of the sectors analysed, sales of products that are already present – such as HD-ready TVs, HD DVD players, portable multimedia players and navigation systems – will be consolidated, leading to decreases in the prices of these products, which are currently the most expensive on the market.

In general, customers will demand products of higher quality that offer a superior consumer experience, and this is expected to lead to increased concentration among the main manufacturers in those sectors with the highest added value and with less innovation.

Consumer Lifestyles

Two trends in Spaniards’ lifestyles are having a great influence on the market for consumer electronics. They are spending more of their leisure time at home, and there is a general move away from the major cities to single-family houses and housing developments on their outskirts.

As Spaniards are spending more of their leisure time at home, this is driving up expenditure on consumer electronics products, such as flat-screen TVs, home cinema systems and DVD players. Films, which are mostly downloaded via the Internet, account for a considerable amount of Spaniards’ leisure time in the home.

At the same time, Spaniards are increasingly opting to live in single-family houses in housing developments on the outskirts of the major cities. The average time Spaniards spend commuting to and from work (whether by public transport or by private car) has increased considerably, and so has the popularity of portable media players and in-car media players.

Outlook

Both trends are expected to continue. This partly reflects the economic situation, which may be contributing to the restructuring of private consumption patterns and to an increase in the numbers of people looking to live outside the major cities, where the cost of housing is more moderate.

According to the Spanish Institute of Statistics, Spaniards spend an average of two-and-a-half hours a day watching TV and videos, so that this is their main leisure activity in terms of time allocated. This figure has increased considerably in the last few years. Likewise, Spaniards nowadays spend nearly one hour and 20 minutes per day commuting to and from work, nearly 15 minutes more than they spent, on average, just six years ago. In these periods, listening to music and watching videos are replacing more traditional pastimes such as reading books and magazines.

Current impact

The patterns of growth in the most dynamic sectors within the market for consumer electronics relate to two main trends. On the one hand, flat-screen TVs and DVD players have displayed strong growth, since Spaniards are spending more of their leisure time at home, and more specifically watching movies and TV. On the other, portable multimedia players and in-car DVD players have also experienced a similar degree of dynamism in overall terms, with portable multimedia players and navigation systems displaying the strongest growth; sales of both were clearly boosted by the increase in time spent commuting to and from work.

Spaniards are seeking alternatives to the traditional habit of reading during their daily trips to and from work by public transport, and sales of portable mp3 players, and lately of portable multimedia players, have registered the greatest increases. For these commuters, the size of the device is of key importance, and these products have been able to offer what the portable CD player was unable to offer in the past: a small size and a product that is easy to carry around. A similar pattern has emerged for Spaniards travelling to work in their private cars. Since they spend more time in the car, they also demand more sophisticated in-car audio systems, with better sound quality and features.

For this reason, purchasers of portable media players have emphasised the need for smaller devices, and placed less importance on their storage capacity. As with in-car media players, the success of the mp3 format has forced manufacturers to offer products that incorporate connectivity with portable mp3 players.

Future impact

These changes in lifestyle are expected to continue during 2007–2012, with consequent benefits for the consumer electronics market as they become part of Spaniards’ daily lives. Indeed, despite the slow-down in the real estate market, sales of single-family houses are growing faster than those of any other type of building.

The sectors that are more directly related to home leisure and portable audio/video for daily use are those with the highest predicted growth over the forecast period. Although household penetration rates are already high in sectors such as flat-screen TVs, portable media players and navigation systems, their market potential is still considerable, especially bearing in mind their replacement cycles and new patterns of consumption, in which design and functionality are of great importance and represent two key decision factors at the time of purchase of new products.

In accordance with the new consumption habits, manufacturers are opting to offer products of higher quality, with design and size as the main consideration in the case of portable media players. The development of Digital Terrestrial Television (DTT), which broadcasts in HD quality, and the increase in the number of TV stations, together with the development of the Internet as a platform for audiovisual leisure products, all reaffirm the idea that Spaniards will be spending more of their leisure time at home and therefore spending more of their income on products related to TV and video.

the Importance and Impact of Innovation and New Product Development

Brand image remains a determining factor for Spaniards at the time of purchase one product or another. Price is becoming less of a critical decision factor than it has been until now, and consumers are now beginning the decision-making process with different criteria. A quality product no longer suffices; it is necessary to offer something else.

All sectors considered in this study are affected by this trend. Companies obviously make a special effort for those products that cause consumers to spend a larger amount of money, in terms of both R&D and marketing campaigns. High-definition TVs, mobile phones and laptops are the star products, for which the degree of imagination displayed by the major companies is assuming an ever-greater importance.

Outlook

The general trend seems clear. Brands in this sector are working hard so as not to miss any part of an attractive market whose sales are increasing year on year. Consumers’ tendency to differentiate between brands will increase in the long term, although the major brands offer very similar products. There is little difference between TVs, DVD players or mp3 players, so good marketing and product differentiation campaigns come into play.

Those companies that do not put into play aggressive strategies to attract clients through their strong images as dynamic and capable brands will quickly disappear from the market or be absorbed by larger companies.

Current impact

The influence of a strong marketing campaign is fundamental in the market for consumer electronics at present, and this will certainly remain the case in the future. Most decisions taken by consumers are influenced by these campaigns and, as such, the bulk of a company’s turnover may depend on a good advertisement on TV or a good campaign on the Internet.

The sectors in which the major companies are focusing their efforts are those of general consumption, where differences among competitors are minimal. The usual strategy is to try to associate these products with a lifestyle, as is already the case with fashion or branded watches.

A new strategy is to focus on a consumer segment that remains reluctant to enter this market – women. According to Mr Marzano, Philips’s design director, women decide on 70% of household expenditure. More lively colours and rounder shapes are the main weapons used to attract female consumers. Design and imagination are enhanced to improve sales in those cases where a high level of quality is assumed in all products.

The wish to buy a product with an attractive design may make the consumer willing to pay a somewhat higher price and take home a more exclusive product; this provides one way in which companies can differentiate their goods from low-cost Asian products. For this reason, many consumer electronics manufacturers have hired designers to improve the appearance of their products. LG has engaged Prada to design a line of mobile phones, while Samsung has hired the services of the Danish furniture designer Fritz Hansen to improve its product line. Computer companies have opted for Ferrari and BMW as a means of differentiating their products.

To date, consumers have responded quite well to this strategy. A few years ago it would not have worked, but the increase of purchasing power caused by the stable economic growth of the last few years is making consumers more concerned to differentiate between models with features of this type, which make them feel they have exclusive products.

Future impact

Over the forecast period the scenario will remain similar, but with a greater degree of inventiveness. Less obvious strategies are already being put into play, such as the use of recycled materials to manufacture technology, thus avoiding damage to the environment. This is another way of attracting the attention of a public that is sensitive to these issues and of offering an image of a company that is concerned to preserve the environment.

Solid marketing campaigns in traditional channels such as the press, and of course the Internet, will also be exploited by marketing directors. In 2006, online advertising in Spain amounted €310 million, up by 91.4% from the level of the previous year. Currently, six of the top ten spenders on digital advertising are companies in technology- related sectors, being either Internet operators (ya.com), mobile phone operators (Vodafone, Telefónica and Orange) and manufacturers of electronic products (Sony and Nokia, ranking ninth and tenth respectively).

For the moment, these ideas have been put into practice for mass market products, mainly mobile phones and digital products, but these resources will also be used for other devices once their markets mature. This is just the beginning.

Demographics: the New Spanish Consumers

Demography is changing in Spain. The population pyramid is reversing, as in most countries of Western Europe. There are fewer births in Spain, with an average of 1.4 children per woman. Children born to immigrant couples already account for more than 15% of the total. At the other end of the scale, the high longevity of the Spanish – at 81 years for women and 77 for men on average – is exceeded only by that of the Japanese.

Consumer typology is also changing gradually. New target groups of consumers are appearing, such as immigrants, retired people or young people that are in work but cannot afford to buy a house, and therefore have more disposable income to spend on leisure.

Outlook

The long-term development of the population’s age structure is not easy to predict and will be affected by the performance of the economy and by government policies. If the population pyramid reassumes its natural shape, the profile of consumers will change and so will the market for consumer electronics products. The ability of consumers to buy a home, working conditions and immigration will all be elements to be borne in mind.

In the medium term, this trend will remain stable and manufacturers will focus part of their market strategy on price and product segmentation so as to reach to all consumer groups. The economic capacity of each group will determine which products it consumes, since a retired person or a recent immigrant obviously cannot spend as much as a middle-aged professional. Similarly, the purchasing channel chosen by consumers is not the same in all cases.

Current impact

Young people (aged 20–35) have for a few years been a very important group of consumers. All companies take them into account when they release their new products. Because of the great difficulties involved in purchasing a home in Spain, 76% of young people aged 20–24 still live at home with their parents. Because they cannot buy a home and have to pay no rent, they have high purchasing power. Mobile phones, computer-related products and media players are all favoured by this group. As a rule, consumers in this group choose mid-range products so that they can spend some of their money on other things, but price is not the most decisive factor at the time of purchase. The distribution channels preferred by this group are shopping centres and specialist shops in their own neighbourhoods, in 35% and 55% of cases respectively.

Immigrants, whose numbers are ever increasing in Spain, already represent more than 8.5% of the total population (somewhere around 4 million) and behave rather differently from the indigenous population in terms of their consumption behaviour.

Immigrants’ average purchasing power is lower than that of Spaniards, with 31% of immigrants buying their consumer electronics products on credit. Price is a vital decision factor for this group, and immigrants often purchase some of their goods in pawn shops. Products favoured by immigrants are TVs, mobile phones and DVD players, and their preferred channels are hypermarkets and department stores.

Companies are offering mid- and low-range products to these new population segments at affordable prices, and also providing them with finance. The terms of payment should not represent an obstacle to purchase of the chosen product, and this is a case in which the market’s dynamism is being tested. The major players in the market must observe the new population segments and launch products that meet the needs of all segments of the public.

Future impact

The future of the market is not easy to predict. If the economy weakens, the market for consumer electronics will also be affected, and those consumer groups that are not yet mature will be the first to register the change. These factors have a direct impact, since many of these products are still regarded as luxury and leisure goods, rather than necessities.

The level of market diversification is expected to remain the same during 2008–2012 as it is today. Those products that led the increase in sales in 2007 will continue to do so, but may perhaps begin to show symptoms of exhaustion. In the longer term, a gradual decline is expected in the price of housing, which will lead to increased expenditure on first-phase equipment, and increased sales of such products as TVs, computers and hi-fi systems.

The main distribution channels will be department stores, discounters, mixed retailers and, increasingly, the Internet, which offers flexibility and other facilities at the time of purchase. All these market movements have the positive effect of warning the market players not to treat all consumers as belonging to just one big group.

Changes in Distribution

Distribution channels are beginning to change in Spain, as purchasing power and purchasing habits change together with changes in the population. Horizontal sales platforms, such as hypermarkets that offer variety of products, no longer enjoy the leadership to which they have become accustomed in recent years, despite having the greatest number of points of sale. Their sales are falling, in contrast with those of vertical platforms and hypermarkets, whose importance is increasing.

The new shop concept, with longer opening hours, a broader range of products, greater specialisation, lower prices, better-known brands, bigger floor areas and better payment facilities are still the main characteristics of the new market in consumer electronics products.

Outlook

The prediction for the medium and long term is that the market will continue to evolve. Vertical platforms and hypermarkets will gradually continue to gain in importance, in contrast with horizontal platforms, unless the latter find a means of adapting to the needs of the new market. Concentration is also expected to increase, especially in those regions with stronger competition among platforms, such as Catalonia, Madrid and the Basque Country.

Current impact

The new movements in terms of distribution channels have pushed the major players to adjust their strategies to adapt to the market. Horizontal platforms have therefore concentrated until now on conforming to the current Spanish distribution pattern, which currently involves seven purchasing groups. These big groups are based on the idea of defining and enhancing their operating synergies in the companies’ strategic processes, such as purchasing operations, logistics, marketing, and information and training systems.

Hypermarkets and department stores have taken advantage of the sector’s promising performance. On the one hand, they can launch their own lines, taking advantage of the entry of new players and of the segmentation of prices in the sector. Carrefour, Eroski and El Corte Inglés are the three main department stores in terms of number of establishments.

Vertical platforms – outlets that offer one particular type of product such as technology products, food products or clothes – are experiencing the strongest growth, with the number of outlets rising from 409 stores in 2006 to 460 in 2007, an increase of more than 13%. Specialisation, the location of stores (in many cases on the outskirts of the major cities, with large surface areas) and tight prices are their main weapons. In Spain, the main chains of this type are Media Markt, Miró and Bang & Olufsen.

This new division in the channels of distribution essentially benefit consumers, who can choose among different options. Young people prefer vertical platforms, while immigrants opt for department stores and those consumers with more resources favour horizontal platforms and independent distributors. These factors account for the current distribution of sales channels.

Future impact

The main horizontal platforms must redirect their sales concept, image and marketing campaigns as soon as possible if they are to avoid continuing to lose market share. They cater mainly to older consumers, for whom consumer electronics products are not a major interest, although they do have greater purchasing power. It is essential for these platforms to get closer to younger customers with greater enthusiasm for this type of product if they are to recover the privileged position they have lost in the last year.

Vertical platforms are expected to continue to grow following their current pattern, which has yielded great results so far. The six major companies in this sector plan to open several new stores during 2008–2012. Their strategy remains firm: low prices, prestigious brands and specialist attention.

The major hypermarkets and department stores are opting to promote the sales of their own product lines at lower prices, with the backing of the established major brands. Their idea is to improve their portfolio in the next four years, opening some new centres. Independent retailers cannot follow the pace set by the major groups and play their own game. Attentive and close service, a broadening portfolio and an increasing level of dynamism are the pillars of this group.