Yellow Leader

Aggressive pricing and unorthodox marketing policies have made Euroset an unquestionable leader in the sales of mobile phones. But the company does not want to stop at that: it has moved into new business areas and has emerged as the leader of all Russian retail.

By Yelena Rytsareva

What fetches money to Euroset

The largest mobile phones retailers

Aggressive behavior in the market and the charismatic CEO have been the evident birthmarks of Euroset business. Numerous stories have been published in the press, including Expert magazine, about Yevgeniy Chichvarkin, the chairman of the board of Euroset group of companies. But in our today’s analysis we have tried to place focus on the company itself, bringing it off the charismatic personality of Mr. Chichvarkin. The company has become more than the leader of domestic mobile phone sales. In 2005, Euroset sported the highest sales growth in the whole retail sector of Russia, increasing revenue by 124.3% in one year (See Table).

The Prices Are Lower

The first two interrelated drivers of that unprecedented growth are expansion of its retail network and the growth in the number of mobile users, who use a shop next-door to pay for the mobile service. A Euroset outlet has increasingly become available as the nearest pay station. The yellow Euroset color has cast a shadow over the whole of Russia, and is increasingly present in CIS. The total count of Euroset outlets has come to 4400.

Pricing is the main tool Euroset employs to fight competition, strictly following the discounter format. The new slogan “The Prices Are Lower” which has replaced the controversial “Prices Are Sooo Darn Good!” holds true. The aggressive pricing policy often leads to excruciating price wars in the regions, sometimes provoking violent attacks on the yellow pavilions. But more often than not, Euroset wins.

The recipe allowed the company to overtake competition in mobile phone sales. Not only that. According to different estimates, retail mobile phone market grew by 20 to 25% in 2005. Compare that to Euroset’s increase in revenue by almost 125%. Discounter format and unorthodox marketing policies alone could not have produced such impressive results.

Feel the Spirit of the Market

According to Renaissance-Capital analysts, Euroset controls about 30% of the mobile phone retail market, now in a position to dictate its terms on the device vendors and telecoms. In the past, Euroset arm-twisted Samsung and Vympelcom, now it is exerting pressure on Nokia. The company has clout enough to influence the prices on the market. Take another discounter in food retail: Pyaterochka, even after the merger with another retail giant Perekrestok will not control even 2% of the market.

But scale is not all. Euroset is very responsive to market challenges. Initially, the company only focused on the sale of mobile phones and mobile operator hook-up charges. With the growth in subscriptions, the company started to sell payment cards and accept payments for mobile operator services. As the market started to be saturated, Euroset expanded its product range by adding other devices: mp3-players, digital phones, and accessories. The selection of models and vendors, though, was in line with The Prices Are Lower slogan.

The digital equipment market suffered a severe supply crisis in August last year. The Russian law enforcement agencies staged a crackdown on grey and black import schemes, closing the so-called “customs brokers” and one-day dealers. It was these smaller companies rather than large wholesalers that accounted for the lion’s share of goods clearance at the customs. Suddenly, the established import channels stopped working, and the market began emptying on a major scale. In that situation, Euroset and other major wholesalers went to the authorities and promised that they would import the goods themselves and pay all customs duties. That move did not immediately saturate the market. In the fourth quarter of 2005, the sales dropped 15% against the same period of 2004. Besides, the devices which passed proper clearance procedures cost more, and the market showed a high degree of price elasticity. To compensate for the loss, Euroset quickly arranged credit programs for the phones. In company analysis, that did stimulate demand for more expensive models, and by the end of 2005 about 20% of the phones in Euroset were bought on credit.

In 2006, the company explored new business opportunities. It has already started selling tickets to entertainment events. It also plans to accept repayments of consumer loans and create a virtual operator.

Risks Growing

The more muscle Euroset has, the more risks in its business. The first one is management risk. Already, the company cannot fully manage such explosive growth: there are problems with availability of goods in stores, and sales forces do not always comply with the instructions of the top management. The aggressive policy has impaired relationships with mobile operators, who also have definite influence.

The company has planned an IPO for next year, but many things have to be done before that. The complex ownership structure created before 2004 prevents the company from preparing normal financial reports. The company plans to start a very unstable virtual operator business next year. One can count successful companies in that business worldwide by the fingers of one hand. Another thing that would scare off investors is low profit margins, much less than those of retail food chains, discounters included. According to Renaissance-Capital, Euroset’s EBITDA in 2005 was 5.1%, while food discounter Pyaterochka had 12.2%. But so far, Euroset has successfully managed the challenges of the market, and it is likely that it would be able to manage today’s problems as well.