German market for consumer electronics at a crossroads – New scenario study by Roland Berger and HHL – Leipzig Graduate School of Management

• The German market for consumer electronics has survived the crisis in good shape: The German market grew by almost EUR 27 billion in 2011
• Sales distribution is changing fast: Traditional retailers are being rolled over by big electronics discounters and Internet suppliers
• Consumers are using the Internet to get informed; they expect more new gadgets and want better service
• Four scenarios show the possible developments in Germany going forward

Germany's market for consumer electronics has solid footing and even managed to grow during the crisis. While in Europe as a whole industry sales shrank by 7% in 2010, the German market grew over this period by 6%. However, competition is heating up. Sinking prices and new competitors from Asia are leading to market consolidation. Suppliers who want to prevail in this market will not only have to compete on price but also come up with innovative and user-friendly products. Individuality, simple user guidance, service and design are becoming more and more important, according to a study entitled "The Market for Consumer Electronics in Germany" published by Roland Berger Strategy Consultants and HHL – Leipzig Graduate School of Management (Handelshochschule Leipzig).

"Consumers today are more closely networked and can therefore compare different offers faster," explains Max Falckenberg, Partner at Roland Berger Strategy Consultants. "What's more, brands are no longer as relevant when people buy new electronic products; instead, user friendliness, additional applications and energy consumption are playing an increasingly important role."

The German market is growing

The German market for consumer electronics has continued to grow in recent years. In 2010 the industry's sales in Germany were up 6% at 25.8 billion euros and just shy of 27 billion euros in 2011.

However, with more and more manufacturers entering the market, companies are finding it difficult to hold on to stable market shares in this highly fragmented competitive environment. "Not even the big market players have been able to maintain their leading positions unchallenged in the last few years and have been subject to serious fluctuations," says Prof. Torsten Wulf, Academic Director at HHL. "Compared to other sectors, the consumer electronics industry has a high percentage of multinational market players and a small number of national companies."

Changing distribution channels

The Internet is becoming more important for consumer electronics and is developing into an increasingly vital sales channel. The percentage of products sold online rose from 14% in 2006 to 21% in 2010 and is estimated to have grown by another 5 percentage points in 2011. "The distinct trend toward online trading will continue in the future and gain more and more momentum on the German market," says Roland Berger Partner Oliver Merkel. "This online trend and the growth of electronics discounters will increasingly displace traditional retailers in Germany."

Today, German consumers are already buying most of their consumer electronics products from electronics discounters. Big chains are the leaders here, with 65% of total industry sales. Pure online retailers like Amazon and eBay have also been active for years, but are not yet being supplied directly by the major manufacturers. "This is currently inhibiting the growth of online selling," explains HHL Professor Dr. Torsten Wulf. "Should this change, the importance of the Internet as a distribution channel for consumer electronics would grow even more quickly."

User-friendly and affordable products – what the customers want

German consumers are using the Internet more and more to find out what the market has to offer, and place a lot of value on user friendliness when buying new products. "For many manufacturers of consumer electronics, providing understandable and accurate instructions to guide the customer through the installation and use of their equipment is still a real hurdle," says Max Falckenberg. "Yet this will largely decide the success or failure of individual products in the coming years."

Price remains an important criterion in the purchase decision. After all, the many sources of information on the Internet allow users to quickly compare the prices of similar offers. The third most important purchasing criterion is the amount of energy products consume. This ranks far ahead of attractive design or a well-known brand.

Uncertain future – Four scenarios for the German market

However, the development of the consumer electronics market in Germany hinges on two key factors: structural change of the industry and the economic framework. Based on these two factors, the experts at Roland Berger and HHL have developed four scenarios.

1. "Retail 2.0"
   In this scenario only a few Asian manufacturers dominate the mass market. They use flagship stores to strengthen their negotiating power and thereby put considerable pressure on traditional retail. Consumers spend significant money on quality electronic products. Target-group-oriented retail platforms have solidified the manufacturers' market dominance at the expense of traditional and online retailers.
2. "Fire sale"
   This case involves fierce price competition among both retailers and manufacturers. The economic framework has deteriorated and retail is dominated by discounters and low-price online retailers. German manufacturers have disappeared because customers are only interested in price. Retailers and manufacturers have failed to find a way to stop the downward spiral of prices. An end to the consolidation waves is not in sight.
3. "Service is cool"
   Manufacturers and retailers who stand out from the rest dominate the market. OEMs are unable to break the market power of traditional retailers. On the contrary, consolidation among manufacturers has led to greater negotiating power of retailers. Customers spend a lot on consumer electronics and demand top service and advice. Specialized retailers and manufacturers are able to satisfy these needs.
4. "App store"
   Here the sale of content drives the entire market for consumer electronics. Customers increasingly use comparison platforms to glean information; this is putting considerable pressure on both traditional retail and big-name brands. Consumer electronics OEMs become interchangeable and the brand is no longer relevant.

These four scenarios show the uncertainties confronting the consumer electronics industry over the next few years. However, "Retail 2.0" and "Service is cool" are highly probable for Germany because it is expected that the German market will experience neutral to positive development.

"Growth rates will become more volatile, consumer behavior more unpredictable and the demands placed on market players more complex," summarizes Max Falckenberg, Partner at Roland Berger. "This means both OEMs and retailers need flexible strategic planning to optimally prepare for the future."