Wednesday, January 21, 2009

"Trading Down" Will Continue

One of my major themes for 2009 is the consumer trading down to more inexpensive goods and services out of necessity. One industry where this is most clear is the mobile phone industry. A phone itself is pretty much mandatory spending now, but the type of phone is purely discretionary. I continue to think Nokia will benefit most from this, as they are the worldwide leader in phone sales. They also have the most sales in cheaper phones. A lot of talk is about smart phones, and Apple and RIMM are doing well here, but those sales are slowing too.

The mobile-phone market is moving away from mid-tier handsets as the global economic slump prompts some consumers to trade down to cheaper devices and operators feed demand for high-end phones by promoting them with subsidies.

The global handset industry is forecast to shrink for the first time in eight years, with Citigroup Inc. analysts predicting a 13 percent plunge as consumers are more hesitant to replace their phones. Espoo, Finland-based Nokia cut its industry outlook twice in less than a month in the fourth quarter and said in December the market will slide 5 percent or more this year.

“This year will reshape the industry quite a bit,” said Mikko Ervasti, an analyst at Evli Bank in Helsinki.

The polarization of the market may squeeze those in the middle. Sony Ericsson Mobile Communications Ltd., Motorola Inc. and LG Electronics Inc. have struggled to come up with hit phones or stumbled in their attempts to widen their product offerings.

Nokia, which ships 15 units per second, may boost its global market share to more than 40 percent in 2009, said Geoff Blaber, an analyst at CCS Insight in London. Nokia’s third-quarter market share was 38 percent, more than its next three rivals combined.

“In this economic environment, we expect some, not all, consumers to trade down to less expensive devices,” Nokia Chief Executive Office Olli-Pekka Kallasvuo said on a call last month. “We are best positioned to take this tradedown opportunity.”

Nokia also has an advantage in its network of suppliers and distribution. Nokia was ranked first globally in sourcing, logistics and distribution last year, ahead of companies like Procter & Gamble Co. and Toyota Motor Corp., according to ARM Research. Nokia's size allows it to demand lower prices for the 120 billion parts it buys from suppliers.

“Nokia is set to be a winner on a relative basis, but they will be hurt too,” said Martti Larjo an analyst at Nordea Equity Research in Helsinki. “Apple and RIM will also be winners in relative terms as the smartphone market will still continue to grow, albeit at a lower pace.”

So although these companies may report sales declines during this environment, they are gaining in the long run. I like Nokia, Apple, and RIMM, and I'd buy any of these stocks on further market or earnings-related weakness.

Article via Bloomberg.

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