Distributors will increasingly provide value-add through the Internet, there will be further consolidation and greater competition as well as the very real possibility that distributors may be forced to go direct to end-user customers.
These were the major trends foreshadowed by Australia's major distributors when asked to predict distribution trends and patterns that will emerge in the new millennium.
While the Australian channel is still to see much upheaval and change, distributors confidently predicted that the new millennium will present a myriad of golden opportunities.
"We think the future is very bright," said Tech Pacific's Anne Mossman. "The IT market is undergoing the greatest change and chaos it ever has.
"The Internet is changing everything and when there is that level of chaos in the market there are always going to be huge opportunities for the channel to focus on the core competency of adding value to customers and assisting them to change their businesses. As far as we're concerned the outlook for distributors is very positive."
However, some might question the optimism displayed by Australia's big distributors. International giants CHS and Ingram Micro have already demonstrated deteriorating financial performance as market forces continue to put downward pressure on product margins.
"We all read about the challenges that the world's biggest distributors are facing concerning profitability and we certainly see that as an ongoing challenge that everyone in the channel should be worried about," said Express Data's general manager, Ross Cochrane.
In Australia, the pressures to grow and be profitable are being further intensified by the influx of the big international distributors. Already, Ingram Micro and CHS have marked their line in the sand by acquiring Australian companies and that is just the beginning, distributors predicted.
"All the major global distributors will want to come here. Australia is a lucrative market for them and there is only going to be increased pressure and added competition among distributors," said Ingram Micro's Australian managing director, Michael Shea.
"Hopefully that will manifest itself in the form of a better service delivered to resellers."
In the face of these pressures, distributors predicted a number of consequences:
A polarisation between niche and volume playersGreater efficiencies brought about by the use of the Internet to conduct business transactionsDistributors moving to provide more services to justify their margins and increase their piece of the pieThe possibility that a mixed model might eventuate with distributors being forced to service end users as well as resellers.
"There has to be more mergers," said Prion managing director Michael Bosnar. "This is a very cash-intensive business and you need to have cash to sustain it."
"There will certainly be further rationalisation," agreed James Robbins, marketing manager of CHA, which was acquired this year by CHS. "We're cer- tainly looking to make further acquisitions and will look very closely at any good opportunities that arise along the way.
"It's a very good way of growing your business and I think there will certainly be a lot more happening in terms of distributors being bought and sold."
The question is: who will be acquired and who will be left standing?
"As far as we're concerned, it is very much a case of get big, get niche or get out," said Robbins. "At the end of the day, there is really only going to be room for the global distributors and niche players. We've gone for the option of getting big."
Even Australian distributors admitted that the market was hotting up.
"We certainly see the market polarising," said Tech Pac's Mossman.
"The barrier to entry is rising and if you don't get big value quickly you need to get very niche and add value.
"It's becoming much more competitive, particu-larly for smaller privately owned Australian-based wholesalers and distributors. Certainly the purchasing power of the global distributors is a lot greater," said Emily Ballantyne, Edge Technology's general manager.
"So I think you're going to see a lot of smaller wholesalers disappear or be forced to go direct," she said.
Ballantyne said that while Edge was Australian it had also established international operations in the US, Canada, Europe, the Middle East and Asia, giving it similar purchasing power to the globals.
Michael Bosnar of Prion - also an Australian-owned company - predicted it would be smaller regional distributors that would feel the pressure first.
"The state-based, privately owned regional distributors are going to be under a lot of pressure. It really is a case of increased growth but with decreased margins which will have huge impacts on distributors' cash flow. I don't know how they're going to sustain their businesses over the next 18 months with all the mergers and the global players coming in."
However, some Australian distributors feel they are up for the challenge.
"We've seen a lot of consolidation already over the last 12 months, but we're confident that as long as we're one of the top three distributors in the products we distribute we're going to be strong," said Fiona Dicker, general manager of Dicker Data.
"My attitude is we'll just do our best and see what happens."
Dicker said she was quite content to specialise in her market niche with the narrow range of products Dicker Data distributes.
"We're certainly not going out chasing new products. We don't want to have a huge range, we want to specialise."
Most distributors agreed that it would be those Australian companies that successfully owned their market niche that would be successful in staking out their own claim in the distribution arena of the future.
However, some were more aggressive in their stance. Hugh Evans, managing director of part Australian-owned but South African-backed distributor Agate, said he actually felt it would be the international giants that would feel the pinch in this country first.
"The overseas guys come in and sell below cost to try and buy market share but they can't sustain that forever," Evans said.
"I think that's a really dumb mentality. It's not clever to sell below cost and prove that you can do it longer than anyone else," he said.
"At some point down the track, someone is going to say we're not making any money from our investment and they'll pack up and go home.
"I draw an analogy to the gold rush where everyone staked their claim but in the end there were only a few big players left to clean up the mess left by everyone else.
"It's going to be the local players who are making money that will be left to clean up the mess here."
Indeed, the case of Merisel, which entered and departed the Australian market, lends historical credence to Evan's theory.
While downward pressure on margins is putting the heat on many in the distribution arena, Internet technologies have the potential to put the profit back into the distributor's operation because the cost of doing business online is so much less than the traditional way.
Not surprisingly, then, every single distributor interviewed for this supplement, was talking up an aggressive Web strategy.
Within 12 months resellers will almost certainly be able to do all their transactions with distributors online.
They will be able to get technical support and even training electronically, track availability and shipping status at any point along the supply chain, and quickly generate reports on back orders and account histories.
A number of distributors are talking about being able to link their accounting system to resellers' accounting systems to ensure that the whole process is automated without the need to enter transactions twice.
What the Internet is enabling distributors to do is put the value back into distribution, while also keeping their own costs down. "In the old world, when quality went up, prices went up. The challenge in the new world is to keep quality going up while prices continue to decline," said Express Data's Cochrane. "You have to innovate faster than you commoditise, which means you have to find new ways of doing business that provide a better level of service more effectively."
As a consequence of this and also the squeeze on margins, all of a sudden value-added distribution is back in vogue.
Distributors are desperately looking to both justify the value proposition they bring to the market and to grow new revenues - and they are branching into services to do so.
Again, every distributor interviewed for this feature was talking up configuration and build-to-order services as well as capabilities like direct shipping.
Many of the distributors are going further than that, however, venturing into services areas like network design and implementation as well as software integration that have so far been the domain of resellers and integrators.
"Pure distribution margins are decreasing so we're looking at providing additional revenue stream though providing more services," said Edge's Ballantyne.
What Edge is aiming to do is have resellers who do not have the technical capabilities or skills base in-house to use Edge's skills to provide more complete solutions to their customers. In effect, the reseller onsells the distributor's services capabilities.
LAN Systems has been the champion of this "channel services" model in Australia.
"I think distribution has to be much more services-oriented," said LAN Systems' chief marketing officer, Nick Verykios.
"If you look at what has happened in the consumer, electronic white goods and finance markets, it's all gone the way of channel services to the reseller. It's up to us to break bulk not just in products, but also in knowledge, skills and the various services that resellers provide.
"That is where the industry is going to go. The reseller wants somebody to go into bat for them even if they don't have the necessary skills or expertise."
Distributors are also moving to making it easier for resellers to set up Web sites by having their systems backend the reseller's Web shop front. Already, Tech Pacific and Express Data provide this capability and it's almost certain that other vendors will do the same in the next 12 months.
Whatever the case, it's clear that distributors want a greater piece of the pie. Inevitably, somewhere along the line this is going to see distributors clash heads with resellers and integrators. Arguably, it is happening already.
"Everything we're seeing is a move by first-tier manufacturers to talk about end-user intimacy - building up their own end-user databases and telling us that we should be doing the same," said Laurie Carmichael, managing director of Digiland.
"The issue is that Dell has been so successful with its model in terms of profitability and inventory that it is putting the heat on the traditional channel and forcing tier-one vendors to find more cost-effective ways of getting their products to market.
"So the tier-one vendors are telling us that it's in our interests to have our own end-user databases."
Prion's Bosnar believes that it is a case of everyone in the channel, including distributors, laying down on the table exactly what their value proposition is.
"Where do you fit in the scheme of things? If your cost model is wrong, and the way you go to market is not right or too expensive, then you're going to have to face the consequences," he said.
"HP, IBM and Compaq are not seeing the same return on investment as Dell is, so they have to reconsider whether the channel model they have at the moment suits their future.
"We're going to be guided by the market and we'll see a lot happen in the next 12 to 18 months but already in the US we're seeing hybrid models, in which distributors sell to both end users and resellers, becoming increasingly popular.
"You only have to look at Ingram Micro which has started buying up end-user dealers in other parts of the world," Bosnar said.
Sealcorp's managing director, Chris Spring, also believes that especially in enterprise accounts vendors will not be willing to hand over margin to both a distributor and reseller/integrator.
"Vendors will decide they don't want two levels of margins, they don't want two levels of deliveries, and they don't want two chances to make mistakes.
"In large enterprise sites, one of them has to go - the reseller or the distributor - because essentially they're providing the same function."
This is especially the case as distributors push into services and integration, he said.
"It's a very real possibility that the distributor is going to be cut out of enterprise deals or that distributors are going to decide they have to go direct."