Company 29's decision to get out of the distribution game has once again raised doubts about the ability of smaller regional distributors to compete against the big boys.
Company 29's distribution demise follows the ignominious exit of Queensland distributor Q*Soft which was bought out by Sealcorp after a run of hard times.
According to Company 29 director Alan Tainton, the decision to get out now was based on the fact that margins are becoming increasingly tight and the market at the moment is conducive to big distributors such as Tech Pacific. "The return as a distributor in the Compaq market is not good and we can get much better elsewhere without the risk," explains Tainton.
Fight for the future
He perceives the current Compaq channel rationalisation as the "fight for market share in the future by one or two distributors. We didn't want to fight." He suggested Company 29's $25 million annual revenue did not give them a realistic chance of survival. Tainton said the company will voluntarily close down "debt free" when their lease expires in four months. Staff have already been laid off and the business is operating in "closed-down mode", according to Tainton.
Other regional and smaller distributors agree the game is tough.
According to Michael Miller, service manager of Western Australian distributor Computer Wholesale, a significant proportion of competitive distributors have "seen international companies coming into Australia and are taking the easy way out of an industry with low margins", by selling out in droves. Miller understands this temptation as "the buying power of distributors like Tech Pacific is significantly greater" than that of a tier-two distributor. Munsoor Khan, sales director of NSW distributor Digital Networks Australia (DNA) claims "a distributor might be trading well but in the end they are not putting the money in the bank. The skinny margins mean that you can't afford to make any mistakes."
And according to Mike Muscat, managing director of Victorian distributor BBF, that isn't the only contentious issue. "The thing that disappoints me most in the market and will stop us from growing into a substantial company is the monopoly of some of the bigger distributors. If a customer wants to buy a CPU it has to be Intel, and Tech Pacific has exclusive rights so we are forced to buy from them and compete with them at the same time."
Despite the obvious hardship the regional distributor is experiencing in an era of mega distributors, those willing to diversify product and services will remain an integral part of the industry, according to Muscat.
To counteract the volume-driven model of operation Ingram engages in, regional distributors must, to quote a well-worn aphorism, "get niched or get out", according to David Hancock, a consultant at IT research group Inform. "There is still a role to play for smaller regional distributors by providing some niche product that the big guys aren't. Don't compete on prices and margin, win by offering services over and above what the big guys do."
Khan believes that "regional resellers tend to get neglected and are more likely to stick with distributors that can provide them with good services".
$50 million the magic number
Regional distributors turning over less than $50 million annually face very short life expectancies, according to former Q*Soft managing director Barry Amor.
Their best survival strategy is to actively seek out a larger organisation and allow themselves to be acquired, he says.
Amore claims the dynamics of the market are being driven by the way all the major vendors are encouraging multinational distributors to toss their hats in the Australian ring.
Given the low margins that such tier-one distributors can afford, "the only way you can play against that kind of competition is by becoming a part of a multinational organisation yourself", says Amor.
He believes every regional distributor in Australia is grooming itself to follow that strategy.