Despite ongoing uncertainty in the distribution market and the trauma of the Compaq/Digital merger, Tech Pacific has not only managed to remain Australia's largest distributor, it has made 1998 a landmark year in its history. ARN's Naomi Jackson quizzed the company's managing director, David Cullen, on Tech Pacific's success so far, and its expectations for the future.
ARN: What have been the highlights and lowlights of 1998 for Tech Pacific?
Cullen: The overall picture for us is it's been quite a positive year. We've grown 26 per cent year on year which, when you consider the revenue we're starting to operate at and the industry overall growing at just 17 per cent, is quite reasonable.
One of the big highlights for us has been the opening of our new distribution centre, which opened two weeks ago.
It's the biggest in the southern hemisphere from an IT perspective and now gives us so much opportunity in the marketplace.
In terms of orders, we'll be able to process up to 10,000 a day instead of the 2500 we currently process, and we now have 28,000 square metres of space as compared to about 10,000 square metres.
We also have more state-of-the-art systems so that next year we will be able to extend our cut-off times for taking orders and still deliver the next day.
We will also have the capability to be open 24 hours a day if the business calls for it.
The development of our Internet site has also been key this year. It's taken costs out of everyone's business - customers, vendors and ourselves. We introduced order entry about eight weeks ago and we already have 400 resellers utilising that.
By the end of the second quarter next year, we hope to have 25 customers with an electronic order entry system business-to-business link because that's where the real gains will come from.
The lowlight of 1998 has been the Compaq/Digital merger. It's hard to tell whether we've come out better or worse off because of all the issues Compaq still has with its systems.
What I will say is it's been a little disappointing that the new Compaq model hasn't come to fruition yet. From that perspective, we're looking forward to 1999.
Who or what do you blame for Compaq's delay?
I think it's a combination of a couple of things - it's the merger of two very large businesses into one and the implementation of a new SAP system at Compaq. They've tried to do a lot at once which is always difficult.
When we put our warehouse distribution centre together, we separated the two big issues: one was the physical movement of stock which we've done first; the second was putting our new systems in place during the first quarter next year.
Are you confident you'll be one of the distributors Compaq chooses as part of its new channel model?
I think so. Everything in our model suggests we will be. The only question mark I have is whether Compaq will be a profitable business for us.
We will not enter into a distribution agreement with anyone for the sake of a brand image.
The pressure should be on Compaq to come out with a clear channel model. That doesn't exist at the moment.
Does the fact you were not a Compaq distributor before the merger with Digital indicate it was not a profitable business?
There was a significant amount of history behind it. There were some relationship issues in the past.
Where are those relationships at now?
We've now got a much better relationship, although it's still early days. We're still getting used to each other and, as I said, I still don't understand their channel model and until I do, it's hard to comment.
Have you been given any indication as to how Compaq's distribution model will look?
My understanding is that they're driving towards five distributors consisting of three national and two niche distributors, and 50 resellers. That's what I keep hearing.
You've been quoted as saying you're prepared to operate on zero margins until the new model is finalised. Is that true?
I haven't said that. What I have said is I do not expect a lot of Compaq activity this year. The activity that does take place will be restricted because of the profitability side of it.
With 13 or 14 distributors in the marketplace, the net equation says there's not going to be a lot of revenue activity.
I'd like to encourage Compaq to get their channel model right. If they're having issues with their systems, it can only be simplified by having a clear channel model and having a reduced number of distributors and resellers. It makes sense.
What is the ideal number of distributors the Australian market in general can support?
It's different by vendor, but probably two national distributors and a number of niche distributors.
When you start going over two national distributors for smaller vendors and over three for major vendors it becomes an issue because the market is not big enough.
There'll be some consolidation among distributors and even resellers in some cases because there is over-distribution.
Is it getting to the stage with any products where the margins are getting so low it's not worthwhile having them on the books?
In certain deals, that does exist. I'm not in the business to pick up market share. I'm in the business to be profitable and that's the difference between us and other distributors.
We walk away from business at 1 and 2 per cent.
Our aim is to reduce our cost structure so we can be more efficient but we're also looking to get into areas of the business that offer greater margins like configuration.
We have a profit model and that model exists because we want to reinvest in the business medium to long-term.
I think distributors who aren't niche or volume will find it very difficult to survive the next couple of years because business will be tough in 1999.
If you're not adding value or taking some costs out of your customer space, then you won't be here.
Is there the potential for Tech Pacific to introduce system assembly?
We've been considering it for 12 months but we're still struggling with it because the volume equation is not there as it is in the US.
No one in the world from a distribution point of view has yet made any money out of configuration. The question we have to keep asking is whether we need to be in configuration to protect the balance of business longer term.
On a broader scale, what are some of the key initiatives we can expect from Tech Pacific in 1999?
It will be a lot about consolidation for us: getting the efficiencies out of our new distribution centre; broadening our drop-ship program; completing as much as possible the closure on the Internet in terms of order entry and electronic commerce.
By this time next year, we expect a vast number of our resellers to have a business-to-business solution in place.
Then, in alignment with our drop-ship program - where product is shipped directly to the end user with the reseller's packing slip on it - they will essentially have an end-to-end seamless solution with paperwork not being touched by human intervention.
Depending on what happens with the business and how great our customers' needs are, we might also look to trade 24 hours a day.
Is there the potential for Tech Pacific to be sold off or floated in the near future?
We won't be floating and we have just been through budget presentations with our parent company Hagemeyer where they have reinforced their commitment to our business.
We now represent in excess of 20 per cent of their $12 billion business.
Is it true that when Hagemeyer bought Tech Pacific it was part of the contract that they were not allowed to sell you for three years?
So potentially, if the deal was right, they could sell you off?
They've announced clearly to us that they want to stay in the business long term, but at the end of the day, it's the usual story that if the price is right, they'll consider it.
Given recent moves by vendors to go more direct, what do you think is their ideal model for the future and how is that change likely to affect their relationships with the channel?
There's some reaction, and it's obviously mainly in the US at this stage, to the Dell model. What I find interesting is that 18 months ago, Dell still had 10 per cent of its business going through resellers and now they've reportedly got 18 per cent.
It could even be that as Compaq moves away from the channel, Dell decides to move back into the channel.
The Dell model to a certain extent has been successful because they are the only ones out there with a direct model, but as soon as there are two or three players [they'll lose a lot of that advantage].
It's interesting that a lot of vendors have looked at the Australian marketplace and realised we're not the US. We don't have 270 million people and from a scale and volume point of view, it's not always possible to replicate what's happened in the US.
So I'm pretty confident the business model won't change that significantly. The channel has made the vendors successful so why would they turn their backs on that?