This has always been a dynamic industry where companies going out of business are replaced by new entrants eager to take their place. It has happened at all levels of the supply chain ever since the channel took shape. While it remains true today, power is starting to become concentrated as a few of the larger and more established players tighten their grip on the market. That trend is everywhere you look.
The most obvious example at the moment lies in the mass market retail channel. Retravision (NSW) is the latest buying group to feel the squeeze as times get tough (see page 1 of ARN November 8, 2006) following Betta Stores Limited (BSL) announcing similar difficulties last month. They are not alone.
When margins fall, economies of scale become one of the most important survival tools; those who don't have that luxury can quickly get into difficulty. BSL recognised this and created its own problems by trying to build the scale needed to take on bigger market rivals.
Smaller IT resellers with a history of selling to consumers and small business are experiencing similar difficulties. Mass merchants are eating their consumer business as big integrators extend down into the SMB market. The concentration of market power into the hands of a few must be worrying for distributors.
Mass merchants in the retail market and large integrators on the business side both tend to have direct relationships with the vendors. For an industry built largely on economies of scale such as distribution, an eroding customer base is just about the biggest nightmare around. The mood is still one of optimism at the moment, with Synnex boss, Kee Ong, confident there will still be a place for distribution when the market has found its new balance. Whether it will support today's number of distributors is an entirely different question and the answer is almost certainly no.
In other news this week, Kaz was a surprising name at the top of a Federal Government supply list produced by analysts at Intermedium (see page 1). A lot of people were very skeptical when Telstra agreed to pay $333 million for Kaz two-and-a-half years ago but not too many of them are laughing now. The integrator's founder, Peter Kazacos, said at the time of the deal that it had hit a glass ceiling. He predicted the financial backing Telstra could provide would enable it to compete on a more level playing field with big multinationals such as IBM and EDS.
It is true that Kaz today looks nothing like the business Kazacos sold, but his assessment appears to have been a fair one. The Telstra subsidiary landed the biggest Federal Government contract of the year when it was given the $181 million Defence gig. A privately owned local integrator would not have even made it into the boardroom to discuss a contract of that size.
The biggest absentee at the top of the list must surely be CSC. Hands up who would have guessed two years ago that this multinational services giant couldn't make it into the top five Federal Government suppliers. No, me neither.