Editorial:Disties at war

Editorial:Disties at war

With India and Pakistan at loggerheads over the disputed Kashmir province on the subcontinent, it is perhaps a little trivial to refer to the current market conditions in the IT channel as a "war".

But in the end that is the only way to describe what is currently taking place and, as in any conflict, there are going to be casualties. The fate of former Ingram Micro senior staffers Roger Bushell and Tanya Koens is the most recent example of how diminished gross profit margins enforce infrastructure rationalisation.

Bushell described the current environment as "a battle to the death" between major players and that under such circumstances it was only a matter of time before heads rolled at Ingram Micro.

In last week's issue, Ingram Micro MD Steve Rust labelled the HP channel as "unsustainable". Australia, he surmised, with a population of around 20 million just isn't big enough to support all those players wholesaling the same products.

Just as Rust insists HP's channel is unsustainable with six or seven players, perhaps so too is the situation where there is more than one broad-based distributor supporting the inhabitants of the world's largest island. Much like the Colosseum of ancient Rome, it could be that once this fierce battle is fought, only one big gladiator will survive.

If you were to tally up all the revenues of the Australian IT distribution channel, would the sum be large enough to nourish more than one broad-based distributor working on wafer-thin margins? Some would suggest it is not.

By its very nature, the broad-based distribution business model requires sufficiently large volumes to allow the slim margins available to cover large overheads. Volumes have to increase inversely proportional to how much the gross margins are shrinking. Only then can gross profit be maintained or indeed grown as is demanded to keep shareholders happy.

It is generally accepted that Tech Pac dropped the ball last year with a series of ill-fated moves that alienated customers at a rate greater than it could reel in costs. Ingram Micro took up a lot of the slack.

This year, Kerry Baillie insists things are far better as a result of the many changes and cost cutting implemented in the first quarter. "Business is going great," he said last week. "We have had two record months, we are making money and I am very happy."

Baillie insisted the decision to "meet the market on price" has seen sales increase. "Many old customers have come back to us and our cost structure is more appropriate for the new market conditions."

Rust admits margins are down. Last year's build-up of business was accompanied by increased overheads and now the razor has come out as Tech Pac takes back some lost ground.

There is no doubt there is a new attitude at Tech Pacific. While working hard to build market share back up in the low-margin volume space, the distributor is also targeting what Baillie describes as "value business". The appointment of John Walters, formerly of LAN Systems, is sure to assist this play, which will complement the high cash flow of the broad-based operation. Ingram Micro also moved into this part of the channel last year with its acquisition of Simms International's storage business.

The main combatants in this price war are both armed to the teeth with cashed-up parent companies and are battling for the hearts of the channel. Only time will tell whether mortal wounds get inflicted.

Much like the two proud nations facing off in Kashmir, perhaps some sanity needs to be restored to avoid a catastrophe.

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