Sitting just to the east of the Adelaide CBD, conveniently located next door to the Kent Town Hotel, is South Australian regional distributor Hi Tech Distribution. Take a stroll across the Western fringe of the CBD, and you will find a very similar business in BMS Technology, again flanked by a friendly local pub. BMS's Anthony Szabo and Hi Tech's Ian Vagg both took time out this week to talk with Brett Winterford about taking on the distribution giants, while trying not to step on each other's toes.
A history in the region
Both Ian Vagg, director of Hi Tech Distribution, and Anthony Szabo, general manager of BMS Technology, have an extensive history in IT distribution. Prior to forming the Hi Tech business, Vagg had established the South Australian office of Imagineering, a software distributor that through various collapses, reincarnations and spin-offs became distribution giant Tech Pacific.
It was in this position that Vagg was to learn a valuable lesson about distribution. He found that large national distributors found it difficult to come to terms with the very different markets that exist across Australia's sparse population, justifying the need for specialist distributors that are regionally based. "The hardest thing about that [Imagineering] job was adjusting policies set in the eastern states to the environment here in Adelaide," he says. "Most of the suppliers worked on numbers that didn't work for South Australia."
It was in witnessing this conflict first-hand that Vagg and a partner decided to make a go of becoming a regional distributor based in Adelaide.
BMS, on the other hand, began as an IT retailer. The directors of today's BMS Technology established a retail business called BBS Micro Supplies in late 1986, specialising in the education market. The success of this business led to several exclusive vendor relationships that saw the business split into a distribution arm and a reseller arm. The company purchased the building next door to the retail operation and set up the wholesale business.
In the early 1990s, the directors decided not to continue trying to run both wholesale and retail businesses. "Aside from the conflict of interest, it soon became apparent that the distribution arm was where the growth was, so the retail business was closed down," says Szabo.
Hi Tech began as a software distributor, because of Vagg's experience with Imagineering. Since then, software has shrunk to make up around 20 per cent of Hi Tech's business. Most of the business comes from the distribution of printers (Epson, Lexmark and the recent addition of Fuji Xerox) and notebook/desktop computers (Acer and NEC). Hi Tech remains the South Australian distributor for MYOB accounting software and it sources Microsoft, Symantec and other major software brands through agreements with national distributors.
BMS Technology also does most of its business through printers, carrying five brands: Canon, Epson, Fuji Xerox, Hewlett-Packard and Kyocera. Like Hi Tech, a considerable proportion of business comes through the distribution of notebook computers (Toshiba), while another large portion of the business is through the distribution of networking products from the likes of Netgear and Clipsal.
Being regional distributors, BMS and Hi Tech operate in a "wholesale supermarket" fashion, whereby resellers tend to order their goods over the phone or on the Web, and drop by the premises of the distributor to pick them up and save on freight costs. Vagg says 40 per cent of Hi Tech's orders are taken in such a "self-service" fashion. "Most of our customers are small resellers - more like consultants - which recommend products for customers, order from us and then pick up the goods on the way to installation," he says.
BMS Technology has 700 resellers on its books, 500 of which make orders with the distributor every month. And while these customers range from tier-ones to resellers to retailers, Szabo says that, like Hi Tech, around 35 per cent of the orders are picked up at BMS's premises. "That's just the nature of being in Adelaide," he says. "Everything is 15 minutes away."
Adding further value
BMS, and more recently Hi Tech, have discovered that remaining relevant as a distributor has as much to do with providing additional services than merely having a good range of products at competitive prices.
The old premises of BBS Micro Suppliers, the retail business that established BMS Technology, has now been converted into a service centre for several of BMS's product lines. Three of the five printer vendors BMS distributes have since accredited BMS as a service centre for their products (Canon, Epson and Kyocera).
In recent months, the services work at Hi Tech Distribution has picked up to such an extent that the company has had to renovate its warehouse to cope with the demand. "Services and warranty work has become the growth side of the business," Vagg says.
Hi Tech has now begun employing several network engineers to complete installation work on behalf of Hi Tech reseller clients that require technical assistance on some implementations. But being a distributor and having contact with the customers of its reseller clients has proved a challenge for Hi Tech. In order to convince resellers that Hi Tech is not interested in cutting them out of the game, the company has installed a computer-telephony system that enables it to know which reseller a customer belongs to when they ring the service centre. Hi Tech staff then answer the phone as though they were an employee of the reseller in order to give the appearance to the customer that the entire operation is seamless and uncomplicated.
"Setting up this services business was a challenge, because when you deal with end users there is always the risk it could be perceived you are compromising relationships," Vagg says. "But our resellers know we don't sell direct to anyone - not corporate, not government, not anyone. Instead, what the services business allows us to do is help smaller resellers make larger sales that otherwise could only be done by much larger competitors."
Taking on the nationals
Szabo said local stock and service are the key differentiators for regional distributors when competing with the likes of Tech Pacific and Ingram Micro in the channel. "Local stock is the key for us," he says. "That's why Hi Tech and ourselves are the successful distributors in South Australia. You can't do a lot of the things we can if you're a national distributor. Your customers certainly can't drop by and pick the stuff up."
Szabo also believes that regional distributors can be more efficient than large national distributors. "You can order from us just before the close of business and because we're not far away you can have the product that afternoon," he says.
Both Vagg and Szabo see the recent aggressive moves by national distributors as a sign that smaller operations continue to make grounds in the region. Szabo cites the pricing and terms currently being offered by Tech Pacific as an example of this aggression, but is confident the price wars will not have too much of a negative impact on regional distributors, which are generally approached for reasons other than price.
"What Tech Pacific is offering is pretty attractive and we often encourage resellers to take it up," Szabo says. "But if they buy through Tech Pac and they have a problem, they have to ship that product back to Sydney. So most of our clients prefer to deal locally and get offered service rather than be another one of [a national distributor's] 5,000 other resellers buying the same products.
"The prices that Tech Pacific is offering can't be sustained," he adds.
While BMS and Hi Tech offer similar products and services and approach the market by similar means, both Vagg and Szabo have managed to gain a healthy respect for each other's business and rarely attempt to out-compete each other on price. Both point out that their product range rarely overlaps, with printers being the exception. "Most of the time, it is pushing one brand against the other," Vagg says. "So while BMS will be pushing Toshiba, we'll be focusing on Acer."
Vagg says regional distributors continue to maintain their relevance through the relationships they hold with their customers. He enjoys being in a business that is based on selling into established relationships.
"Our sales guys have a strong affinity with their customers," he says. "When a customer gets a good run, our staff are just as excited. It's what distribution should be all about - if you can help them with their business, it's very rewarding."