Interview: The smell of an oily rag

Interview: The smell of an oily rag

Dicker Data is a bit of an enigma in the Australian channel these days, as it is perhaps the last surviving, locally owned distributor of tier-one brands. The company has evolved from a family business that has been running since World War II and has a business philosophy of meeting the competition on price and low overheads. Gerard Norsa spoke to managing director Fiona Dicker about how the company can survive in the now-commoditised IT industry.

Can you pinpoint the time when Dicker Data became a serious distribution business?That was when we began partnering with Toshiba in 1991. Prior to that, all the money we made distributing was being pumped into R&D for the ultimate dream, which was to manufacture PCs and export them to the world.

How has the IT distribution business changed since those days?The available margin is where it has changed most. In those days it was much lower volume with much higher margin. We were on 100 per cent margins in the early days and it's not that long ago, about three or four years ago, when we were working on about 15 per cent margin as opposed to the 1 or 2 per cent of today. It is now a much more mature commodity market.

So how has Dicker Data fared since 1991?The company has always been profitable and growing.

What is the secret to Dicker Data's continuing success?I think the fundamental thing is having a low cost structure. It doesn't really matter what your sales are, if your costs are lower, you can make a profit. That has always been what we have done. We have never had any leases. We own all our facilities so if things get really bad we can just batten down the hatches and ride it out by just reducing other overheads. If you look at our cost structure - the ratio of employees to sales - we are heaps lower than any of our competitors. We have built our business on low cost structures along with always meeting the competition on price, strong product knowledge and customer service.

There is this aura about Dicker Data that it runs on the smell of an oily rag and that you are in a great position to survive for that reason. Is that indeed the truth?Yes it's true. Even in the face of fierce competition, we can always bring the margin down a little lower to meet the market and still make a little money. We can weather out any price war like the one that is going on at the moment and we're in fact in a better position than anyone else because we do have such a low cost model. We don't have any debt or owe anybody anything. We are cash positive with money in the bank and that has always been our philosophy. We always do everything ourselves and don't have consultants or outsource anything. It is all done in-house.

What about control of the debtors' accounts. How important is that?It is very important. We have a very good COD ratio. Over half of our business is on a COD basis and the other half is accounts. Not too many distributors are in that situation.

So you don't offer the lines of credit that so many distributors offer up as the value they add to hardware supply?Certainly Tech Pacific and Ingram Micro have always offered much more credit than us, but therefore they have also had a lot more exposure and much higher losses from bad debts than we have. Our debtors management is very good but that means we are turning away heaps in potential sales because we don't want to carry the credit risk. We could be a lot bigger than we are but we have chosen not to take on those credit risks and we walk away from the business when we have any doubt. Keep in mind that when you are working on a margin of 1 or 2 per cent, if you lose $10,000 on a bad debt, you have to sell an extra $1 million to make it back up. That is a lot of business, particularly in the current environment. Often it's not worth taking the risk.

To stay competitive and to keep the sales going do you really have to meet the market or do you have loyal customers who will buy off you even if you are a little more expensive?You have to meet the competition. It is nice to have loyal customers and we really love them all but you can't expect them to pay more, even if they are prepared to. Our philosophy is very much that we must meet the competition.

Does that mean that the last six months have been particularly tough?Very tough. It has been really tough probably since about July last year when Ingram Micro started the current price war. Tech Pacific has in effect responded to that since January of this year. They entered the war and fought back with a vengeance. They had no choice but to respond as they were losing a lot of market share. I think we were sort of caught in the crossfire but the strange thing is that we can probably survive in that environment better than both of them and still be profitable.

So are you going to make money this financial year?We are still going to make money, just not at the same level as the year before.

So have shrinking margins been the only challenge of the last two years?Not at all. There have been heaps. Another big one is freight. Our competitors have really competitive flat rates on consignment. Both the big guys have at different stages even offered free freight for a period of time. That's really difficult to deal with because in the end, it is really just giving away money. That goes against all our business philosophies. Freight is becoming very expensive.

Why is freight so expensive now?We are finding there is a much higher incidence of break-ins to delivery vans. We have five instances this year where third-party couriers' vehicles were broken into, including one where 14 notebooks were stolen. It is a generic problem in the industry, which other disties have as well.

Who wears the cost of the notebooks?}Well that is the problem. It should be the courier company but they are finding it difficult to cover the exposure. We have cargo insurance but the premiums are doubling and that all has to be calculated into your costs of freight, which doesn't seem to affect what the other guys are doing and which makes it hard for us to compete. I don't know how the other distributors can sustain subsidising those costs and others. Another example is credit cards. It costs you a couple of per cent for credit card transactions so we have a separate price for them, whereas someone like Tech Pacific doesn't seem to worry about that and they just wear it.

So is it a grab for market share or bad business practice?It is a different mindset we compete against where people just see it as not their business, even though the sale must be at a loss. They are losing money. They have parent companies overseas that have very deep pockets that are sustaining them and allowing them to continue. How do you compete against that?

Is it healthy for vendors to have a price war such as we are seeing?

I don't think it is. At the end of the day, they have to be comfortable distributors can pay their bills and I know they are pretty concerned about that at the moment. The number of large organisations that have gone out of business in recent times - Laptop Land and Senteq, for example - means the vendors are pretty nervous. Perhaps more so it is the credit insurance underwriters who are nervous and they are chopping back the credit limits and taking a look at our exposure. Continuing viability of distributors and resellers is a serious challenge for the whole industry.

What about customer demand? By all reports it has fallen right off as well. Has that been a challenge for Dicker Data?Yes it has. It has really been tough. The market has been flat. We will have a flat year this year for the first time ever. This introduces the serious issue of inventory management. When you are working on just 1 or 2 per cent and you buy the wrong stock, any discount to clear it means you make no money at all. If you are talking about key success factors that is another area where you have to be spot on. We have always focused very clearly on having the right inventory and it is even more critical with low margins.

Is Dicker Data just a box shifter?In pre-sales we add value. Dicker Data's sales team is a clear differentiator. A lot of them have been with us for more than five years. In fact even the newer recruits have been here for more than two. We have a very stable sales team that really know the products we sell back to front. However, when it comes to after-sales we are really just box movers.

Is that sort of distribution still a relevant business model in the IT industry?Absolutely. I think the model of the future is more about fulfilment. I think you are going to see a lot more of the vendors looking to their distributors to handle logistics and fulfilment. The five-star resellers for both Toshiba and Compaq don't have the resources or desire to hold stock and handle fulfilment. Nor do the vendors. From both sides, they will increasingly look to organisations such as us to handle that.

Yes, but are resellers and vendors prepared to pay for that?At the moment they are not. Unfortunately, I don't see the margins ever going up so you just have to have a model that is able to achieve it at low cost.

How do you see Dicker Data differentiating itself in the post-merger HP channel?I can sincerely say we are unique in the Compaq systems and service a unique market. We want to be dealing with the one and two-systems size orders. That is not traditionally where Ingram and TP want to be. They have struggled to cope with that type of order, and there are plenty of them out there. We are signing up 50 new resellers in that space every month. So we are unique in that space and I believe we can offer very good turnover to the vendor servicing it.

So do you think there are too many distributors in the HP channel or is each servicing its own little sphere of influence?Probably more the latter. If you look at Ingram Micro and Tech Pacific, they each want to be servicing the big accounts. Obviously we also like dealing with those guys but our focus is in the ones and twos and we are very strong in NSW where we believe we have 46 per cent market share. Digiland is probably a similar model to ourselves but with a strong Victorian focus and the same with IT Wholesale in Queensland.

There has always been a perception that Dicker Data is for sale. Is that in fact the case?It is always for sale at the right price but I haven't actively been out pursuing buyers. We have had quite a few enquiries over the last five years or so. We did have a pretty serious one last year where there was a great price offered but we decided not to sell the business. To be honest with you, we were probably stupid not to do it because a very short time after that the HP/Compaq announcement was made and there was a chance that we were going to be left with nothing. Fortunately that has all panned out well for us and with all the Compaq product going forward, it looks like we are going to be around for quite a while yet.

Do you see a day in the future when one of the big international distributors buys Dicker Data for the Compaq and Toshiba sales you generate?I could see that being a very smart move for a number of players in the market. If you look at someone like Ingram Micro, they would almost be a similar size to Tech Pacific if they were to buy us. Or someone like Synnex would find perfect synergies with our business and would straight away become the number two player in the country behind Tech Pacific. Even Digiland is about to be listed so they might be cashed up. It would be a good thing for all of them.

What are the good and bad things that you currently see resellers doing out in the marketplace?I think the margin squeeze is the main issue. I know it is an old cliché but if you are just reliant on selling hardware then it is not sustainable. You have to get into adding value. You need to have some sort of services or expertise on software or a niche. There has to be something else there. Hardware should just be an extra to your core business.

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