Start-up distributors battle against the odds

Start-up distributors battle against the odds

New distribution houses face a tough long-term challenge, industry representatives claim

The global financial crisis and mature market might be sending some distributors out of business, but it’s not discouraging others from starting up new companies.

Despite the well-documented fall of veterans such as Infotronics, Phoenix Toner, Protac and TodayTech in recent months, a host of start-ups including Observatory Crest, firstservis and latest entrant, Vadis Systems, are seeing expanding opportunities to deliver a range of technology offerings.

Setting up a distributor business in the current economic climate is a brave move, according to itX general manager, Greg Newham, however, he admitted start-ups fulfilled a valuable role in the distribution landscape. With the larger distributors focused on more prominent vendors, smaller niche players would have a harder time finding business partners without boutique or newer distribution businesses, he claimed.

“Niche products can make good margins, so a distributor won’t need to sell the same volumes as a larger player,” Newham said. But niche distributors still needed to be wary of the same pitfalls the established players labour under. The biggest of these is cash flow.

“As a distributor, you have to be really careful with how credit is dolled out – it is very easy to go broke in this industry,” he said.

While echoing Newham’s respect for the courage of start-up founders, Express Data general manager of marketing and operations, Peter Masters, was less certain of their ability to find a place in the market. The low-margin nature of the industry would make it difficult to develop the scope required to make an impact, he claimed.

“It’s more competitive out there than ever,” Masters said. “It’s already saturated across the board, from niche through to broad-based, and there’s already a lot of consolidation in this mature market.

“There’s room if you’re different and better, but from what I’ve seen of some of the newer start-ups, they’ll find it tough if they’re pitching themselves as they say they are.”

Vadis, a Sydney-based distributor and the brain-child of co-founders, Gerry Tucker and Sepp Stepanian, has been developing its arsenal for the past six months and has six staff on-board and eight vendors including ThinkGrid, PineApp, BoxSentry, SlickAccess and Quipa. Vadis’ business goal is to be a full service distributor business.

“When we looked at the marketplace, the model we put together for the distribution side of things is something that’s not being effectively addressed in the marketplace today,” Tucker said.

The startup experienced no real difficulties in finding financial backers, once the business model had been put together. But Tucker agreed building legitimacy in a mature market would be critical for the new organisation’s success going forward.

“Our stated objective is to be a trusted partner of vendors, resellers and users, and it’s really about being very clear about what we’re doing and how we’re going to do that – we need to demonstrate that it’s not just a slogan, it’s reality,” he said.

Observatory Crest, which launched in Australia in January, leveraged its New Zealand counterpart and its relationship with networking vendor, F5, to make its first thrust into the market. Additional partnerships with Axway and Arista have helped expand its footing. Director, Martin Christmas, said launching in the depths of an economic crisis was “creative timing”, but finding credit was a challenge to be worked around.

“When we talked to the more traditional financial institutions, they looked at us incredulously and asked why on earth we’d want to be doing that now,” he said. “After looking at the way the industry operated, we formed a partnership with MoneyTech for finance, and have been working closely with Hugh Evans [managing director] and his team there.”

With hindsight, Christmas said building a distribution business in this climate was a good idea.

“If we’ve got a business model that works in what, at the time, was considered to be a global financial crisis, and if we can make it successful, then it will stand itself in good stead afterwards,” he said.

MoneyTech’s Evans said a startup’s success ultimately depended on the technology it took on-board and the contacts the founders had within the industry. Storage, PCs or other broad-based technologies would be unwise choices for the start-up, but an emerging technology that a new distributor could add value to would give a solid leg into the market, he said.

The financier has a number of start-ups and young distributors on its books including Observatory Crest and niche notebook supplier, Tegatech, which launched three years ago. Being able to guarantee payments made MoneyTech a reliable option when finance is tight, Evans claimed, and there was no reason a start-up distributor couldn’t be successful in the market if they proved reliable.

“All the distributors that have disappeared from the market have left holes to fill, and as new technology comes through, people will find new opportunities,” he said.

While targeting niche or emerging technologies may be the safest route to market for a start-up distributor, there are still no guarantees. Dealing mostly in licences, cloud-based distributor, firstservis, doesn’t have the same warehouse or logistics overheads that an Ingram Micro does, firstservis managing director, Derek Merdith, pointed out.

Despite the low cost of entry, he admitted the distributor was not in the position it wanted to be in when it launched a year ago and blamed the downturn for slowing up business opportunity.

“But we’re seeing a lot more activity now, which is great,” Merdith said.

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