Why IBM shunned retail channel

Why IBM shunned retail channel

IBM Australia has terminated contracts with around 14 of its major retail partners in a bid to exit the mass merchant channel in favour of corporate and tech-savvy customers.

"The retail market is a high-volume, low-margin business. It is a business that is erratic, price-sensitive and is well served by low-cost operators, both brand and white-box. In contrast, the commercial market is more predictable," said Nerida Caesar, the newly appointed general manager of IBM Australia' personal computing division.

"We're going to go back and play on our strengths and refocus on our core business markets," she said.

IBM has ended relationships with Dick Smith Electronics, David Jones, Myer, Retravision, Bing Lee and Office Works, among others. The terminations follow the parting of ways between Big Blue and retail giant Harvey Norman in October.

The difficulty of dealing with major retailers, which can negotiate low buy prices by committing to volume while at the same time demanding large rebates and high levels of account support, was alleged to be a factor in IBM's decision. However, an IBM spokesperson refused to confirm or deny this was the case.

From January 2002, IBM will build on its 135 business partners, as well as ramp up its direct sales over the Web.

According to Hakan Alac, senior analyst with Inform, IBM was only selling 13 per cent of its PC sales through retailers, compared to 68 per cent through corporate VARs in October. Although this fluctuates in accordance with the PC market, the figure is down from around 30 per cent of sales through retailers in April.

The move has surprised Alac, who wondered why many vendors are trying to extract as much revenue from their end-user sales at the expense of the reach that mass-merchant channels can provide. "I don't know why they're trying to do everything by themselves, quite honestly," he said.

By comparison, the clone market is doing quite well, Alac said, with consumers opting for consumables such as hard drives and more memory, rather than complete systems.

"More people are comfortable buying their hardware through the Internet and catalogues. People want more control," Alac said.

Logan Ringland, senior analyst at IDC, said the move follows what IBM has done in the US for some time. He acknowledged that the move was a return to IBM's core business, which is the corporate space.

Ringland also applauded the timing of IBM's decision. By pulling out of retail in the lead-up to Christmas, IBM can sell the remaining stock it has in the retail channel before the market enters the January/February slow period. "It's a soft market at the moment. Now is the time to do it."

However, Logan said IBM stands to lose out on the SME sector, which traditionally buys through retail outlets. IDC figures state the SME market (one to 100 employees) is valued at $931 million this year. Up until this point, IBM had been strong in targeting this sector, according to Kourosh Ghassemi, IDC's senior analyst for small business.

Santo Pappalardo, managing director of IT Wholesale, said IBM's decision is potentially good for the channel in that there will still be product suitable for the consumer market. It's a case of wait and see, said Pappalardo, with IBM yet to explain to its distributor partners how they will plug into IBM's overall PC strategy. The only question hanging over the decision is what IBM will do with its direct strategy next year, Pappalardo said.

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