Fighting chances

Fighting chances

Rest in peace Sealcorp, CHA, Siltek, Chips. The past 18 months have seen some high-profile players exit the distribution game. Add to that the aborted sale of Tech Pacific and layoffs across the board and you could be forgiven for thinking the distribution channel is in dire straits.

But scroll through the headlines and you will find an equally impressive number of success stories - a wealth of new deals, new opportunities and expansions. Those who have streamlined their business practices to see out the current IT downturn have the long haul in mind, and are likely to emerge the more successful as a result.

"The past 18 months have been an interesting period where we have seen a few mergers and companies folding or even withdrawing their Australian operations entirely," says Michael Ly, operations manager with Hallmark Computer International. "This has actually benefited Hallmark in certain respects as it reinforces our position as a long-term, stable distributor in an increasingly volatile marketplace."

While the September 11 attacks may have seemed like the nail in the coffin for IT, there are still opportunities out there.

"I think some markets are doing better than others, such as storage and handhelds," says Dicker Data managing director Fiona Dicker. "Retail seems to be hurting the most and some corporate resellers are still doing well."

Alstom IT general manager Greg Newham says that sales in security and productivity software have been strong as companies look to operate more efficiently. "There is a certain amount of the fear factor with security at the moment," he says. "It is not only what has happened in the past couple of months that has spurred the market - there is a realisation that companies are vulnerable to attack. With businesses looking to operate more efficiently, they are using management software as a business tool to ensure productivity."

Newham says Alstom has performed well this year, despite the downturn. "Business has grown strongly this year, but the market has not necessarily grown at the rate people projected, so it is a matter of concentrating on the products that are profitable."

Daisytek has also done well over the past year. With a 40 per cent growth rate, it looks to be bucking the trend. From its IT consumables heritage, the company plans to offer the full breadth of office supplies to resellers from February next year. Daisytek's offerings have also expanded to include a range of low-end hardware products such as storage drives, digital cameras and inkjet printers.

"I guess we are doing different things than other people," says Daisytek managing director Paul Connelly. "We operate in a slightly different end of the marketplace."

With distributors facing increasing pressure from vendors looking to bolster that all-important bottom line at the expense of margin, profitability is becoming increasingly difficult.

It always helps if you have a personal interest in the company. "When a distributor is Australian-owned, the people who own the company run it," says Mike Muscat, managing director of BBF. "With overseas companies, if the business does badly, at the end of the day the guys running it are only employees. They're not going to shoulder the financial responsibility."

Many distributors have looked to cut costs by shedding staff. Others have preferred to maximise their efficiencies in their partnerships with resellers. "Resellers and distributors need to share information and work closely in the market to be successful," says Peter Masters, national marketing manager at Express Data.

Hallmark also believes in the importance of loyalty between the distributor and the reseller. "Relationships between suppliers and their customers are becoming just that - more of a long-term partnership than a series of one-off sales," says Hallmark purchasing manager Perman Lam.

Masters believes genuine partnerships with resellers and superior service levels will be the key to Express Data's future success. "When times are tough, you have to get absolutely everything right," he says.

To date, Express Data is one of the few high-profile distributors to avoid staff cuts. But the distributor is far from smug that it has so far escaped the cull. "It is an interesting reflection of the current market. We are being very careful and cautious and we realise nobody's immune from market forces," Masters says, adding there were no current plans to lay off staff. "We are not critical [of those companies that have cut staff] because at the moment no-one can predict the market for more than a few weeks in advance."

Dicker Data has also avoided staff retrenchments, by reducing working hours. "We have looked at all aspects of our business to reduce operating costs to make us more economical," says Fiona Dicker. Dicker Data has also developed an internal outbound telemarketing team to proactively ask for business.

The loyalty of resellers becomes particularly important in tough times. Equally important is loyalty from vendor partners. However, the struggle to make targets means more and more vendors are appointing more distributors, a strategy that is largely viewed as short-sighted by the channel.

"In some quarters, vendors are able to remain true to our strong partnerships and work with us," says Alstom's Newham. "For others, their projections aren't being met and desperate times call for desperate measures. The problem with that is distributors that have been loyal to a vendor stop seeing the value in doing so.

"Distributors begin seeing price wars on some products and there is a tendency to take the focus off those products - it's not a great strategy for vendors."

BBF has found success lies in keeping its product line constant. But the distributor has in the past taken the hard line with vendors that have unrealistic expectations of the market. In March, BBF parted ways with long-term supplier Gigabyte when the latter appointed additional distributors. BBF has also shifted the focus of its arrangement with hard drive vendor Maxtor, following that company's merger with Quantum.

"The Quantum distributors play a different game: operating on low margins with an increased reliance on rebates," BBF's Muscat says. "As a wholly owned Australian company, we can't take that gamble."

"Putting on extra suppliers can be counterproductive," says Daisytek's Connelly, sighting the recent move by Hewlett-Packard to add another consumables distributor to its list. "Vendors have to be cognisant that all parties have to make money out of what they are doing to maintain the health of the channel."

Express Data's Masters says he has seen the practice, although not among the vendors he deals with. "If anything, the trend is to go to less distribution," he says. "There needs to be a lot of value in a relationship for distributors to invest in taking on a vendor. You must gear up to thoroughly understand the technology - and that expertise gets diluted the more distributors are appointed. It's not smart business; it's a very short-term solution. If a vendor appoints a distributor to get a stocking order they are just delaying the inevitable and making the problem worse. The clock is ticking."

There is less business out there, but the market should still be big enough for the companies with solid business models, he says.

"It may be a bit Darwinian, but I believe we will be left with a strong market when things pick up."

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