ARN: How do you believe Australian resellers perceive Tech Pacific?Cullen: The general view of Tech Pacific is that it is the broadest IT distributor, supplying a range of IT&T products which surpass other distributors in terms of product offerings.
They [Australian resellers] see us as offering competitive market prices. What we need to do is make sure we get sufficient returns for our investments. We're not always going to have the lowest price in the market place, but we will always carry a competitive price. Historically, most resellers would see us as having made the most productive investments in our business, whether it's warehouses, systems or Web technology.
Tech Pacific holds the spot as Australia's largest IT distributor with sales of $1.2 billion expected this year. How did you reach this size?Good management. Obviously the business goes back a lot of years and we've always looked at it from a longer-term perspective. And that goes back to the 80s when we had a pretty colourful past with the Tech Pac and Imagineering coming together. [Our success comes from] being very selective in terms of the agencies we deal with, such as first-tier agencies or agencies that will give us the right return on working capital for our business, [as well as] making sure we have very close relationships with resellers and vendors at all levels throughout their businesses.
[It also comes from] having the right people. We think over the years we've had the cream of the IT industry from a distribution perspective and we ended up being the training ground for the industry. We've got probably more representatives in reseller and vendor businesses than anyone else today.
Your parent, Hagemeyer, appears to treat TP as its star performer. Why do you believe TP is outperforming their divisions in other countries?One of the reasons Hagemeyer purchased us - not the sole reason - is because of our e-commerce capabilities. We've had the lowest cost base for doing business within the Hagemeyer group by a fair way. They found it quite interesting that we could operate with the type of margins that we do and still get a satisfactory return on our working capital.
How has having a Dutch parent changed your perspective on the distribution business?They spent time looking at our business model and we spent time with a number of their businesses explaining our business model. Particularly, we are fortunate to an extent that the majority of our customers are IT literate. In most other businesses, the customer base isn't as IT literate, so we have an advantage to begin with, however, we've been able to push that advantage by being first to market with our e-commerce drive.
Hagemeyer [gives us] an understanding of distribution. They also offer a critical capital base that further supports us longer term.
You recently completed a management restructure. How has this benefited resellers?We are now much more specialised in what we do. Previously we have been seen as a broad-based distributor. Our intention is to be the best specialist and broad-based distributor.
Explain the motivation behind TP's new third-party products divisionWe started a third-party logistics business about 15 months ago. The main reason for that is to be successful longer term. Also our vendors and our customers, need to specialise in their core competencies. We don't believe their core competencies are in logistics, so there is a significant opportunity for us to add value to their businesses by being a bigger part of their logistics and warehousing operations. We also think that from a cost-based point of view, they can't match the costs we operate in within that logistics market. We also think we have some significant advantages over our competitors in that we can supply a solution. We can not only supply the IT product, we can also manage inventory and debtors on an agency basis. We are not just moving boxes, we are bringing product together.
What is your attitude towards e-tailers? Can you treat them as the same type of customer as a traditional reseller?Businesses that will survive long term are [the] profitable [ones]. We will deal, as traditionally we always have, with all legitimate resellers. Our view is to support the retailers as long as they have a legitimate business model and from a longer-term perspective, only those legitimate businesses will survive anyway. The Nasdaq and US experience is starting to show that legitimate businesses will survive.
Do you expect e-tailers to commit to the same sorts of volumes that traditional resellers do?To achieve the right price points, they do. But their costs for doing business with us are significantly higher than other resellers. If we are providing additional services and infrastructure we obviously charge an additional margin. There are no free services at Tech Pacific. If we have to invest, the retailer will have to invest, and e-tailers are not necessarily getting a lot of the advantages a lot of our major accounts are getting because the volume is not there.
The obvious most recent example is buy.com. How have they shaped your attitude towards e-tailers?It hasn't really changed it at the end of the day. Our view is buy.com needs to determine its market strategy, as Harvey Norman needs to determine its market strategy. And we're not going to interfere and get involved in that, [because] we're in the middle so we have a particular role to play in terms of fulfilment.
Whether it's a buy.com, a dstore or an E-store, if they are not profitable models they will not be successful.
ARN has started to see press releases from the e-tailers claiming they are profitable. Do you think they are worried about nervous investors? My take is they are trying to reassure the stock market they are viable long-term players because the stock market has said if you are not getting a return on your business then your price is going to be marked down accordingly.
Their cash flow statement will determine whether they are profitable or not.
A new software management system caused a six-week long logistics problem for resellers last year. What impact has this had on your business?It obviously had an impact at the time, particularly with a distribution business of our size - the largest in the Southern Hemisphere - and, so any change in systems was going to be an issue to an extent. We had problems through November, December and January as we fine-tuned those systems. From a market point of view we have set the service standard in the industry.
Once you get into a situation when you are not meeting that standard for a period of time and you are the size of supplier we are, you are going to get a reaction from your customer base. We told customers through that period that we understand the issues and apologise for the problems we may have caused, but we don't apologise for the investment in our business.
How do you see your e-commerce capabilities changing in the future through the TechLink Web site?Most of the changes we went through last year were for the warehouse management system, so it was not a full ERP upgrade. At the same time, we have improved our e-commerce solutions.
Now that we are about to launch our configuration tool for software, for instance, we're pushing ahead with track and trace/proof of delivery and we're looking at fast-tracking EDI, so wherever there is a transaction and a piece of paper we are attempting to automate that through e-commerce.
Are you confident TechLink is set up to cope with future changes in e-commerce and reseller buying patterns?We've got the basics to continue to be the leader in e-commerce. We've got the traffic that goes through the site and the feedback as to what they need, we just have to make sure we take it to the next level. Some of our competitors have started to catch up by copying what we are doing, we're now in the process of taking that to the next level again.
Tech Pacific's business still primarily relies on logistics and volume box moving. Is this a sustainable long-term business proposition with ongoing margin squeeze?Very much so. If you see the consolidation that's going on in the industry at the moment, and while I'm not necessarily in agreement with some of the statements "get niche or get volume", I think it's about volume. We can do both, and once we are executing at both it will make life very difficult for the niche players in the marketplace. We've got the critical mass and the tier-one agencies such as the telecommunications agencies, and with more and more convergence happening we become more important to both the telecommunications vendors and the IT vendors. Because of the investment our parent company has allowed us to make in our business, resellers and vendors can invest in this company from a long-term perspective as well.
The other big advantage we have in the marketplace is the fact that we don't compete. The majority of our competitors today compete against their customers, whether it's an Express Data/Com Tech model, or it's a Prion/Agate model.
Obviously Express Data (ED) and Com Tech would argue that one.
You just have to look at the way companies get consolidated. If you go back to the basics of accounting, the profitability of Express Data eventually ends up in the Com Tech group and supports the reinvestment in Com Tech. So the stronger ED gets the stronger Com Tech gets, the stronger Com Tech is to compete against ED's customers. Our model does not work that way. At the end of the day the ownership is common. If you look at those types of models there is a lot of leverage into engineers, back-end support, so there has to be a lot of information that is shared between those companies.
How serious do you see Ingram Micro Australia as a threat in the future?Ingram has a lot of work to do. Ingram is still a traditional OEM supplier with an OEM mentality. I think it depends on how much they are willing to invest in the market here. They brought out a US model, put it on top of an ERA/OEM model and thought one and one equals three. It hasn't happened yet. But Ingram is a sizable company with a good US operation and their own issues in the US from a trading profitability point of view. They cannot continue to survive with the kind of model they have and getting the returns they are getting because their shareholders will not accept it.
The positive thing from our side is whatever we do, we develop in Australia first. Whatever a lot of these international companies develop they do so in the parent company's jurisdiction, then they have to roll out to the Australian market.
How far down the value-added route can TP venture?Depends on your definition of value add at the end of the day. From a traditional point of view we will take it as far as we can. We won't compete against our customers and our value add will be value add for our resellers. We encourage our vendors and resellers not to handle product but we will have our systems hooked up with our resellers so that they are obviously supplying invoicing and their value.
We are going to drive our systems business with a couple of important things this year. We have a very focussed team on that high-end UNIX space.
We are going to drive the value add on the networking side of our business and through our sales force. From a vendor's perspective we have 200 people in the marketplace - 100 in the call centre and 100 people in account management who are selling Tech Pacific's and our vendors' stories every day. So there is a lot more value add we can supply from that perspective.
If you take the PC market, you are obviously providing build-to-order services there. I also perceive that as a potential opportunity for further value add.
How far can you take it knowing you could potentially compete with resellers?We see it more as a partnership. If we can complete that configuration at a lower cost than our reseller partners can then it makes sense. Most of our major resellers can see the value add that we bring to the table because it stops that double handling of the product. They know we are not going to compete with them.
PC sales have seen a downturn in the first half of this year. What impact has this had on your business?We've been impacted but our PCs are the fastest growing part of our business this year. We carry IBM, HP, Compaq, Toshiba, so we have the market leaders. We put a lot of focus into dealing with those major vendors and adding more value, more configuration.
How do you see the next two quarters performing post-GST introduction?The third quarter of this calendar year will be strong. July will be a very good month, particularly at the corporate end where one of the issues we have had is a lack of budgets. A lot of budgets were spent with Y2K. The SME market will still be reasonably strong. Particularly in the third quarter, there will be a lot of businesses that still have to come to grips with handling the GST, particularly on the SME side of things.
The other opportunity we see, and we're getting a lot of enquires, from OEM manufacturers who are starting to talk about branded product. There will be good opportunities there because there are some businesses that won't necessarily survive the transition from sales tax to GST.
We've also got the Olympics in September which will be an issue in NSW particularly. Logistics-wise we think we are OK. We've spent the last 12 months putting together our Olympics plans. We will operate 24-hours-a-day out of our distribution centre at Matraville, so customers will be able to collect product at any time during that period.
Our line haulages leave at around 9:30, 10 at night, so we don't see any problems for the rest of the state. The only real issue we see is within the Sydney metropolitan area.
The other slight problem we see is in-bound (flights), where people take prime position on planes as opposed to cargo. So we are having a look at our stock position for the July, August period so we have stock in key areas.
What's your five-year plan in terms of market positioning?What I see happening is continued consolidation. I think you will see two, maybe three major players from a distribution point of view, long-term. We believe that we will be one of those players. Looking five years ahead we will continue to be the leading distributor. We will have quite a strong third-party logistics business, which will combine with our existing logistics business.
What revenue projections do you have for the next five years? I don't know, it's a hard question. If you go back four years we were turning over $370 million and people were questioning how far we could grow, and we will turn over $1.2 billion this year. I think you could look at the same scale, although growth won't be as fast.
What do you think the future will hold for distribution in Australia, particularly given the demise of Dataflow and ongoing market consolidation?It was bound to happen with a market of 18 million that has been over distributed for some time. But at the end of the day, good management ensures good companies survive.
One e-commerce retailer said to me just the other day that they've just realised that business is still about people dealing with people. That is about 65 per cent of what makes it tick at the end of the day.
What was your reaction to Dataflow?
A little bit mixed. It's always sad to see someone disappear because it impacts employees and shareholders. From our side we don't like to see that happening.
I think you've got to be clear what business you are in, and I think Dataflow had a mixed business model. They went through the Kidscape era and the smartbuy.com era. Again we are very clear about what we are about. We understand who our customer is and who our competitors are, and we have to deliver logistics excellence.