INTERVIEW: Tech Pac boss blasts mixed model

ARN's Cameron Tomes and Paul Zucker recently met with Tech Pacific MD David Cullen. He spoke candidly about Ingram Micro moving into Australia, the current price wars between distributors, Tech Pacific's expansion plans and the ramifications of market changes in New ZealandARN: We'd like your thoughts on the whole globalisation of distribution issue. Ingram's view of Australia is there are a lot of second-tier distributors that really don't deserve to be here. They're suggesting they'd like to see these players thinned out before attacking Tech Pac head on. How do you think their presence through ERA will affect you?

Cullen: The market in Australia today is over- distributed. It's a small market compared to the US. I'm amazed at what Ingram appears to be doing with ERA. It only owns 21 per cent - it has no controlling investment. Likewise, ERA is only prominent in certain areas of the market. It doesn't have back-end systems, capital investment in its business and it doesn't know how to trade in the various segments it needs to as a broad-based distributor. Over time, I expect that to change, and one day, if it gets serious about the market, it'll be in Australia.

Vendors have to be fully aware that over- distribution leads to low margins and loss of mind share. Unless the model is right in terms of infrastructure and investment, you can't just sell on price. Anyone who is selling just on price won't survive.

We have a number of instances of our com- petitors just selling on price. Some of our more aggressive competitors who have made some acquisitions recently, think that by having an office in three or four states they are now a national player. I would see a lot of those players falling over. They will not make it. It you don't have the banking system in place, the capital investment and the long-term planning, you're not going to survive in this marketplace. And that's an advantage Ingram obviously bring with them. They've got a lot behind them, but they haven't got it here.

Have you heard about Ingram's new online distribution system, Impulse?

The only feedback I've had is that they've had difficulty scaling their systems. Again, Australia isn't the US. Obviously some systems can't scale up, and some can't scale down. I'm confused by what their plans are for Australia, and just how serious they are.

Ingram tells us it will come in with a couple of big brand names, then fill out its offerings. It sees a big gap under TechPac and perhaps Express Data. Which second-tier distributors do you see as vulnerable to this approach?

The distributors that will find it difficult in this market start with those with a mixed model - the ones who try to act as distributor and reseller, such as Avnet, Prion, Express Data. Long term, you have to be in one business, not in both.

Is that because of internal competition, or the way the resellers feel about them?

A bit of both. For instance, they find it hard to relate the margin they make as a distributor, to the margin they make as a reseller or systems integrator. On the other side, it's very difficult from a customer point of view. At some stage they're going to cut out their customer and the customer will remember it. It happens today and people have long memories. You need focus to be a genuine national distributor, and our model has been clearly set up so that we don't have any conflict by competing against our customer.

It makes it difficult if you've got that mixed model, and the message we keep getting from our customer base is: "don't change your model. It works well, and your competitors' models don't necessarily work well."

The guys that are at risk outside of that are the distributors that don't have the investment. They've taken a short-term approach and a pricing-led model. Most of them, and there's a number of them, and I won't name them but we all know who they are, are trying to set themselves up for sale.

It just amazes me the way some of our competitors are running their businesses from a price point of view. I've had four or five examples in the last month of our competitors running at 1 per cent margins on products that are on back order. That's not a smart way to run your business.

With so much talk about the need to maintain margins in this industry, why are distributors doing this to themselves?

They're trying to buy loyalty in some channels where there is none. OEM is a perfect example, because retail is very price-driven.

How difficult would it be for another distributor to approach Tech Pacific in size?

Very difficult. Maybe not impossible, but if we take our eye off the ball it always leaves an opening.

Would one of the big overseas players want to enter the Australian market in a big way by buying and aggregating a number of mid-level local distributors?

You have a look at what Ingram has done in Asia. It acquired 20 or 30 companies and that means 20 or 30 different cultures, different systems, different ways. Look at our competitors in Australia around the hundred million dollar mark. Most of them have approached us at one time or another to buy them out. I've usually replied: "Why would we pay goodwill for your business? If it was the asset value, OK, but at the end of the day we're probably dealing with most of your customers anyway. Over time, I'll pick that business up if you take your eye off the ball."

But their expectations are that someone's going to pay 20 times earnings for their business, and they'll hang in there until that happens, which may be never. Maybe Ingram will come in here and do that or maybe it'll start from scratch. We wish it all the best.

A common complaint from distributors is the average reseller is fickle, and will swap distributors and vendors willy nilly.

Yes, particularly if you don't have a value-add statement in terms of value-add distribution. I'm getting more positive feedback because we keep adding more value in our offering. We've got the "free into store", we've got the "broad base", we've got the "Web", we've got the "direct shipment to end customer", and we've got competitive price. We'll never be the lowest price, day in, day out. I've had a number of meetings with the BCAs and the Senteqs recently, and the larger resellers understand the cost of doing business. Look at our new warehouse - we're planning years ahead and how many of our competitors are doing that?

Ingram says one advantage it has is being able to source product from anywhere in the world. If there isn't stock here but there is in Singapore, they'll bring it in for you.

Since we were acquired by the Hagemeyer group, we now have opportunities to move into Europe and the US. It's likely that if we did expand into those markets it would be by acquisition, and that would give us the infrastructure to do something in those markets. But remember, it's extremely difficult to work across international boundaries with taxation and foreign exchange and duty and things like that. Distribution works on such narrow margins you can't get it wrong.

What are your expansion plans?

We are looking outside Australia. We are looking inside, at non-IT areas that are still distribution. We haven't got anything concrete on the table at the moment, but we have some things we want to do.

What are your thoughts on what's happening in New Zealand, now that parallel importing is allowed?

The impact is really only on high-margin products because by the time you weigh everything up, in terms of what it costs you to service and support, it isn't cost effective.

In terms of software, the Dataflows of this world, who make between 60 and 70 points on exclusive lines, are going to have major problems. That's where we'll see product dumped into New Zealand.

People who make between five and six points - the traditional distribution business - won't be affected. There'll be a little bit of an effect, but generally, by the time you add up things like credit, it won't happen. And what manufacturer will sell to a guy to dump product in New Zealand? It would have to buy from someone like Ingram, and by the time it added its margin, freight and warranty, it just won't make sense.

But really, it's the high margin products where the effect will be. Someone like Renaissance, who has an exclusive in New Zealand with Apple, which is probably funding most of the business, will have a major problem. That model's got to change.

From Tech Pacific's point of view, it's positive. It'll be interesting to see what the Australian Government makes of it.

What do you think it will do here?

Not too much. It had a battle here with CDs and that got squashed. I think it'll be a wait-and-see issue.

Everything else that's happening, like GST, will put it off the table.