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Distributors in turmoil

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A couple of weeks is a long time in the IT industry and you really notice it when you go away. I’ve returned to find a distribution sector in even more turmoil. Profit warnings, resignations and job cuts at the once almighty Ideal Hardware, profit warnings at Datrontech and at Northamber, and more job losses at Ingram Micro. There have also been some not insignificant events at Illion (the loss of Cisco) and changes at Computer 2000 – but the latter company seems to be the only one that is really keeping its head well above water right now. There are a lot of companies and a lot of circumstances here which we could explore, but what these events mean in the broader term is that we are coming to the crunch – and it HAS been coming – for the old models of distribution. Ian French, Ideal’s new MD, has said as much in his comments in the press over the last week. The old linear model is dead, distributors now need to be either very large and extremely efficient logistics operations – and they can perhaps provide back-room logistics for resellers as well with drop-ship and private label type services, or real specialists that focus on a particular technology, vendor or market space. RBR is a great example. That company sells Cisco and nothing else and it is growing very quickly indeed. Equinox is another example; it is not as focused as RBR but it only carries a few vendors and they are higher-end networking vendors. It only works with a few resellers and it works really closely with them. Little to choose OK, there may be little to chose between these firms and systems integrators but there is a difference. In effect they are real specialists, with real focus who lend their skills to the reseller. They are also in the back room. Their focus means that they can’t sell direct because, to put the whole system together, you need other skills as well. Skills are key here – you have to have something the dealer does not have – but this means putting ime, effort and money. So your margins – products or services have to be really good. At the other end of the scale you need massive volumes at the low low margins available to support a really good logistics back end. It costs an awful a lot to keep that running efficiently and if your wafer-thin margins collapse you are struggling. Try to do both and you could end up in a lot of trouble – vulnerable to margin fall-out in the volume game while not having enough money to plough into the high-level services that will generate really good margins in specialist areas. This is what has happened - to some extent – to all the companies issuing profit warnings. Add to this the increasing use of the Internet for ordering and a simultaneous drop in growth rates and fall in prices, and it’s little wonder that profits are sliding. For Ideal this has been a particularly difficult time with disk drive prices and market growth both falling. It has also had the continuing Digital/Compaq merger to contend with, and been trying to adjust to its changes in management. In many ways, it has just been caught out by circumstances. But results are what counts to the City and after last year’s under-performance, the market will be very unforgiving this year. Especially after the experiences they have had – and continue to have with other listed distributors. Azlan, Illion, Datrontech, Northamber – they have all had their problems and continue to find it tough going in the UK. What is the future for these companies? Radical change is needed or they will find themselves in trouble. They must decide – are they volume players that add value through logistics, or high-value adders that focus on a particular area of the market? Broadliners The broadliners are the ones that, ultimately, have the best chance of handling the volume business as they have the scale. Tech Data/Computer 2000 is a massive force now. Ingram should not be written off in spite of its present troubles here – but it does need to get its act together fast. Nor should CHS be dismissed as a competitor; it too has had problems but on a pan-European and global scale, still has the potential. It’s interesting to note that Computer 2000 seems to be the only company sailing along comfortably right now. Yet it has focused business units inside the company so isn’t that trying to do both jobs? Well, that depends how far Computer 2000 goes with the mix; if one part of the business is being used to prop up another, it won’t work. But if it is being used to focus sales and support on the supply side, and to isolate costs and profits inside the business, then it probably can work. It looks like it does! And Computer 2000 is not trying to be a real specialist with all its products and services. In disk drives for example, volume products are handled by the components division – not the specialist storage business. And the networking division would not claim to have the level of expertise in particular areas that an RBR or an Equinox might. It is interesting to see Ingram now adopting a business unit model – albeit with much fewer divisions. But does any of this really matter? It depends who you are? If you are a director, employee or shareholder of the companies in question it matters a great deal. If you are a direct customer of those firms it might also matter – in the short term at least. For the employees and directors of the companies concerned it is a stressful time and you have to feel sorry for them. But they, as individuals and as companies, must decide where they are going and implement the changes quickly to have any hope long-term prosperity. For shareholders, it’s all pretty gloomy and those people have every right to feel aggrieved. Profit warnings are always demoralising and perhaps its time that the expectations of the City were managed down a lot more – better to under-promise and over-deliver than be over-optimistic at first and apologetic later. People who lose money don’t forget how they lost it in a hurry. For reseller customers it might mean a problem in terms of service delivery for a while but no-one will win any prizes for jumping off struggling ships. There will always be someone willing to sell you products of course, the question is what value they will add. Resellers only need two things – the logistical backup and the skills back-up, distributors have to provide one or the other or they are not going to survive. For end-user customers the fall from grace of the middle-ground distributor that mixes volume and value is not really of any major significance. It may look like bad news and a lot of disruption, but really it’s of no consequence. Someone will still be there to sell you products and services. All that is happening really is the computer industry is adapting and changing itself to meet the needs of the market today. That means plenty of choice, low-cost and, if you want it, direct shipments. Good skills and services are what you need and, if the current shake-out in the distribution channel means that, in the end, distributors provide better support for resellers and systems integrators, that has to be positive news. It will, however, take time to filter through. ®

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