EVOLVING TO SURVIVE: Top Trends In Channels

Few major drifts that gave distribution business a new outlook were the
consolidation of the tier-1 distribution companies, the shift towards value
addition, focused approach to business and the convergence of consumer
electronics channel with their IT counterparts.

The last few years saw IT distribution don a new outfit. As pressure on
margins increased, the entire channel right from Tech Pacific at the top to the
smallest reseller at the bottom of the distribution chain, took a re-look at
their business model. The result was the evolution of few top national
distributors in to value-added national distributors.

Four years ago when Tech Pacific created a Value Division within its
organization - the first of its kind for any national distributor there were
more skeptical feedback than positive ones. Some termed the decision as the
company 'moving away from its core expertise'.

However, with falling prices and margins, there was no better way for the
distributor to ensure profitability. Others did not take time to realize the
important of adding value to their business. Ingram Micro, SES Tech, Neoteric,
Iris and Rashi Peripherals, all followed suit by setting up their own value
divisions.

Today, of the 12 true national distributors, at least eight are in to
value-added distribution. "Distributors are seeing the benefits of this
model and trying to build one that has higher margins," says K Jaishankar,
MD, Ingram Micro India.

For some it is adding a basket of products that required high amount of value
additions. For others it is providing pre-sales and after-sales support and
technical know-how on integration of the products. Yet some specialized in
specific product categories, while few have chosen to provide industry vertical
expertise. Setting up proof-of-concept centers and engaging certified personnel
within the organization are other ways of how distributors have added value to
their business.

Valued-added distribution is truly a silent revolution that has taken
magnanimous shape. Today, most national distributors generate about 15% to 30%
of their revenue from the value-division it has created.

"Selling value products as a business is surely growing. The market is
demanding value proposition in every products they buy. In coming years, selling
value will play an important role than selling the products," says Krishna
Prasad, CEO, SES Technologies.

Moving away from the tradition 'push' approach of a box mover, to
adopting a pull approach is not an easy task. According S Narendran of TVS-E
most distributors have not taken up value-added business consciously, but have
been forced in to this transition because of the nature of products and
principals they have tied-up with.

While, some traditional solutions providers who usually don the role of a
value provider have their doubts about following this model, though. Gaurang
Bhat, Director, CDP India, a Mumbai-based solutions provider says, "There
is no doubt that 'value-add' is the need of the hour. But doing both volume
distribution and value distribution is not easy. A distributor's outlook
towards business is more of a box pusher, and it will take a long time before
customers completely accept them as a value-added distributor."

While vendors evaluate a distributor on the basis of his reach, logistics and
financial capabilities, there are many companies who do not have their official
presence in the country. For such vendors it becomes all the more important to
have distributors who will do that extra bit to push their brand. In such cases,
distributors are the ones on whom systems integrators can depend on for the
know-how, who in return pass it on to customers.

FROM SI TO SOLUTION PROVIDING

While distributors wear the value-providers hat, another trend that emerged
in the last couple of years is the shift in the business of systems integrators.
Just like the 'value-addition' part that happened in the distribution
business, smaller systems integrators have scaled up to become end-to-end
solutions provider.

The strong SIs with the right people and financial strength have
metamorphosed into giant companies, with complete ICT expertise. These include
Allied Digital Services, Ontrack Solutions, Orient Technologies, Omnitech
Infosolutions, SK International, Wysetek Technologies, Sai Info Solutions,
Accutech, SK International, KayBee Infotech, Team Computers, Nirmal Datacomm,
Lauren Technologies, and many others who have created a niche in providing
end-to-end solutions; be it networking, storage or security solutions.

"The thin line that differentiates a systems integrator from a solution
provider will soon disappear," says Rajeev Mittal, Director-Small &
Mid-market Solutions & Partners, Microsoft. According to him, the entry of
latest technology is bringing in newer players to the market, thereby increasing
competition. This is also making existing players invest in the skill-up
process. "However, what will drive each one's business is how efficiently
they take care of the customer," says Rajeev.

CONSOLIDATION AT THE TOP

The talk about consolidation happening in the distribution industry
came true with the most important event of the year in the history of IT
distribution - the announcement of Ingram Micro acquiring TechPac. The complete
integration of the two companies is expected soon.

With this development, channel partners are a confused lot. They are worried
about the credit policies of the new entity. Resellers now have fewer options to
pit one distributor against other, while bargaining for better business terms.

Though mergers and acquisitions have become a way of life elsewhere outside
India, the same may not happen frequently here in the channel business. This is
purely for the reason that existing companies here do not have any real value to
offer, either in terms of R&D capabilities or unique asset base for
acquirers.

However, what industry observers feel is that weaker distribution outfits may
get weeded out. "But, it surely is not going to be trend," says Tejas
Shah, of Zeta Technologies. Chetan Shah of Xpress Computers feels that
consolidation is good. "Distributors might see it as a prudent move to
merge with a competitor and tap each others strengths in a more effective
manner," he says.

"Sub distributors are certainly under jeopardy as they do not bring in
any significant value-add other than stocking/availability and as the large
stockist today follow a direct marketing model, there is no space to co-exist.
Resellers, on the other hand, will be conduits to reach the user and would
therefore flourish. Perhaps they will be forced to specialize in select
goods/segments to sustain their presence, as it evolves," says Sujit Singh
of Dax Networks.

Chetan Shah agrees, "The number of people in this tier
will decrease. Financially stronger companies will survive, while the few will
choose to closed down because of the thin margins." Those with financial
muscles in the third tier sustain and survive with new vendor engagements.

Resellers like Mumbai-based Creative Computers and Pacific
Infotech who have traditionally been hardcore resellers have scaled-up to
involve SI activities in their organizations. While few others like Radiant, SP
Technologies and JayDee Electronics have graduated to become master resellers
for various brands.

Few master resellers aspiring to become national distributors
are also slowly upgrading their infrastructure and logistics. "From being a
city player to become a national player is not an easy task. It required a whole
lot of experience and money," says Narendren of TVSE. Today most national
distributors have a network of at least 30 branches across the country.
Acquiring these numbers required enormous amount of efforts and patience from
master resellers or sub distributors.

The market also saw the concept of regional distributors (RDs).
This did not gain much popularity and many vendors reverted to the ND model for
its distribution requirements. The concept of RD model was a 'kick-starter'
for many small resellers to grow big. LG Electronics' policy to appoint RDs
throughout the country helped them establish a name for themselves in the
market. Many never-heard of resellers got a chance to come in to the mainstream
distribution.

However, LG's policy to continuously evaluate its RDs on
its performance saw the exit of non-serious players and entrance of new upcoming
resellers. While some vendors successful played the RD model, there were few
vendors who chose to revert to the ND model for want of wider reach and lesser
effort to manage them.

GOING BEYOND THE METROS

Another important trend that came very pronounced in the last two years was
the emergence of smaller towns and cities as potential markets. These markets
are growing at a good pace, but metros are still a better place to get volumes.

"In the midst of high competition in the metros,
distributors are proactively trying to reach out in smaller cities and towns as
these areas represent high growth and a untapped market segment for many of
them," says Chetan. Sujit agrees, "Distributors are steadily making
investments in all the necessary resources to elevate and manage themselves to
meet the end-to-end solutions of end-customers."

Over the years, most NDs have created its presence in most
big cities to leverage on this opportunity. However, the top 12 NDs put together
cover only 30% to 40% of these growing cities. "About 60% to 70% of the
market is yet to be explored," says Narendran.

Entering in to a new market also help the distributors
enables customer retention to a large extent. As this 'survival-of-the-fittest'
game continues, by the end of last two years, what we have today is set of 10 to
12 national distributor, a set of over 3,000 strong sub-distributors who are
aspiring to become national distributors, and a large number of reseller waiting
to become master resellers. Some are inching towards systems integration
business with hope to become a complete end-to-end solutions provider in years
to come.

CONVERGENCE BREEDS NEW CHANNEL

The shift in technology focus from computing to communication and now to
entertainment has given birth to a new trend. The consumer electronics (CE)
channels have started taking up convergence products like digital cameras, MP3
players, LCD TVs, mobile phones, PDA and many other entertainment devices.
"Electronics and communications channels are definitely trying to enter in
to the PC add-ons, peripherals and accessories market like cameras, PDAs, USB
and devices," says Chetan.

The visible trend is that CE channels have begun to adopt
convergence products, but the IT channel is not embracing consumer electronics
products. Digital cameras are moving through both IT and photography channels.
Similarly, MP3 players, cell phones, PDAs, etc are moving through the IT and
electronics goods outlets. Beside the convergence products, LG is pushing its
MyPC through its CE outlets. Many more will follow. Who knows! May be 10 years
down the line we will

find all these products being sold in Hyper markets and Super markets!

NELSON JOHNY

PROMINENT CHANNELS TRENDS