The Year of the Distributors

'One man's foodmeat is another man's poison', that succinctly sums up what happened within the Indian IT distribution fraternity in FY10. That the impact of the global recession would slow down both consumer and commercial business was obviously anticipated; that it would put considerable pressure on the working capital was also a foregone conclusion. It did not need Paul the octopus to predict that there would barely be any opportunity to sustain margins on the volume business products; the likes of Ingram Micro and Redington braced themselves for the backlash and accordingly tightened their belts.

Unfortunately it was still the biggies who suffered the most-Ingram revenues declined six percent, while Redington barely stayed afloat growing seven percent during the year; in stark contrast though, the tier-2 players like Savex, Compuage and Supertron probably had their best years in recent memory. Even many tier-3 sub-distis or regional distributors recorded high growth in topline, though the margin squeeze was more secular. The contradiction in contrasting toplines was indeed difficult to explain considering that the same set of market dynamics were applicable to all.

The paradox could be entangled only from two angles; firstly, it could be argued that though the biggies anticipated most of the problems, it was their sheer size and the number of principals that prevented them from taking preventive measures from all corners. There were bound to some businesses that would do worse than others and thereby pull down the overall figure. More importantly, strategic decisions by some leading vendors like HP (theirs was a game-changer) or the 'tough nut' approach of Microsoft too had their impact on the two biggies. But most importantly, the growth of the tier-2, tier-3 and even tier-4 players in the upcountry markets at the expense of the two biggies finally signaled the 'Indianization' or democratization of the domestic IT market.

This is how one could aptly describe the last fiscal for the distribution segment. If there were repeated blows for some, there was good news for others. What more could be a better way to describe the repeated blows that national players of the game, Ingram Micro and Redington suffered, it was advantage-Savex Computers, Compuage Infocom et al! The year started on a low note and the anticipation of bad weather ahead proved true for FY10. It was this anticipation that resulted in the biggies revamping strategies to stay afloat. This surely ensured that they stayed ahead in the race but with a few injuries though.

One vendor to have a significant impact on the Indian distribution market was not even present there two years back. Since adopting an indirect model, Dell has been a game changer for the Indian channel. FY10 marked a biggie likesaw Dell reaping the rewards of its channel strategy - PartnerDirect. After the initial phase of appointing partners across the country the company, the focus was now on services;steps were initiated to involve the channel community here in a big way. In certain regions where the company did not have a presence like the Northeast, Dell even allowed its partners termed as Dell Appointed Service Providers to service customers. The launch of Customer Appointed Service Providers for the convenience of its customers, where a customer could bypass even Dell's set up to avail the services of the channel also proved a major step.

While the vendor was going all out to woo the channel, a few partners expressed apprehension about Dell's channel policies with regard to DGS&D rate contracts. Dealers dealing with DGS&D rate contracts in Dehradun had claimed that the company was engaging in unethical business practices and taking undue advantage of the tie-up that they (Dell) had established with them. These allegations were however refuted by Dell.

The biggies (read Ingram and Redington) received another major blow because of the googly delivered by the double taxation of software. What actually kicked the wave of storm was the Finance Minister's attempt to simplify the tax structure of software by waiving off excise duty. But there was no clarity offered on whether either VAT or service tax or either of them have to be charged. This sparked a storm among software distributors and resellers. This complicated the taxation structure rather than simplifying it. Software resellers had been levying excise duty and Central Sales Tax (CST) on import of software, VAT on its sale and service tax on the implementation of software. The exemption of excise duty on packaged software and the simultaneous application of Special Addition Tax (SAT) have left dealers flummoxed. The question that arose was whether they should continue with the existing tax structure of charging these three different tiers of tax, or stop charging excise duty on license fee or charge only the service tax. And what followed proved beneficial for some and disadvantageous for others.

With Redington and Ingram Micro shying away from doing any business for Microsoft's software owing to the double taxation imbroglio, there was a shortage of Microsoft's stock in
the market.

Their hesitance leftThis led software dealers having to deal with mounting tenders and orders. As a counter measure, Microsoft appointed Rashi Peripherals, Compuage and Neoteric Informatique as distributors to increase the Miscrosoft Operating License Products (MOLP) business. Approximately 80 percent of the boxes and 40 percent of the MOLP business of Microsoft was till then done through Redington and Ingram. If in the past even if both might have done good business for Microsoft but with Microsoft acting tough, even their resellers of Ingram and Redington were left with no option other than approaching the newly appointed distributors. While this two-way battle was going on at one end, others like Iris Computers levied CVD and VAT on the OEM products of Microsoft. What Microsoft did was-lash a the whip on the biggies further by not just turning around to the new entrants but at the same time building a larger network of distributors to facilitate business for its partners. This in turn provided better support to Microsoft's SMB customers across tier-2 and 3 cities, which anyway now are becoming the centre of focus for the Indian IT market.

The entry of Microsoft into Rashi's protfolio, led to an increase of two percent in business. While for Compuage even though the addition of Microsoft became a part of its array in H2 of FY10, along with Cisco and Dell, and HP in H1, together pulled the revenue margins by 15 percent. Dell entered into an exclusive distribution tie-up with Compuage to serve large format retail (LFR) segment in India. This would be an added advantage for Compuage which already has a dedicated team that manages LFR business to sell Creative products and Odyssey peripheral. Compuage will jointly manage the Dell ship-in-shops at Croma and Reliance Digital outlets. The LFR segment which did not witness much growth owing to recession, is another promising segment that is expected to see a big jump in the next two to three years.

Next came the final choker from HP! But the biggest twist in the distribution landscape was yet to come. Sunil Dutt's entry into HP PSG as the president did ruffle a few weathers but time proved the anticipations to be true. In a major revisit of strategies HP decided to reduce its billings with the national distributors — Ingram Micro and Redington and instead opted for regional and tier-2 partners. Instead of having multiple distis fighting in each location, the rationale was to have one disti focusing in a specific zone who is investing in the business, taking care of and promoting the business. This seems to be his mantra. The other important aspect of this entire rejig was HP's decision to appoint telecom distribution channel to sell its range of netbooks and entry level notebooks. These moves were an attempt to infuse life into its consumer PC business;, which is dominated by notebook sales but in the recent years notebook sales have failed to cross the figure of two lakh unit per quarterhit badly in FY09 and first half of FY10 due to slowdown. Probably the appointment of Sunil Dutt as HP PSG head had some influence on this-he had followed a similar model in his earlier stints at Nokia and Samsung, and had even worked with many of these telecom channel partners. Further, in order to add a personal touch to its business with its partners, HP intendeds to set up direct interaction methods even with its small tier-2 and tier-3 partners. Following this sudden move, it is learnt that Redington India might face a marginal hit of Rs 130 crore on its topline in the current financial year (FY 2010-11) or approximately 12 percent drop in its overall PSG portfolio. The numbers for Ingram have not been calculated yet.

Meanwhile, HP is also re-energizing its focus on retailing that is through the HP World model, which is a very important part of its channel business. HP plansIt planned to expand this initiative on a pan-India level. Presently, there are 200 HP Worlds and in the next one years time the company targets to expand it to 300. HP intends to appoint distributors who can prove its move to be beneficial. These would be basically partners who have the expertise and infrastructure to address the retail market in an efficient and organized manner. HP has appointed Savex Computers during FY10 as the exclusive distributor for all HP Worlds across the country.

Small towns though were not on the agenda of companies a few years back but with the passé of time they have assumed enough importance for each company to sit up and take note of its existence. The channels that added tier-2 and tier-3 markets helped distributors who played their cards well to stay ahead. For deeper penetration into the C, D, E-class channels vote for a requirement of good strength. HP has already appointed Linkworld and Karuna Management as zonal distributors in the east. The entire idea behind this is to appoint local distributors who understand their respective local market dynamics better and can generate better business and growth.

Realising the importance of these small towns that are growing at 60 percent, Rashi decided to increase it focus on these towns which collectively contributes 40 percent to its revenues. Education is expected to be the biggest growth driver of this segment. The SOHO segment was the strongest segment which did not degrow even after recession, offering a major advantage for those banking on it. Though enterprise demand slowed down SMB and SOHO appeared the promising segments.