Middle East measured

During the past few weeks, vendors, distributors, resellers and retailers from across the Middle East have taken the opportunity to register their views on the market’s prospects by answering our first-ever online Channel Confidence Survey. We can now reveal the results of that poll and give you an idea of the channel’s ‘temperature’ as the all-important fourth quarter starts to heat up.

The objective of the Channel Confidence Survey was simple: to take the temperature of the Middle East IT channel in the run-up to the all-important fourth quarter of the year.

While the IT market in this region is notorious for slowing down during the summer months, Q4 tends to signal the period when trading activity kicks into gear ahead of year-end.

Executives who participated in the Channel Confidence Survey were required to answer 12 questions relating to the state of the market, the performance expectations of their organisation, the priorities for their business over the next year and their overall outlook on the health of the channel.

Given that every component of the channel supply chain - from vendors right the way through to distributors, resellers and systems integration - has a significant role to play in how the market pans out, we invited stakeholders from all levels of the Middle East channel to give their verdicts.

More than 125 IT companies operating in the Middle East participated in the survey. 64% of them were based in the UAE, which still continues to serve as the primary regional hub for most vendors and distributors. 13% of respondents hailed from other locations in the Gulf, while the remaining participants originated from surrounding countries in the region.

Vendors represented 43% of all respondents, while wholesalers accounted for 38% of the sample, illustrating the continued significance of the distribution and sub-distribution channels in this region.

Channel companies that sell to the end-user (namely resellers, VARs, systems integrators, consultancies and retailers) made up the remaining participants, ensuring a good mix of vendors and channel players - a helpful balance given that both parties don't always appear to be on the same wavelength when it comes to their expectations of the market!

The graphs and charts over the following pages give a useful indication of the channel's outlook as it stands at the moment, as well as the immediate priorities and goals of IT companies based in the region.

The idea of running a Channel Confidence Survey was not to arrive at a point where a sweeping generalisation of the market's condition could be made, but to gauge a feel for overall channel confidence and expectations.

You can use the results to see how your views on the market compare with your peers in the Middle East, or simply to measure the sentiment of the channel during the most vibrant trading period of the year.

If you are budgeting for a year-on-year increase in sales during Q4, how strong do you expect this growth to be?

While anecdotal evidence suggests large parts of the third quarter have been sluggish, predictions for how the fourth quarter should pan out indicate the channel expects to see a much-needed upturn in fortunes.

89% of respondents said they were anticipating year-on-year sales growth in excess of 10% during Q4, with 27% budgeting for a spike in revenue of more than 30%.

Quite whether such lofty expectations turn out to be a little optimistic will become clearer towards the end of December, but the results certainly suggest a belief that there is enough demand in the market to make double-digit growth a reality.

Interestingly, channel players remained more assured than vendors, which isn't something that can be said often. 30% of channel players are planning for 30%-plus sales growth this quarter, compared with only 23% of vendors.

If you are budgeting for year-on-year profit growth during Q4, how strong do you expect this growth to be?

As companies in the IT sector know only too well, sales growth doesn't always translate into profit growth, especially when margin erosion across most parts of the industry remains such a contentious issue.

While 89% of survey respondents believe they will see sales growth of more than 10% this quarter, only 60% reckon that will be mirrored in bottom-line growth.

In fact, 20% of respondents admitted they were expecting minimal profit growth this quarter, if any at all.

While the fact that the Middle East channel's expectations for sales growth are not replicated in profit terms does not come as a complete shock, it emphasises the need for vendors and partners to address channel profitability in order to create a healthier market.

How would you assess the overall financial health of the Middle East channel at present?

Out of the 12% of respondents that considered the overall financial health of the market to be unhealthy or very unhealthy, 66% originated from the reseller and distributor channel - a statistic that some may suggest goes to show channel players are more sceptical than vendors.

Alternatively, it could just indicate that manufacturers are reluctant to admit any concerns they have! That said, the overall feeling of the Middle East channel appears to be buoyant.

A majority 46% of respondents considered the Middle East market to be financially healthy, with 35% saying that it is no healthier or unhealthier than usual.

What is your main business priority for the next 12 months?

The sales versus profit dilemma is projected firmly into the spotlight again following the response to this question on the main business priorities of IT companies in the Middle East during the next 12 months.

Upon reflection, it's perhaps no surprise that the results of earlier questions revealed a significant discord between sales and profit growth expectations when 27% of respondents admit that chasing revenue growth remains their major objective during the next 12 months.

Just 10% of those who answered the Channel Confidence Survey confessed to putting profit growth at the top of their agenda.

While it is routine for vendors, distributors and resellers to pay lip service to the importance of profitable growth, it appears that the nature of the market means the focus is still on building revenue for now.

Clearly this emphasis on increasing operational size and volume is reflected in the fact that a further 47% of respondents admitted that finding new business partners and expanding into new markets was their immediate target. With only 2% of Middle East respondents revealing that trimming costs is their chief priority, it's clear that the mission of the channel is to grow, grow, grow!

How would you currently assess the ability of your customers to meet their payments?

How companies feel about their chances of collecting debt is often a good indication of whether any sinister issues are brewing in the channel, so the results of this question will certainly give the channel community something to ponder.

Given that the majority of respondents believe the financial health of the market is nothing to worry about, it is no surprise that 66% remained confident of their customers' ability to meet payments.

However, the fact that 26% of the market - one in four respondents - had more concerns than usual is something the channel will need to monitor carefully.

For the record, of the 8% who claimed to be ‘extremely concerned', half were vendors and disties and the rest were resellers and integrators.

Which sector of the market presents the strongest growth opportunity?

The consumer and SMB sectors are widely regarded as major growth categories for the Middle East IT market, an opinion that two thirds of respondents agreed with.

In the end, the consumer market, which is flourishing in the UAE and increasingly elsewhere, nudged ahead of the SMB sector to take 36% of the ballot.

Given that retail companies only represented 8% of respondents, it might seem strange that the consumer sector made such an impression.

However, it's likely that the figure was influenced by the votes of vendors and distributors that have made the consumer sector an important part of their growth strategy.

How concerned are you that negative global economic trends will spread to the Middle East? channel?

Economic downturns in Europe, coupled with well-documented housing and banking issues in the US, have left Middle East vendors and resellers glancing nervously over their shoulders.

84% of respondents admitted they were either concerned or very concerned that negative global economic trends may spread to the Middle East channel, suggesting there is a strong sense of anxiety among market players despite the generally optimistic outlook for local growth.

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