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Sun 13 Jan 2008 04:00 AM

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Boxing clever

The boundaries of the Dubai-based distribution channel are being tested on a daily basis as the market's ‘middlemen' develop new ways of delivering value in an increasingly congested environment. But where will the modern-day distributor of 2008 need to focus their attention to stand the greatest chance of success in the Middle East? Channel Middle East editor Andrew Seymour reports.

I t might rank as one of the most volatile categories of the IT market, but distribution is a function that vendors and resellers could ill afford to be without. Whether it's supplying stock, running technical seminars or providing post-sales assistance, the role of the distributor remains the glue that binds together the manufacturers and their entire channel network.

Yet despite its importance, the distribution sector remains an unforgiving place where complacency is seized upon by the competition and inefficiency can quickly lead to financial disaster. Distributors striving for success in 2008 know they have to strike a fine balance between meeting the rising expectations of their vendor partners and providing resellers with the range and consistency of service they have come to take for granted.

Everybody is looking at the bottom line. Many people got hurt financially during the last few years. They were shaky years for everybody and that has resulted in a mentality change

These demands are leading wholesalers to adopt a more sophisticated and professional approach when it comes to managing their overall business in the Middle East. Many are assuming a tougher stance with brands that don't contribute to their financial health, while at the same time coming up with initiatives designed to develop the first-tier channel.

"I can sense today that distribution is really changing somehow and the whole dynamics of the market are changing," said Jacques Chammas, managing director at Mindware.

Venu Menon, sales director at networking specialist Online Distribution, insists contemporary distribution is much more about providing added value in terms of training and support, rather than mere box-pushing.

"The core functions used to be just logistics leverage whereas now the role has extended further to include strategic territory management, technical support, education, marketing, relationship leverage and credit leverage," he added.

The age-old argument of local versus regional distribution, which has taken a back seat in recent years, looks set to resurface during the next 12 months as a result of the differing pressures enforced on the vendor community. The prevailing need to reduce costs, but at the same time appear more competitive, is likely to culminate in mainstream vendors conducting business with fewer - but ultimately larger - partners in an effort to exploit regional economies of scale.

Smaller vendors endeavouring to penetrate the market, meanwhile, will lack the profile to fit that model, leaving them to partner with an alternative set of distribution companies.
"Typically, as the large distributors get bigger and cover greater territories, it will become more difficult for them to develop smaller brands and these vendors will be relegated to the smaller in-country distributors to try and attain the traction they need," predicted Guy Whitcroft, COO at Aptec. "These two trends will likely result in increasing polarisation of distributors into the large, high-volume regional ones and smaller, more niche-focused companies operating in specific countries with smaller brands."

The verdict from several market experts is that distributors will need to identify ways of expanding the services they offer to resellers in an effort to drive customer loyalty. Distributors who used to talk about volumes, delivery times and warehouse capacity are now speaking about technical sales consultancy, online services and the benefits of advanced ERP systems.

Cisco-focused distributor Comstor has spent the past six to eight months signing up resellers to its OneX channel programmes and is already planning another addition to the family with the wireless- and mobility-focused OneWave scheme. The programmmes give Cisco resellers access to a comprehensive portal of training programmes, sales resources, product guides and lead generation tools. "We are totally dedicated to Cisco which means our commitment to resellers and the OneX programmes is clear," said Steve Lockie, managing director at Comstor. "We are really providing the customer with the tools they need to be successful in this market.

Comstor isn't the only networking distributor to recognise that if the market is to evolve then investments need to be made in educating customers and arming them with a wide range of sales resources, rather than just pursuing a culture of heavy discounting.

Polycom and TippingPoint distributor FVC says partner education tops its agenda. "An important factor that we believe needs more energy is enabling partners through training and hand-holding, and making them stronger," said Dharmendra Parmar, regional marketing manager at the company. "For that they need to be educated so that the customer can trust them to deliver those solutions.

Cisco and Intel distributor Logicom intends to focus on enhancing its sales and technical expertise this year, according to general manager Nicholas Argyrides (main picture). "An in-depth knowledge of the product and, to an extent, how to actually market it is required from both distributors and resellers," he said. "It is true that vendors' expectations have been increasing with time, especially when it comes to numbers. In fairness, suppliers such as Cisco provide the support to distributors that will often level out the high expectations. However, some vendors have yet to learn that it is all about pushing their products through the distributors, not to the distributors.

Online Distribution, meanwhile, anticipates making a series of investments in its CRM and VoIP infrastructure in an effort to facilitate business with customers. "Before the end of this financial year we will be introducing a partner loyalty programme with a slew of benefits and rewards to partners and integrators that do a major portion of their overall business with us," added Menon.

Incidentally, the talk of adding value and developing new services comes at a time when there at last seems to be an acknowledgement from distributors that profitable growth is more important than top-line growth. Chammas at Mindware thinks this change in attitude is evidence of a maturing market.
"I think if you look at the other players then nobody is telling you that they are going to be worth US$200m or US$300m next year - everybody is looking at the bottom line and profitability," he said. "Many people got hurt financially during the last few years. They were shaky years for everybody and that has resulted in a mentality change in distribution.

Mindware's focus on profitability has seen the company dramatically modify its product portfolio. Three years ago its components division represented 80% of its business, but the gradual introduction of a number of enterprise brands has diluted that contribution to just 45% of Mindware's US$200m turnover and helped inflate its overall profit margins.

For many companies, the focus this year will be on the level of service they can provide beyond normal credit and supply. Mindware says it will focus heavily on software, security and storage, ramping up the technical support it provides to resellers and paying attention to market creation. "Channel development and know-how is what the distributors need to engage in the channels or areas where there is higher margin," advised Chammas.

Distributors will clearly face a number of hurdles when it comes to channel development this year though, not least in persuading resellers to strongly commit to training their people. "This is an area which is a challenge and we are putting a lot of effort this year into making sure it happens," admitted Parmar at FVC. "It is not only about the technology and the product, but also the generic sub-skills that need to be developed because when resellers recruit new sales people they may not have the necessary sales skills.­

At the same time, if channel development is to become an even bigger focus, distributors will need to be adequately rewarded by the vendor community. Programmes that compensate distributors for their technical ability, channel breadth and market development skills need to be promoted in order to sustain long-term growth. "Such measures will align the vendor efforts with the new strategy of distributors to focus on value-added services," said Argyrides. "It is still true that numbers talk, but volumes should be the end-result of supporting other strategies. Volumes should not be the strategy itself.

While the usual trends of geographic expansion, product portfolio change and even M&A activity are also likely to characterise the market in 2008, Whitcroft at Aptec reckons Middle East distributors should heed the old adage of ‘get big, get niche or get out'. "In the near term, distributors will need to decide their strategy going forward and start positioning themselves accordingly. Financial pressures, due to costs, will be brought into sharp focus too," he predicted.

Yet while wholesalers talk fondly of how they are going to introduce new initiatives to the market, they still have an obligation to ensure they don't neglect the traditional functions of distribution. "Price, availability and credit is really where we are at in most markets," reflected Lockie at Comstor. "However, we've got the added complication here of logistics, which are taken for granted all too often. The real experience that most of our customers or end-users have of distribution is still the final drop.

The Dubai-based distribution channel is destined for another eventful year, but clearly the victors will be those capable of blending conventional distribution methods with the new range of skills and services that delivers more than what the customer expects.

Distribution HurdlesWhile most Dubai-based distributors are optimistic about their prospects for 2008, they are also aware that the sector in general faces some huge challenges over the next 12 months. Credit problems, absconding resellers, capacity issues and profitability worries have all plagued the distribution channel in recent times and wholesalers won't need reminding that they will need to overcome more than a few hurdles this year.

Steve Lockie, managing director at Cisco-focused Comstor Middle East, reckons the steepest challenge continues to be one of scale because each market in the Middle East is relatively small compared to any of the developed European or Far East markets. "The fact that we don't have monetary unions, free movement of goods across borders, standard imports procedures or customs documentations means it is still a very inefficient model," he admitted. "And because it is difficult to get anything to work on a scale, the two-tier model in this part of the world is more inefficient and expensive than elsewhere."

The challenge of achieving scale is unlikely to be eased by what many regard as a worrying shortfall in skilled and experienced labour. Distributors predict they will be forced to increase their wage bill if they want to attract the right skills to the Middle East.

"Employees from other countries are increasingly reviewing their options each year and many are returning to their country of origin as salaries and living standards increase there in real terms," said Guy Whitcroft, COO at IT distributor Aptec. "That shrinking pool of talent is adding to the local cost pressures as companies compete for these people by offering better conditions and packages."

The impact of grey marketing on the authorised channel is another issue that distributors are certain to have out with their vendor partners in 2008, along with the unrelenting pressure to meet targets in order to ensure profitability. Credit risks also loom large, according to Nicholas Argyrides, general manager at Logicom. "In the absence of proper regulatory bodies to monitor the financial health of companies in the Middle East, bad debts are increasing in frequency and volume," he said. "This has driven many of us to search protection under a credit insurance policy which, naturally, does not come free. This extra cost further erodes our bottom line."

Keeping a firm focus on profitability is clearly the key for many distributors throughout the Middle East this year. Jacques Chammas, boss at Mindware, insists the secret is for companies to assess their sales objectives versus their margin and associated level of risk. "I think these three are critical because the vendor wants to grow sales, whereas you want to grow sales, but also the margin," he said.

Chammas suggests distribution is becoming more about man-management, meaning those with the most talented personnel stand the best chance of long-term success. "You need to have very efficient managers and employees and increase the level of productivity individually, which is why training will play an important role. It's about giving more responsibility to the right people."

Clearly the variety of tests that distributors face will also depend hugely on the market sectors they operate in. While components specialists will naturally concern themselves with rampant price fluctuations and retail distributors face the task of winning more shelf space for the brands they represent, networking distributors are confronted with the challenge of harmonisation and access to markets where incumbent telecom operators still reign supreme, according to Comstor's Lockie.

"One of the key driving forces for growth in networking worldwide is convergence and in the Middle East that is very difficult because of the restrictions still placed on VoIP or any form of multimedia on the network that utilises IP as a bearer. Then you've still got some issues in markets where there are monopoly operators."

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