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Sun 22 Feb 2009 04:00 AM

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Cash counts for distribution channel

If senior distribution sources are correct then the Middle East channel is destined to witness a major shake-out this year as the pressure becomes too much for some companies.

If senior distribution sources are correct then the Middle East channel is destined to witness a major shake-out this year as the pressure becomes too much for some companies.

In an environment where the priority has changed from prevailing to simply surviving, it appears that those with cash at their disposal stand the strongest chance of making it through the storm unscathed.

As the Middle East channel finds itself under the cosh, it is perhaps no surprise that the distribution rumour mill is rife with speculation over who could be a casualty of the frosty conditions that continue to make business extremely difficult.

But are these really tough times for everybody?

An increasing number of channel insiders have made it clear in recent weeks that distributors with cash to hand — and the capacity to make good use of working capital — could actually profit from the stress that the sector is under.

To understand this, sources say it is important to consider the bigger picture, which ultimately consists of multiple factors but starts with mainstream distributors encountering serious cash flow challenges at the moment. At the same time as this is happening, banks remain prudent in their lending, to put it mildly, while manufacturers are following strict orders from HQs to scrutinise their credit exposure more closely than ever before.

As a result, they are getting tough on things like overdue payments and unrecovered debts, which didn’t necessarily warrant any urgency before. At least two Dubai-based distributors said this week they know competitors that have been put on immediate hold by vendors after struggling to collect arrears from reseller customers.

Consequently, those with cash are getting deals passed their way because the vendors know they can absorb the product, and more importantly pay for it.

At this point in time, distributors with access to funds arguably possess more of an advantage in the market than at anytime in the past, providing their reserves are managed carefully. As long as they continue to trade and don’t lose out to unpaid debts — because cash can quickly be swallowed up if payments aren’t collected — then the theory is that their positions should be enhanced.

Put simply, cash-rich distributors will be better placed to purchase higher quantities of stock and therefore generate more attractive margins — due to volume and cash discounts from vendors — while larger deals are also more inclined to be directed their way by vendors.

Again, that improves their chances of invoicing more business and maintaining cash flow, thereby affording them greater purchasing power to buy more stock — and so the whole cycle reworks itself once again.

Cash-strapped competitors, on the other hand, could find themselves increasingly handicapped in terms of deals, margins and stock allocation, leaving them in a position where just a couple of big debts may prove fatal.

Follow this argument through to its natural conclusion and the upshot is that financially-sound wholesalers could actually emerge from the current turmoil in a better position than when they started, while weaker contenders are at risk of losing their footing completely.

This scenario is certain to lead to some carnage in the market, although that’s not to say it would be bad for the long-term health of the channel. Most vendors are probably guilty of over-distribution in some product lines anyway so the natural elimination of partners could correct that problem, rendering unprofitable business compelling again and leaving disties to put the emphasis back on value generation.

What does remain unclear at this point, however, is exactly which players or sectors of the market are most susceptible to the volatile conditions we are seeing.

Two schools of though persist, it would seem. The first is that authorised distributors with true reseller breadth will triumph at the expense of sub-distribution or brokerage companies, which are perilously placed because of the nature of their business. Not only do they typically trade without price protection, but they cannot afford to accept large inventory consignments or take massive credit risks.

The opposing argument, meanwhile, is that sub-distributors may actually do quite well amidst such unpredictable circumstances. Companies that have no contractual obligations with vendors and aren’t tied into programmes can often act more nimbly than distributors that are.

As has happened before in other regions when the IT market has suffered a major crisis, organisations renowned for operating under the radar have actually made a lot of money from cleaning up with bankrupt and excess stock.

It is still far too early to say how dramatically the regional channel landscape will evolve over the coming months. For now, distributors just have to make their cash count.

Andrew Seymour is the editor of Channel Middle East English.

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