Consequences of push for profit

If we have learned anything from Aptec’s acquisition of Tech Data Middle East, it is that the market needs to take a long, hard look at itself.
Consequences of push for profit
By Andrew Seymour
Tue 01 May 2007 04:43 PM

Before the market even dares to ponder how Aptec's latest capture is going to redefine the landscape, there needs to be a full and frank post-mortem of the reasons that forced Tech Data's withdrawal from the region in the first place.

When the world's second largest IT distributor calls time on its venture in the Middle East - a region supposedly characterised by double-digit growth rates and unlimited expansion opportunities - serious questions need to be asked. Tech Data's dramatic exit saw it become one of the first heavyweight IT companies to turn around and effectively say, "hang on, this market isn't such a healthy place to operate after all." In doing so it may have done us all a favour, even if it makes uncomfortable viewing.

This is not a decision that Tech Data took lightly. As a quoted company judged by the size of its bottom line, it was never going to be. The company undertook an "extensive" review of the operation, but even after evaluating its long-term prospects it still came to the conclusion that it was better off out.

Of course, everybody is asking the same question: is its departure down to management issues or the fact that the Middle East market is losing its appeal? There are many who will argue that it is the first reason. They will allude to Tech Data's failure to build a meaningful business outside of the UAE or its struggle to transform its Azlan enterprise unit into the same powerful force that roars so loudly in Europe.

While I accept that these points have to be taken into consideration, they do not tell the whole story. The fact is that the one global distributor that enjoys the trust of the vendors, has access to a comprehensive back-office infrastructure, and ostensibly does everything by the book couldn't cut the mustard in the Middle East.

To me, this suggests a couple of things. Either the margin structures of some vendors and their product lines are broken or distributors need to be a bit more artful to survive than Tech Data ever could ever afford to be as a listed US company governed by the need for transparency.

In explaining the reasons for its departure, Tech Data chose its words very carefully, but they will haunt the market for some time to come. In delivering the verdict that it could no longer "operate profitably" in this region, it exposed the very point that we are all in danger of forgetting: the health of the Middle East channel is tied to profit margin, not sales volume.

This is becoming a major theme in distribution and it has huge implications for the wider market. Other distributors privately continue to voice concerns about the rate at which transactional margins are decreasing, creating an over-dependence on vendor rebate programmes.

Until certain vendors admit that they are massively over-distributed for the size of the market, the risk of breeding an unhealthy trading culture will remain worryingly high.

As far as Tech Data Corporation goes, the lack of a presence in the Middle East is no big deal to its global aspirations. The Middle East accounted for just 1.5% of its sales last year.

At a local level, we all know that the context is completely different. Tech Data was the second largest broadline distributor by annual sales in the Middle East. It had the financial backing that many other distributors crave and an array of A-brand vendors regarded it as one of their primary routes to market in the region.

Regardless of how Tech Data was run in the Middle East, the nature of its exit has cast a shadow over the market. Vendors and the channel community need to be honest and frank with each other to build models that encourage margin and profitability. Otherwise Tech Data won't be the last distributor forced to pack its bags and decide enough is enough.

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