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Thu 4 Dec 2008 04:20 PM

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Pressure mounts on distributors

Overstocking in the volume channel is causing problems for regional distributors

Middle East distribution sources are warning that a glut of inventory in the volume channel is forcing wholesalers to dramatically revise their order status with vendors or sell below cost in a bid to manage their way out of the current challenges they face.

Reports that distributors are saddled with unusually high levels of stock, are the biggest indication yet of the pressure on the second-tier channel in the wake of the ever-changing global economic climate.

The combination of an apparent slowdown in consumer purchasing and the cautious spending attitudes of corporates has put paid to the end-of-year forecasts that many vendors and distributors have been working to, according to sources.

“The channel is overstocked at the moment,” said one senior regional distribution figure. “The impact of the financial crisis in the rest of the world really seems to be hitting the market hard. Anybody with a large stockholding that expected to have huge sales faces quite a challenging job.”

Volume channels are understood to be suffering the most pain, with distributors struggling to clear stock and in some cases even putting orders on hold until they are able to get rid of existing inventory.

In a bid to move product, prices are also being slashed across the board, with one source claiming the HP channel was particularly affected last month as partners attempted to meet their targets ahead of the vendor’s year-end.

“In order to hit the quarterly rebate we saw that the market price was slashed very aggressively — as low as 20% below distie cost,” insisted one source.

Mohan Choudry, general manager at Fujitsu Siemens and Lenovo wholesaler Distributech, admits stocking is a massive issue for the channel, but insists his eye is on how the situation is being handled at reseller level.

“I have stalled increasing any inventories right now because I have to clear the existing inventory before looking at it further,” he said. “This existing inventory is not in terms of my warehouse, but the resellers’ shelves, because we need to look at the sell-out before we even think of stocking further. The biggest worry that we have is that some distributors come and flood the market even more.”

There is also an argument that the inventory surplus has been exacerbated by vendors over-forecasting the strength of demand during the early part of the year. In some instances that has led to between two and three times the amount of product that the market can absorb being pushed into the channel, say commentators.

“The sell-out isn’t actually that bad — the problem has been that the supply is more than the market can take,” claimed one hardware distributor. “To be honest, I don’t see a strategy from anybody that is working at this stage. It is as though product has been dumped and forgotten about.”

Hyder Mir, general manager of sales at Despec MERA, insists the fast-moving nature of the consumables business that it operates in means it is less exposed to inventory build-up, but says it is a concern for distributors carrying big-box items.

“Consumables are a must-have product so excessive stocking is not happening. But if you are a corporate buyer that has to purchase a printer, which is an extra budget for you, then that is something that might go on hold, and that leaves the distributor stuck with stock,” commented Mir.

With talk of credit insurers acting cautiously and credit availability reduced, distributors admit they are treading carefully. “Our priority is not to make any big mistakes at this stage,” said Choudry at Distributech. “We have tightened the system a bit and don’t want to get into stocks that are not moving. We used to be very aggressive, but we don’t want to be like that now,” he conceded.

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