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Sun 7 Jun 2009 11:51 AM

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The real agenda behind the vendor-distributor rush

Things happen in the Middle East IT channel that don’t always seem to make sense.

Things happen in the Middle East IT channel that don’t always seem to make sense. Such as why vendors continue to hire more distribution partners at a time when market demand is widely perceived as unpredictable and uninspiring. Perhaps this latest trend is not as illogical as it initially appears, however.

The pace of sales activity in the Middle East market has slowed down during recent months, but the appetite for new distribution agreements most definitely hasn’t. ITE-Microsoft, Redington-Negtear, Logicom-HP, Redington-Dell — those are just a flavour of some of the tie-ups that have come to light just lately.

I’m sure the immediate reaction from most channel onlookers has been the same as mine: if the market is contracting as fast as everybody says it is, why would a vendor want to appoint supplementary distributors?

Now, the most rational answer would appear to be this: putting extra sales channels in place increases the likelihood of more transactions occurring and consequently more revenue being booked.

For vendors facing pressure from EMEA to bring in the numbers it is undoubtedly an appealing solution. But the strategy only ever works as lucidly as it sounds in a handful of cases.

What often happens when vendors take this measure is that it merely leads to more stock being dumped into a market already besieged with digestion problems, while simultaneously creating further competition for existing distribution partners under enough stress as it is.

There might be a sales spike in the short-term, particularly as the new distributor looks to impress by taking a couple of large consignments to begin with, but longer term the only thing the vendor is likely to face is a price war that compromises everybody’s profitability and a bunch of pretty aggravated partners. Rather than just flooding the market by hiring more wholesalers, it would surely make sense for vendors to take the reverse approach by either reducing numbers to make it more comfortable for existing partners to operate or implementing a much greater level of segmentation so that each distributor is measured on the specific markets it is asked to develop.

But back to the initial question. Why appoint supplementary distributors at a time when market demand is unquestionably weaker than at any time before?

The real answer is credit.

Since the beginning of the year, the problems affecting the market all stem back to the availability of credit. The harder it has become to access credit, the more difficult it has become to do business. On top of that, insurers have been rapidly withdrawing cover for reseller customers they deem a risky bet.

All of this has created a situation which has been nothing short of disastrous for vendors that have watched their regional volumes boom on the back of a vibrant channel credit climate in recent years.

Let’s try and illustrate this. For argument’s sake, assume a vendor had four distributors each providing US$10m of credit lines to the market before the downturn. Now, if those distributors today are only capable of providing US$7m then the total amount of credit offered by those same four companies is US$12m less than it was before.

How do you make up that shortfall and ensure resellers have access to the credit lines they need to buy your products? Simple. Appoint another distributor.

By doing this, manufacturers go some to way correcting the imbalance of credit in the channel and improving their chances of reaching resellers that don’t have limits with existing distributors or are struggling to get the capacities they want.

I don’t doubt vendors are sincere when they cite market expansion and reseller penetration as their incentive for hiring additional distributors in the present environment, but below the positive spin the prospect of another credit source clearly remains a major motivational factor these days as well.

Looking further down the line, there is an unremitting danger that vendors could find themselves saddled with massively over-distributed channels as a result of their current actions, and that will lead to problems of its own.

But that’s a battle they seem prepared to ignore for now.

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Kash 10 years ago

I totally agree with you Andrew. The whole game of getting a new Distributor or a Distributor getting a new vendor is putting more pressure on the Market, in turn creating a price war, where the losers are always the Distributor and Reseller. Vendor, today are pushing distributors to their extreme to achieve their own committed numbers, going down to offering incentive to Resellers, price discount after purchase to distributors, daily spiff at distributors office etc... its high time they realize the market situation and both (vendor, distributor) make sure they help the reseller to move out the stock rather pushing more stock to full their warehouses. Vendors need to realize that distributor work on minimum margins which is now even lower due to the economic crisis, getting more distributor will create more fall then gain.

Arun Chawla 10 years ago

I would simply say - Perfect article written. Well done

Raj 10 years ago

let us take a neutral approch and analyse the the situation:- If vendor is appointing new distributors to map required credit frame in the market,it is a fair decision. Resellers are able to get necessary credit support to run their business and credit as a reason for slow business and aggrevating crisis is taken care. Remember, these days all distributors are offering credits through insurance companies and the limit offered by these ins co's are not as per the market potential or demand. In this case distributor play a very big role by offering so called "internal credits" to the market. More the no. of distributors more the chances of getting credit by resellers. Now about the TAM, total addressable market. Who knows the total market size in terms of brands? It is a PUSH to channel and FLUSH from channel activity which keeps all brands alive. Whoever is smart to achieve maximum PUSH and faster in FLUSH will take max market share. Yes for this game more distis are needed, sub distirbution is created, distributors are awarded premium brands, resellers are kept alive by allowing them to do the regular cycle of invenotry turns and cash gains.