CHANNELS: A Squeeze for Tier Two

Competition is a necessity not just from the consumer point
of view but also from the industry perspective. It could also imply changing the
way you have been doing business. Today this is best demonstrated in the fast
changing channel world. Traditional distribution models used to subscribe to the
three-tier distribution model with the manufacturer and master distributor at
the top followed by the regional distributors and the local retailers at the end
of the chain. This is fast changing in the new channel market.

As the industry is fast shaping as a low-margin, high-volume
ballgame, one of the key distribution trends is cutting down layers in the
channels, and thereby the costs. The benefits are passed on to the customer.
Today the manufacturers and master distributors are approaching the retailers
directly, cutting the distribution layers. The regional distributors, the
earlier sources of sales, are being edged out. Retailers too are dealing
directly with the top rung to improve their margins by cutting out the regional
distributor, their earlier source for products.

Another interesting trend is the transparency in pricing.
Today retailers cannot have their own pricing; they price their product
depending upon the customer.

Manufacturers are increasingly making their product prices
public via the Internet or published price lists. This has eaten away the
margins, and to improve the margins, channel players are trying to reduce the
distribution chain as far as possible. All this is affecting the regional
distributors the most and these players have to constantly evolve to keep
themselves in business.

Says Ganesh Ayyar, president, marketing, Asia-Pacific,
Hewlett-Packard India, "The major change in the channels segment has been
that the focus has shifted from the supplier side to the consumer side. Instead
of depending on the supplier to push sales, the channels have started focusing
on customers to generate business."

Distributors’ countermeasures

The first step that the middle-rung players are adopting is
changing the credit policy.

RK Malhotra, CEO, OA Compu—serve, Delhi, believes that the
margins are not commensurate with the efforts and that one of the ways which
could make a difference to the business is to adopt a safe credit policy.
Instead of supplying to all, the company will be selective about its customers
and supply to only those with paying capabilities. Thus with lesser outstandings,
there will be regular cash flow, which will help the company undertake changes
in the business strategy–like setting up franchisees or going retail.

Retail is another component of the overall strategy that
regional distributors are actively exploring. While Compuserve would rather
adopt the franchisee route, Softek is definitely looking at increasing its
retail presence across Delhi with more outlets. Another Delhi-based distributor
Miraj Marketing has just set up one retail outlet and plans to increase it
across the city. The tier-two players are moving to the third tier to stay in
the business. Not only will the benefits reflect in their logistics, this move
will also take the middle level channels closer to the customer for support
services.

Seems like a good strategy under the circumstances, what with
tier-one distributors like Godrej Pacific, Ingram Micro and Redington gradually
increasing their retail presence. Manufacturers have also joined the retail
bandwagon pledging to establish closer ties with the customer. Therefore, it is
only wise for the middle level players at the regional level to go along with
the adage "if you can’t fight them, join them".

Simultaneously, a lot of players have also changed their
target customers. A few of the players are moving to directly selling to the
corporate and the government sectors, and adding services to their offerings as
a key differentiator with a local flavor. While Miraj’s entry into networking
products will also see it being accompanied by providing integration services,
Softek’s value-add will be in terms of providing free consultation to its
customers and integrators. OA Compuserve, which already has domain knowledge on
networking solutions, will use it to leverage its distribution business.

Another part of the distributors’ strategy is the
aggressive expansion of their product portfolio. SD Computers, dealing in
products of Samsung, HP, TVSE and Epson, is now talking with Sharp and Xerox.
Not only will it add to the product range, it will also move the company up in
the channel hierarchy. Now SD Computers will be looking to being a tier-one
distributor. Softek Computers has recently added the motherboard to its product
range, importing directly from Taiwan, and Miraj Marketing is looking at
expanding its product offerings to include networking products. This strategy of
product expansion is complemented by a number of value-added services.

Solutions

A few of these players are going back to where it all
started, suppliers, and the distributors are asking the suppliers to bail them
out. Says PK Sharma, CEO, Comnet Vision, "We shall ask the suppliers to
help us out and I think they should." But with the big suppliers themselves
being in the retail game, it is unlikely that help would be forthcoming.

The regional channels will nevertheless play a critical role
in the distribution market for the inherent advantages in the system. One, they
will continue to have intimate knowledge of the market conditions. Two, they
will continue to have the logistics edge because it is possible for them to
replicate presence all over a city which is not so easy for bigger players. Yet
the fact remains that the channel market is witnessing a lot of changes and can
turn into a "do-or-die" situation for these players in spite of their
inherent advantages. So, sooner the regional players realize this truth and
accommodate their business plans the better it will be for their long-term
business survival.

Balaka Baruah Agarwal
Cyber News Service, New Delhi