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