Distribution : In Troubled Waters

The agony seems to have piled up on the IT hardware front in India during the
slowdown in FY 09. As a cumulative effect, the impact not only remained limited
to the hardware principals but also trickled down to the distribution channels
as well. Be it national giants like Ingram Micro and Redington,medium level
players like SES Technologies and Rashi Peripherals, or regional players like
Sogo Computers and Technocrat Infotech, every IT hardware distribution company
endured heavy losses in some business division or the other which constricted
their annual growth.

The jolt came as an additional blow to the distribution fraternity as they
were already fighting with threats like decreasing margins, multiple competitors
in same product-lines and increased pressure from vendors to do volume business.
The year, therefore, raised questions of survival to many of the distribution
houses as they ruffled their way through to beat the economic meltdown.

Hardware Blues

IT consumption in FY 09 was severely impacted, especially in the second
half. As per MAIT findings, for the first time in India, PC sales recorded a
negative growth of 7%. What was more disturbing was the fact that key growth
drivers for the Indian hardware industry like notebooks, servers, display
products, and printers suffered adverse growth last year that in turn affected
all stakeholders. The impact was more visible on notebook consumption as sales
dipped. Unlike a steady growth shown in preceding fiscals, FY 09 witnessed a
negative turn and growth slipped down by 17% for the first time in many years.
Sale of desktops also went down by 4%. However, server and storage growth
although affected, remained more or less flat.

CyberMedia Research    DQ Estimates

It was a year of survival of the fittest, and those who managed to enter the top 10 list have proved their ability to steer their business in the right direction, withstanding difficult times to be the true match winners

Notwithstanding a satisfying first half, impact on hardware sales became more
pronounced during the second half of FY 09. The OND quarter in particular was
hard hit, and the situation went beyond repair with sales in almost all product
categories receiving major blows. With PC sales tumbling down drastically,
distributors felt the heat as PCs constitutes one of the key component in their
business. The impact was borne by both branded as well as assembled segments and
there was no respite for distributors. Monitors and printersthe other two major
bread earners for distribution businessalso met with similar fate as both
product categories witnessed decline in their sales. Even component business,
led by processors and hard disks, faced severe crisis as PC sales were badly
affected. The only saving grace was server and storage product-linesthe second
key component of the distribution business. With data center growth on the rise,
demand for server and storage solutions somewhat remained intact, generating
good business for the distribution channel.

In the desktop and laptop space, HP continued to be the dominant player
followed by Acer and HCL. Dell, however, emerged as the surprise winner as it
successfully convinced consumers about its vibrant product-lines. Having
initiated its channel business in the beginning of FY 09, Dell rolled out some
good channel policies and attractive incentive schemes for its partners which
made the company walk away with many national and regional distribution
powerhouses. While most of the leading PC brands suffered during Q3 of the last
fiscal, Dell continued to do good business. By Q4, once the market started to
show some signs of revival, Dell managed to conquer a handsome market share
beating the likes of HP and Acer. One major flop in FY 09 has been Lenovo since
its popularity with both consumers and partners plummeted. The brand failed to
pull sales both in desktop as well as laptop categories. While its competitors
failed to fill up the lacuna created by Lenovo, Dell not only made most out of
the opportunity but reinstated its market position by eating up a large chunk of
the share left vacant by HP, Acer, and other PC brands. This sudden shift in
trend naturally got reflected among the distribution fraternity. While players
dealing with Lenovo products along with HP and others definitely felt the brunt,
those selling Dell products appeared to be stronger to tackle the slowdown.

While CRT took a backstage last year with most of the leading display vendors
discontinuing the product-line, TFT or LCD monitors became the hottest selling
product in the display category. And with the cost of LCDs declining further
through the year, demand for the product soared even higher. However, the
transition forced distributors to increase their volume sales for LCDs in order
to make good margins which was again not a very difficult task for them. One big
upset in the monitor segment in FY 09 was Samsung whose sales decreased
drastically. The vacuum though was filled up by AOC and Acer. Both these brands
churned out good business for their partners. AOC, in particular, witnessed
increased adoption among distributors through its aggressive and channel
friendly policies.

For printers, adoption of laser technology among users increased rapidly,
while inkjets remained steady. MFD devices have been the flavor of the season
with new technology launches by principals at regular intervals and also
reduction in prices. Although HP continued to dominate printer and consumable
segments last year, brands like Canon, Samsung, and Epson did good business as
well. However, both monitors and printers couldnt grow much as both categories
had to bear the brunt of the slowdown.

Two more areas that witnessed explosive growth in the previous two fiscals
were external storage devices and laptop accessories. Although they were less
affected, growth was limited for both. Consumption of flash drives and SD and
MMC memory cards/sticks were moderate and that of external hard drives, digital
cameras and MP3/MP4 players were restrained. Demand for gaming products like,
high end graphic cards, joysticks and other related devices and accessories
failed to attract significant buyers.

CyberMedia Research    DQ Estimates

The four Meccas of Indian IT hardware businessNehru Place (New Delhi), Lamington Road (Mumbai), GC Avenue (Kolkata), and Ritchie Street (Chennai)too witnessed business downturn. H2 in particular, put the local distributors and resellers through an acid test as the already stiff competition among them became more pronounced

In the component business, the impact was inevitable on Intel and Seagate
even though they were leading in their respective segments. Brands like AMD,
Western Digital, and Hitachi however generated some good business through
aggressive marketing activities. Amidst all these turnarounds, business was mild
for those distributors who tried to focus on their own brands as the market for
components and accessories remained down last year. Instead of actively
promoting its brandV7Ingram remained de-focused with it and limited itself
from launching any major new products. Supertron, on the other hand launched
Solitaireits premium brandin addition to Supercomp to address the niche market
segment. Mediaman launched its mobile accessory range under its own brand,
Bravishs which it started distributing through telecom channels. However, none
of these moves could fetch expected results for these companies, although it
gave them some respite.

Small is Good

With uncertainty in the economy becoming inevitable, consumers buying
sentiments too become low and restrained. However, the show kicked-off on a
positive note last year, and most of the distribution houses focused on
enhancing their product portfolios as well as geographical expansion. The mood
for upcountry penetration has been still buoyant and the key thrust has been
towards exploring newer, virgin markets. Over the past few years, tier-2 and
tier-3 cities in India showed maximum business potential and more or less every
distributor responded by increasing their upcountry networks. By the beginning
of last year, these markets already showed signs of maturity, attracting these
companies to be more active towards generating higher business growth from the
Indian upcountry hinterlands. Understanding the growing potential of small towns
beyond the tier-1 and 2 boundaries, the companies started paying more attention
to capture these untouched markets.

The trend caught up not only with the level 1 distributors, but the regional
and sub-distributors also became aggressive with their activities towards
Mission Upcountry India. Interestingly, this active upcountry invasion by
distribution houses came as a handy proposition for the companies during the
recession. As sales declined heavily in big cities especially in the second half
of FY 09, business in upcountry locations remained less affected.

Upcountry remained a thrust area for Ingram Micro, and contributed more than
15% to its earnings. In a bid to enhance its upcountry reach, Ingram increased
its active partner strength to 12,000 and added eight new warehouses across the
length and breadth of the country to improve its supply chain. Unlike Redington
which refrained from any expansion plans last year, IRIS identified northern
India as a strong and growing upcountry market and restructured its regional
focus. It declared Delhi NCR as N1 and the rest of North India as N2 region.
This move helped IRIS add Rs 50 crore extra in revenue. The company added five
new branches in Ranchi, Patna, Varanasi, Vijaywada, and Nagpur. While Compuage
opened six new branches, Supertron opened four new branches at Ludhiana, Surat,
Jamshedpur and Kolhapur. Savex too opened three new branches at Jammu, Varanasi,
and Visakhapatnam and increased its presence in the East as the region
contributed 15% to its revenue. Savex also added 6,000 new partners across India
to beef up its already strong partner network. Neoteric focused on building a
pan-India distribution footprint in order to increase its penetration across C,
D, and E class cities. SES also focused on enhancing its pan-India reach and
witnessed good growth through breadth billing.

The Show Must Go On

The slowdown acted as a catalyst for the distribution community as it forced
the companies to re-engineer their business strategies that would deliver rich
dividends later. As shrinking businesses cornered them further, distributors
were compelled to device alternative business strategies to keep their boats
sailing during the recession. Most of them focused either on consolidation and
restructuring or ventured out into newer avenues.

While its volume business accounted for over 80% of the overall revenue,
Ingram enhanced its thrust in the value division as well. The re-categorization
of some of its value products like HP and IBM enterprise servers into volume
products not only measured as its business revamping strategy but also indicated
the growing maturity of domestic market consumption. Ingram further focused on
niche areas such as PoS and physical security and carried out new initiatives
like investing on certified training services for its partners and end
customers. The company also established its proof-of-concept center in Mumbai
for Juniper and Fortinet.

Redington meanwhile added nine new vendors and focused on large projects that
assured good RoI. In order to help its partners maintain their working capital
during the downturn, Redington built a core of committed partnersa move that
helped the company sustain its bottomline. It also launched the easy access NBFC
channel financing initiative to help its partners.

IRIS added Microsoft OEM products, APC power conditioning products and Canon
printers, projectors and security camera ranges to its distribution portfolio.
While it continued to focus on the education vertical and bagged some large
deals in the desktop and laptop space, Iris accelerated its focus on government
and defense sectors too and won some major contracts. Compuage focused towards
accelerating its overall organizational and operational strengths during the
last year. It added new product-lines including HP commercial printers, plotters
and supplies, AOC monitors, K7 anti-virus and total security productsLinksys,
Cisco networking products, Targus laptop accessories, Odyssey monitors, UPS
accessories and Universal one-for-all remotes. Savex added new principals in the
form of HP (printer and consumable) and Acer (LCD monitors). Instead of any
further additions, the company focused on consolidating its existing
product-line during the second half of FY 09 as the economic environment
declined further. Supertron, on the other hand, added big names to its
distribution portfolio like Dell (desktop and TFT monitor range), IBM (server
range) and extended relations with Buffalo for its wireless networking products.
While it maintained its channel business, the company increased focus on
government and large enterprise sectors, which together contributed 14% of its
overall business. For Rashi, the time was primarily for consolidation. It
dropped Lenovo and instead of adding any new brands, concentrated on existing
product-lines. The company further divided its workforce on the basis of various
product verticals in order to provide better partner support.

Moving forward, Q4 09 offered some breather to the industry as business was
restrained from further downfall. However, in spite of some improvement visible
in certain verticals, overall business remained flat. With signs of revival in
the domestic economy, the current fiscal would prove to be a vital mettle for
the entire distribution fraternity who would leave no stone unturned in
surpassing the loss earned last year and restoring their growth story.

Piyali Guha

piyalig@cybermedia.co.in