IT Channels: The Future of Selling

“I check into a hotel in New York and want to see a copy of The Times of
India. Along with a cup of tea, I ask for the newspaper to be delivered to my
room. At the hotel, the third-party contractor taking care of printing services,
goes on the Web, downloads the latest edition, prints and delivers to the room
for a dollar. Now, this is not a distant dream. We are building our strategies
of what we think is the future of selling.”

This is Ravi Aggarwal, VP, HP India. Clearly, the point he is
trying to make is that the two-tier distribution system is in for a paradigm
shift, from that of products to services. For instance, you could hire a laptop
for a few days, rather than invest in buying one. Sounds far from the
traditional channel world? Welcome to reality.

Traditionally, we have known the distribution model to be a
three-tier system, comprising the wholesaler or the distributor, the dealer and
the reseller. With the expansion of business and consolidation in the market
place, the channel has evolved into an efficient two-tier distribution
structure, involving the distributor and the dealer, thereby cutting down on
time and cost. And with the advent of the Internet, the channel is reshaping
itself yet again.

Worldwide, PCs have been driving sales of IT products
following the two-tier distribution model as the standard. India has also
followed a similar practice and in this process, there are distributors like
Tech Pacific and Ingram Micro playing “the all-important” role–importing
the products, building the channel for the products, offering credit,
warehousing and logistics. The name of the game has been cash flow management;
the distributor having to pile up inventory stock, distribute it and get back
the money invested on time, to roll it back into the business.

The distributor in a country takes more than two weeks to get
stocks ordered from abroad, do the warehousing, get the order and deliver it to
the channel. It then reaches the end-user through the dealer and the local
reseller. By now, the product has passed through nearly 30 transactions,
traveled nearly 20 destinations and the cost has spiraled up to over 40%, thanks
to the margins at each level of transaction. So the customer finds different
prices at different levels of channel hierarchy. Worse, the product price has
dropped by nearly 30%, resulting in a loss for the distributor and the other
components of the supply chain. The industry is familiar with Intel’s price
drops almost every quarter and the swings in the PC prices that follow.

The Net advantage

With the arrival of the Internet, the channel’s hold over
pricing is being broken. Usually, for small buyers, retailers in the cities were
the only source of IT products-related information. Also, there was no
uniformity of prices even in case of branded products and the prices would vary
from reseller to reseller. In case of the gray market products, the prices would
usually depend on the knowledge of the buyer: better the IT knowledge, better
the price.

However, the Net has ensured that adequate information is
available on the various Web sites and this transparency has eliminated the need
for malpractices. The Net has brought in the ability to search the database of
merchants to find the best price. For instance, the price of a HP printer on the
Web ensures that the customer is aware of the price of the printer even before
he buys it.

Similarly, take the example of a first-time buyer for a PC.
Earlier, the home customer would typically go to the nearest dealer, put forward
his requirement and check out on the pricing. Today, the customer visits various
dealers’ Web sites from the luxury of his home, figures out the technical
specifications that match his requirement, locates the dealer nearest to his
home, touches and feels the product along with his family and brings it home.
“The whole quality of selling experience is different,” says NY Prasad,
CEO, Ingram Micro. Information availability, the change in the supply chain
management structure, cost-effectiveness, process efficiency, the increasing
number of virtual stores and e-tailing contribute to make selling different. Yet
another school of thought is that the Internet will offer a means by which the
distribution model itself can be done away with. Dell’s unprecedented success
in its direct model of supplying a PC from the manufacturer to the user is a
case in point. Dell has done away with the need of the channel network and, with
its success, other companies are also looking at selling over the Net. The
advantages of the Net and the increasing pressure to replicate the Dell model
could spell doom for the channel players.

Channel conflict

The Net and the direct model are bringing forth many
uncomfortable questions about the future of the existing channel market
dynamics. For instance, the top-of-the-mind issue is whether the two-tier
channel is in for a shake-up or the channel will be completely done away in a
few years time.

The players think that the channel will be part of the system
and no vendor can afford to completely do away with it. “The inherent
advantages of the two-tier distribution model will ensure the sustenance and
growth of the channel, which still holds above 70% of sales for vendors and will
continue to do so,” vouches Prasad. And he has his reasons. For the sheer
scales of economy, the way to market the product to the customer will need a
face and a delivery mechanism, and hence the channel. “The first-time PC
buyer, who goes in by the ‘touch and feel’ will go through the retailer,
while the second-time buyer, who is looking at buying online or updating is an
e-tailer,” explains Prasad.

Channel players in India have another advantage–the low
reach of the Internet and the absence of call centers for booking PCs. While PC
volumes are substantially high, the penetration of the Internet or the telephone
density does not justify such a scenario. Besides, customer buying patterns and
the “touch and feel” factor ensure that the model remains. However,
channel players agree that the Internet is here to stay and will continue to
define the way products are sold. Agrees John Aravamudhan, president, TVS
Electronics, “What we will see is the emergence of a new medium of selling
on the Internet, while the traditional channel will continue to fulfill its
role,” TVSE is a model that has integrated the traditional and the
futuristic models into its distribution architecture.

The other front–vendors going direct–has already opened
up. The large corporates, with specific purpose-driven requirements of their
own, have the option of placing an order on the Internet. HP, for instance, has
a separate, secure Web site for each of its large customers who want to order
the HP range of products across as many as 40 countries around the world.
“Instead of one company ordering the products at 40 different places 40
different times, the company uses this as an extranet, with security features
that help it get the required resources across the world,” explains
However, the vendors still have a lot of room for the channel partners. Taking
HP’s example, in addition to its direct sales through the Web site for its
large customers, the company has divided its countrywide channel into corporate
dealers, value-added resellers, traditional dealers and retailers. Other
companies are moulding themselves to different levels of reaching out to
customers. Compaq, which operates through its channel for instance, has launched
its e-store recently. A store that offers direct supply of products by placing
an order on the Web or through call centers.

Consolidation today

The existing channel and the way of conducting business are
undergoing a major change. To start with, there is the change at the players’
level. "Consolidation of big players at the distribution level for a global
reach and for a sizeable market share has already started happening," says
Aggarwal. For, finance, logistics and supply chain management remain key factors
that impact the distribution business. Consolidation is the only way by which
companies can truly become global.

According to Hans Koppen, senior VP, Ingram Micro and
president, Ingram Micro, Asia-Pacific, "In the US market, at the uppermost
rung are Ingram Micro and Tech Data. Below them a majority of the players have
either gone bankrupt, merged or been acquired."

India cannot remain away from the same. "At another
level we will see the consolidation at the reseller or dealer level. The
resellers dealing in printers, components, software and the likes, operating in
isolation will come together and act as a one-stop-shop for customers,"
observes Prasad. This is because the companies cannot expand on each product
line and will compliment each other and leverage on each other’s strengths.
"However, there is the opportunity for value-added niches, which will
determine the growth and sustenance in the market," says Ravi Swaminathan,
director, Compaq India, "For ultimately, people will shop around for better
value," he adds.

Increasingly, it will be focusing and building up on
specialized areas. "If a manufacturer wants to be another Ingram Micro,
then why reinvent the wheel?" questions Prasad. Drawing the analogy of the
runway to the distribution model, he says, the channel allows for a single
runway on which all fleets can fly, rather than creating a separate runway for
each aircraft.

Convergence on the end-user is a major trend that is
happening worldwide. "The manufacturers, distributors and dealers will
finally converge on the customer," says Prasad. According to him, the trio
will leverage on each other’s strengths to give a final, customized product
and service to cater to the customer’s requirements. In the process, we will
see that the "all-important" distributor, who handles everything from
importing the product to building the channel for the product sales, will focus
on logistics, cash flow management and the supply chain. "The tier-two,
will now have to focus on the relationship management rather than box pushing,
especially in a first-buyer market like India where selling still happens by
reassurance and ‘touch and feel’ factor," says Ravi Swaminathan.

Renowned speaker and Web specialist Lester Wunderman
observes, "Disintermediation will happen in the channel business." He
goes on to explain that "companies will eliminate layers of intermediaries
to increase profit margins, reduce prices and provide consumers with more
information and services". Dell has done this successfully and other
vendors are trying hard to replicate the same. In doing so, concepts such as
virtual stores, displaying ware, specifications, price and features will spring
up, ensuring a more "informed buying transaction". He envisages that
in its wake, it will also present a lot of opportunities in converting homes to
work places and shopping centers.

One of the most revolutionary shake-ups that are about to
change the channel business, however, is the shift from product distribution to
services. The market will open up and grow dramatically for services in all
areas. "It will be availing the services on a need basis, and not
necessarily buying the product. To that extent, services and support will become
an integral part of the channel," says Aggarwal. Industry vanguards expect
that the services will throw up unlimited opportunities for the channel.

To start with, there would be the new realm of channel called
the Internet channel, which would be primarily catering to customer requirements
of online purchase. This will be a focused area of sales and services via the
Internet. The Net has already shown us the possibility of online sales picking
up like a forest fire. According to a Forrester report, the e-commerce market
will account for more than $10 trillion worldwide by 2004. The north American
market alone is expected to grow to $3.5 trillion by the same period. Even an
under-estimated 5% of this market for the IT industry will lead to the
phenomenal growth for the channel, according to industry sources.

According to an IDC report, "Online sales will account
for almost 40% of US consumer PC shipments in 2004". A comparison with the
performance during the last year reflects the growth for online sales. In 1999,
just 8% of all PCs were sold to US consumers or fewer than 1.4 million were sold
via the Internet. In 2004, close to 40% of all consumer PC sales in the US or
almost 9.3 million PCs will be made available online, as per the IDC report. The
Internet channel partners will be the primary routes for consumer Internet
purchases. And for the services segment, we will see the emergence of
"portal partners" or "portnals". A term coined by IDC,
"portnal" is a platform for vendors to deliver services to partners
who recommend, sell, implement, and/or support their products. Most of the
second-time buyers or computer peripheral buyers will transact online, based on
the brand experience and the ability to talk to someone at the "portnal"
will impact the buying.

As a result the channel will get more IT-savvy in its
operations. The distributor will function as an intermediary between the vendors
and the customer, by extending his IT infrastructure to the channel as an
intranet, while the extranet or customized Web site will be used by the
customer. Major distributors such as Redington, Ingram Micro, Tech Pacific have
all implemented the distribution ERP packages, and integrated to the warehouses
and branch offices, giving them the ability to track every single transaction at
any given point of time. Statistics reveal that online sales will see an
explosive growth in the years to come. "We have had about 45% growth on
online sales compared to last year in the APAC region," admits Aggarwal.

Nevertheless, this is not to be confused with the direct
selling model as offered by Dell. While vendors and manufacturers will invest
further on online business, it is not to be forgotten that the vendors will move
into the multi-channel approach for doing business. HP for instance, in India,
has a channel strategy that allows them to divide the market into corporate
dealers, value-added resellers, traditional dealers, and retailers, in addition
to online direct sales. The company has recently launched its consumer direct
program in India. "The customer today has a lot of choice, one-to-one
marketing, online sales, dealer and virtual store," says Swaminathan.

Globally channel players are facing the heat from both the
customers and the vendors. Vendors, in the face of increasing their
profitability on lines with Dell, are moving direct via the Net. IBM, HP and
Compaq are already selling direct to their customers. On the other hand,
customers with information available on the Net are becoming more demanding from
the channel partners. Smaller channel players will have to bear the brunt rather
than the distributors like Tech Pacific and Ingram Micro. Though in India, we
still have the lag time of about two years before we have a robust
e-infrastructure, sooner or later, the reality is going to seep in.
Consolidation will become a common facet of this market segment and the players
will increasingly look at services rather than just pushing the boxes.

In light of such a scenario, the industry will throw up
numerous challenges as well as opportunities. The quicker the channel player
realizes the importance of the new market dynamics and plans accordingly, the
better the chances of survival in the coming topsy-turvy channel world.

in Chennai

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