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

Aggarwal.



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.

AKILA SUBRAMIANIAM



in Chennai