The Challenge of the Channels

The IT distribution industry is very unique in its structure and to the best
of my knowledge, the only industry which has multiple national level
distributors selling exactly the same products from multiple manufacturers with
absolutely no geographical demarcation. In most other industries like white
goods, automobiles, pharmaceuticals etc the channel structure ensures minimum
conflict and less competitive pressure on pricing. This aspect makes IT
distribution the most challenging industry.

The IT distribution industry in India has evolved over the past decade. It
has undergone major transformation during this period in terms of the number of
products, distributors and resellers, channel and vendor expectations as well as
the financial aspects of the business. Today, the IT distribution industry is in
a state of flux plagued by over distribution in most of the fast moving
products.

When the market was growing at a healthy rate, there was enough business for
everyone. With volumes dropping, margins coming down and fixed costs remaining
more or less same, most distributors had to rethink their business models and
strategies to remain viable.

Interestingly, in IT distribution, anybody can sell a pull product if he
offers the right price and the right credit. Therefore profitable sales, more
than the sales volume, comprise the measure of success. There are several cases
where distributors / resellers are selling the same product, but some make
profit, some don’t. In an over distributed market, only those who understand
the unique needs of a particular business and fulfill them will succeed. The
real challenge for multi product distributors is to manage diversity in skill
sets and resources required for different businesses while keeping the costs
under control. There is no magic formula for success, which works across
products and businesses.

One good thing which happened to the industry last year was that all the
distributors/ resellers felt a need to not violate certain business
fundamentals, especially those related to credit. The results have been positive
for everyone. A similar need has been felt on the pricing front. Every channel
member needs to ask himself, "Is my value add in line with my margin
expectation? And is my cost structure in line with my value add?"

Those who are unable to be competitive in a multi distributor scenario are
likely to go for exclusive arrangements, develop niche areas, and focus on
developing other business models like services, value added distribution,
geography specialization, training, technical support etc.

Much has been discussed and written about the emergence of a direct model
though the fact is that direct sales existed much before distributors came into
the market. Ironically, distributors came into being to a large extent because
manufacturers could not fulfill the overall end user or reseller demand. Just as
distributors do not exist to make products, manufacturers do not exist to
specialize in logistics and multi vendor solutions delivery. While some direct
sales will continue to happen, the emergence of a 100% direct model does not
seem feasible. One of the main reasons for this is credit risk management. None
of the manufacturers are geared up to manage this aspect, especially in the SMB
(small and medium business) and home segment.

In the coming years, the distribution industry will continue to change in
line with the needs of the market. However a lot will depend on the growth of
the SMB and home segment.

BY Jitendra Kulkarni

The author is CEO, Redington India