Rising petrol prices, an unexpected tax and a looming e-toll charge will force the highly-competitive channel market, known for its thin margins, to make drastic changes this year.
Rising distribution costs have, until now, been absorbed by the channel, which has placed increased pressure on margins. However, the channel will be forced to pass these expenses onto end-users in the middle of the year; forcing up the price of hardware and potentially limiting growth in the segment.
Finance minister Pravin Gordhan yesterday announced several tax increases, including an additional 18c per litre fuel cost from 6 April, and a 7% tax on imported monitors that will come into effect on 1 April, after having been abolished in 2004.
The e-tolling system will also kick in on Gauteng's freeways towards the end of June, and the price of crude oil is again on the rise, which will spill over into fuel prices.
Unbearable situation
Tarsus CEO Pierre Spies says the channel cannot continue absorbing rising costs and there will be a “fundamental shift” in the business model in the middle of the year, when the distributor starts passing increases on to end-users. The South African hardware market is worth about R20 billion a year.
Spies says Tarsus will lead the way by passing these distribution costs onto end-users in the middle of the year. Currently, SA is one the few countries without delivery fees, he adds.
There are several issues placing pressure on thin margins, including rising insurance costs, due to hijackings; higher fuel prices; and increased security expenditure, says Spies. In addition, he explains, margins are under huge pressure, because of a global oversupply in the PC market, and businesses undercutting each other.
“The tolls will have an impact on distribution businesses, as well as the channel. This is, however, only a portion of the costs that are in store for our industry,” says Spies. He says the rising cost of security, fuel, insurance and toll fees, all add an additional cost to the business, which will have to be recovered somewhere.
Spies says at 66c/km, products could go up by anywhere between 0.5% and 5%, depending on the item, as a result of increased cost pressures.
Craig Brunsden, Axiz Workgroup executive director, says the company is concerned about the impact of tolls. A 66c/km charge could result in travel costs increasing by between 5% and 15%.
“Currently, no service providers have a clear plan on how to deal with the impact of the tolls and are rather adopting a 'wait and see' approach,” says Brunsden. He says the costs will have to be passed onto consumers.
Shocking news
In addition, importers will face the challenge of a 7% customs tax on monitors, which will kick in on 1 April. Government abolished the tax in 2004, “based on the assumption that they were used as computer screens”.
However, says Treasury, the tax will come back into effect as some monitors are also being used as televisions, which do attract an excise tax.
Darryl Squara, GM of Tarsus' Samsung business, says the monitor tax “has taken everybody by surprise” and caused “nightmares” for the channel last night, after the news came out in the budget.
“Unless the vendors agree to absorb the increase, the 7% will be passed down the channel and ultimately mean a price adjustment in the market. Margins on monitors are too tight for distributors to absorb,” says Squara.
Mustek founder David Kan says the introduction of the 7% tax is “too vague” and the South African Revenue Service must clarify how it will work.
Strategy change
Hannes Fourie, senior analyst of systems and infrastructure solutions at research house IDC, says these economic factors will squeeze the channel. The segment is already under pressure as a result of increased competition from retailers, online sellers and cellular operators that bundle deals.
Passing increased expenses onto end-users could limit growth in the sector, says Fourie. He says the higher prices will be felt by those under budget pressure, but higher prices will not have a major impact.
Fourie says companies will have to decide whether to sacrifice margins to remain competitive, or change their strategy and target the higher end of the market, where margins are wider.
The oil price, currently approaching $120 a barrel, will have a big impact on the channel, as it will flow through to higher fuel costs, says Fourie. In addition, he says the tolls will add to distribution costs, although the final per kilometre price is yet to be announced.
In addition, the increased monitor cost will affect companies that rely on high-volume sales to make up for thin margins, says Fourie.
IDC estimates that about a million monitors are sold every year in SA, and about two million desktops and notebooks are bought each year. About 40% of PCs sold are desktops, which are mainly bought by small businesses, says Fourie.
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