Channel under threat

Traditional box-droppers will see their distribution channel market share eroded from 36% to 25% within the next four years, as an increasingly hungry retail sector bites into the space, which is worth billions of rands a year.

This will put more strain on the thousands of companies that play in the already highly competitive market known for its thin margins.

There are at least 4 000 traditional distributors in the market, notes Hannes Fourie, senior analyst of systems and infrastructure solutions at research house IDC. He explains that these companies focus on selling PCs and other related items to small and medium enterprises, and are under threat of closing their doors if they do not respond to the changing environment.

Profit margins in the channel are already slim, and credit guarantee companies are loath to extend cover to smaller companies following a recent wave of liquidations, players in the sector note. They cite collapses such as the recent liquidation of Eclipse Networks.

In addition, spend is moving away from the reseller space, and into retail stores that can offer better prices. As a result, many small distributors could be wiped out in the near future unless they add value to their products. This could be achieved by expanding into the value-added services space, such as maintenance contracts or installation, which does not involve upfront capital investment.

The failure of smaller companies will leave the country's distribution giants and vendors with millions in unpaid debt. Some vendors are already moving to a cash-only selling model to fend off this threat.

customer bases and product ranges, and will create SA's largest channel-focused company.

Fourie says dedicated IT resellers have two options. The first is to liquidate, and the other is to add services and become a value-added reseller, a classification given to companies that earn more than 60% of their revenue from services.

IDC predicts traditional dealers will see their market share drop from 36% in 2009, to 25% in 2014. The retail sector, which is targeting the PC market, will gain market share from these distributors, with retail sales expected to double in the same time period.

Fourie notes the PC market alone is worth R1.5 billion a year, a figure that is expected to grow to R1.8 billion by 2014. However, this excludes other items, such as consumables, he explains.

Tarsus Technologies CEO Pierre Spies expects some smaller channel players, those that typically spend less than R1 million a month, to close their doors in the near future. However, he cannot quantify the companies that are potentially vulnerable to failure.

Spies explains that spending in the channel is still slow, as corporates continue to sweat their assets and government prioritised spending on areas of infrastructure such as roads for the Soccer World Cup, instead of on ICT infrastructure.

He has seen liquidations increase at an “alarming rate” in the past year, and most of the casualties were companies that buy less than a million rand's worth of computing equipment from Tarsus. One of the larger failures was Eclipse Networks, which owes Tarsus R38 million.

Spies says smaller distributors are battling to obtain credit, which places their cash flow under pressure as they need to be able to offer terms to clients. “For the first time in many, many a year, there is a barrier to entry.

“Margins are under pressure, and after the recession most distributors are overstocked,” he notes. This has resulted in stock being sold to retailers at huge discounts, and even sometimes at a loss, in order to clear inventory. As a result, small and medium companies are bargain-hunting in chain stores instead of buying through the channel, explains Spies.

“The channel is struggling; it is having to sell so many more units in order to be profitable. Traditional box-droppers are taking strain.” Spies says the only solution is for smaller players in the channel to add value to their offerings by providing services such as installation or networking, or even cloud computing solutions. However, this is difficult as the sector is under-skilled, he adds.

SA is a drop in the ocean in terms of global PC sales, and accounts for 0.5% of all sales, with about 400 000 units sold annually, comments Spies. He explains that this places the country at the back of the queue when new products are released, and retailers are able to import directly from international suppliers, leaving the channel at a disadvantage.

Neil Rom, MD of Printacom Technologies, says “there is a lot of pressure” in the channel as consumers are cost-focused.

Rom says the channel does not operate on high margins, and the market is not as buoyant as expected. He points out that the companies that are under threat are those that are not managing their business properly.

In the last two years - during which SA was ravaged by a global recession - Rom has seen several smaller companies collapse, although he did not say which ones folded, and he expects a few more casualties to appear as market conditions continue to be challenging. “It's very shaky at the moment.”

The printing sector alone is down about 20% year-on-year. Last year, sales were 40% lower than in 2008, explains Rom. However, he says, Oki has managed to buck this trend and its sales are higher.

Jason Goodall, MD of Dimension Data's Middle East and Africa business, says: “The market is still tough out there... In today's tough market, cost-cutting is seen as a major driver.”

Pure technology spending on items such as computers, printers and networking is flat, notes Goodall. He comments that the money that is being made comes from value-added services such as managed hosting.

Goodall adds there must be hundreds of smaller resellers, and he would not be surprised if several companies fold or consolidate in the near future. He points out key relationships with vendors and customers are vital, as is a well-known brand name as companies will not risk placing orders with unknown entities that could fold.