Here's a section from an email I got the other day. For obvious reasons, I've altered some of the figures and changed the company's name:
'FastLane Computers says it is on seven per cent net and 16 per cent gross. That's very good for anybody in the channel. We'll achieve three per cent net this year on a projected #50 million. We think that's not bad for volume product supply. Our product supply business plan is to achieve 3.5 per cent net next year and 30 per cent minimum compound growth over the next three years. If our Project X proves to be a winner, we'll grow faster than that.'
So seven per cent is good? Well, maybe it is for product-based businesses, but I thought the whole channel was into services now. Shouldn't those margin figures be higher?
'FastLane' is one of the most admired and fastest growing dealerships in the UK. Yet it operates on very small margins.
I suspect it will be able to grow as long as it can keep its funding going, which is not always going to be easy. But it clearly needs to remodel its sales profile if it is to improve margins. An independent consultant recently said a service business needs to be operating on gross margins of 60 per cent. Venture capitalists, after all, look for a net return of about 40 per cent on capital.
The 30 per cent rate of growth sounds ambitious, but it does indicate just how bloody it's going to be out there. Vendors will increasingly use lower cost, more direct routes to market and as they fight for share on tiny margins, the problems will increase for the FastLanes of this world, unless they increase margins.
How do they do that? It's not easy. More value, more systems, cutting out the customers that eat up your working capital? Pushing up invoice values and firming up on pricing? It's all hard work.
Even the rising star dealerships may struggle to develop their business unless they manage to make the switch to services. And if they have already done that and are still only turning in six per cent, either the independent consultant has got it wrong or there are more tough times ahead for growing dealers.
The consultant is probably not living in the real world but, with the high fixed costs needed to support service-oriented businesses, he's not that far out on the gross margin. Certainly, 15 per cent won't be good enough overall. Services are still generating most of the profit but not most of the revenue and hardware sales are dragging the margin down.
The channel building and direct sales that big-name vendors are introducing will bring down the cost of selling hardware and prices. Dealers will be left out of the equation - on hardware at least.
The question, then, is how fast the dealer can move its business model.
It will have to be pretty swift to avoid more fallout in the hardware business. Some upwards movement of the gross margin is going to be needed as well.
Simon Meredith is a freelance IT journalist.
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