IT distributors are having a tough time of it, to say the least. Last week, Datrontech issued yet another profit warning, just a day after Ideal Hardware announced its profits would be significantly below market expectations.
Previously, Ideal had been impervious to the troubles affecting the rest of the industry, but it has now joined the growing band of distributors wallowing in a depressed market. Northamber, CHS Electronics and Ilion have also been struggling to come to terms with market conditions over the past months, Osmosis has disappeared and it seems it won't be long before others go to the wall or are swallowed up by bigger fish.
But why is the market depressed and what, if anything, are these companies doing about it?
Peter Rigby, director of marketing and communications at CHS - which in March had to revise its fourth-quarter 1998 figures after overstating its results - believes, like others, the millennium bug has a lot to answer for and expects the market to pick up at the beginning of next year.
'The year 2000 issue has led to a decline in PC sales, as a lot of corporates hang onto to their IT budgets until next year,' says Rigby. 'This in turn has had a knock-on effect on peripheral sales. As the market diminishes, competition increases, leading to reduced prices and then to reduced margins. Competition will always be tough in this market, but I think the first quarter of next year will see an upsurge in sales.'
It may be a little hopeful for broadline distributors to expect that everything will return to normal once the calendar changes. Others believe there are far greater underlying threats to distribution that won't go away so quickly.
Components distributor Flashpoint has so far weathered the storm, but believes the downturn in demand is not just due to the year 2000. Sukh Rayat, general manager at Flashpoint, says: 'Demand is fuelled by the large corporates and unless the distributor can add significant value, that demand can be fulfilled by direct vendors. Other considerations are market saturation and the fact that the processing power in many of today's PCs is so great that there is little need for upgrades. The only real growth is coming from second-time home buyers, but this won't help the broadline distributors.'
This explanation certainly sounds more realistic than the wait and hope attitude. Markets are constantly changing and distribution is no different.
In fact, distribution is faster moving than most of the industry, so companies that sit back having achieved success are likely to find themselves deep in trouble in a short space of time - as happened at Ideal.
Admittedly, the market is slack at the moment and a significant amount of business has been lost to direct vendors over the past year or so.
It is even fair to say that the millennium bug will have an effect on sales in due course, while longer term problems include vendors selling across the Web, retail and e-commerce. Right now, broadline distributors are scrambling to adapt to a trading environment which is undergoing rapid change.
Datrontech is one of those companies that has had a hard time coping with the state of the market, as illustrated by its issue of a further profit warning last week. But it has at least admitted that it understands the need for change in the industry and claims it is willing to carry it out.
'It's no secret that distribution has to change,' says Tony Wand, sales director at Datrontech. 'It's easy in this business to let your costs get out of control and with today's tight margins, that can be deadly.
Business needs to be created through contact, rather than more general marketing methods. You have to become exceptionally good at customer relationships and you need to be very slick at credit control.'
When Ideal disbanded its operational board last week, it was admitting to the world that it had got it wrong and its current structure was not right for the changing world of distribution. Ian French, head of the executive board at Ideal, cited a lack of focus as one of the key reasons behind last week's profit warning.
According to Paul Sangster, sales and marketing director at rival storage distributor Hammer, it was the structure of the board rather than the people on it that caused Ideal to lose touch.
'The main problem with the operational board was that it removed the directors from the day-to-day running of the business,' says Sangster.
'If you do this, it is very easy to lose track of what is happening in the company.'
This is what happened at Ideal and probably explains why things managed to go so wrong in such a short period of time. French admitted last week that Ideal 'had become a fat, lazy company in which certain people had begun to build empires'. To its credit, the distributor has been more honest than most in not laying the blame for its reshuffle at the doorstep of poor market conditions - which in this case were only an exacerbating factor.
Honesty is fine when things go wrong, but it won't solve the problems being faced by the distribution sector. Until distributors cut their overheads and change their structures to deal with a changing and uncertain trading sector, the bad news from the distributor camp is going to continue.
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