Squeezed margins, cutthroat competition from the retail arena and often proves just as easy. Worse still, the year ahead threatens to claim as many resellers as ever. stringent distributor credit control mean that deal-ers are going belly up at as fast a rate as ever. And this, despite the fact that an increasing number of businesses are staving off complete collapse through accounting practices like CVAs (creditors voluntary agreements).
'The rate of liquidations among computer dealers is continuing at a fairly high rate,' says industry accountant John Alexander, partner at Pannell Kerr Forster. 'There is always a high turnover of dealers going into liquidation.'
Alexander, who has been handling dealer crashes throughout the 1990s, says the rate of failure seems as high now as it did three or four years ago, when there were a large number of high-profile crashes. 'The change is that mainline distributors have improved their credit checking functions,' says Alexander. 'They are less exposed.'
Paradoxically, the fact that large distributors, some of whom did get burned by big dealer and retailer collapses, have tightened their credit checking procedures - for instance, by having regular private meetings with other distributors where problem cases are discussed - has worked against some dealers.
'Smaller dealers may now have to go through an intermediary distributor to get kit,' says Alexander. 'This squeezes profit margins even more.' Rather than finding a solution, the problem is just shifted around within the industry.
The reason small dealers go into liquidation, says Alexander, is not solely the low margin made in selling kit, but the fact that it is so easy to start as a dealer in the first place. Dealers tend to start off undercapitalised. 'A new dealer can start out with a gold card and a #10,000 overdraft,' says Alexander. 'But they run into problems through non-existent margins.'
There are a number of reasons for the falling margins in the PC business, but one has been the popularity of PC superstores, stocking a huge range of kit at prices that reflect the economies of scale that they buy at - small dealers cannot compete.
However, according to market analyst Romtec, the number of new dealers - particularly among the 5,500 they track on a monthly basis - is rising faster than the level of failures. The reason, perhaps, is that Romtec does not track the smallest dealers which exist on the periphery and so are most likely to run out of cash.
A recent study by Microsoft estimated that there are about 25,000 channel players in the UK, ranging from the largest super dealers that compete head on with mainline distributors to resellers that don't even make a dent in the industry's revenue.
Research by Dun and Bradstreet's Computer Market Intelligence Centre (CIMC) suggests there might be up to 60,000 separate channel organisations - many of them small.
Romtec does follow an estimated 75 per cent of the UK's dealer population, and claims it would be impossible to track much more since many dealers operate on a small level.
'Three years ago, we were deleting 80 dealers a month,' says a representative of Romtec. 'Now we are deleting 50 dealers a month and the dealer population is on the increase.' This is a hard claim to confirm, especially since there is a lack of accurate figures from the Office of National Statistics - which only calculates the number of people working in the entire PC industry. However, it does seem that fewer large dealers are folding, and those that are tend to be the invisible ones. Of course, there are always exceptions.
Deborah Pennington, head of the computer division at credit checker Graydon, confirms that liquidations have dropped off in the past few months, but says it is a result of seasonal factors as much as anything (see box, page 42).
'March, April and May are peak times for dealer failures,' says Pennington.
'It is then we see what the real levels are.' The reason, she says, is that the first year's quarter - January through March - is traditionally the busiest period for most dealers, as customers' financial years end and they purchase equipment. If dealers over-trade, or take too much money out of the business, it often catches up with them the following quarter.
'March is the peak time when some dealers are unable to settle and therefore go out of business,' says Pennington. 'And we are beginning to see the start of it.' There is certainly a seasonal element to the financial problems of dealers and retailers. Even with cashflow troubles, dealers are likely to keep going through what will be their busiest period, in the hope that increased sales will save them. It is only when the books are inspected that dealers realise what kind of trouble they are in, and the business folds.
Typically, distributors require payment within 30 days of delivery, and the problem for some comes when bills need to be settled - particularly if the customer takes longer than 30 days to cough up.
Despite this harsh environment, there are many Vars that are keeping their heads above water.
A survey by PMP Research (PC Dealer, 18 February) found that nearly three quarters of Vars polled had more than doubled their revenue during the previous year, particularly Vars that dealt in skilled, high-margin business, such as e-commerce solutions and the internet.
It is in the low/no margin business of simple box shifting, where the resellers that are in most trouble operate. But the PMP survey also found that 44 per cent of Vars had a chance of ownership during the past two years, as small, specialist Vars - possibly those in a weak financial position - were snapped up by larger competitors, eager to increase their own skills.
Brian Burke, representative of Dun and Bradstreet CIMC, points out that the PC market is so volatile and fragmented that it is resellers in certain market sectors - rather than simply resellers of a certain size - which find themselves being squeezed. Burke uses the examples of dealers selling Apple kit, and low-margin, generic PC builders as groups that have got into trouble.
'The PC market is so volatile that dealers in the wrong areas can get into trouble,' says Burke. If a dealer is operating in a market that suddenly gets squeezed, or even disappears, then they will find it difficult to operate - no matter how big, or financially sound, they are.
The only answer for the dealer in this situation is to get into more lucrative, skilled, service business. But this can be easier said than done, with skilled Vars already battling over what little is left. Also, the super-dealers - having bought up ailing Vars themselves - find it easier to offer a total solution for large customers, taking control of the customer's entire PC budget in outsourcing deals. As this pattern becomes increasingly prevalent, smaller dealers will find themselves further squeezed, until they eventually disappear off the map.
Burke points out another factor that affects the level of dealers which disappear, namely, the changing practice of industry accountants. Recently, there have been a number of high-profile CVAs in which creditors agree to receive a percentage of money they are owed from the debtor company, rather than allow it to crash into a liquidation, where they may well receive nothing.
The recent takeover of Preview Data Systems (PDS) by SCH - where the giant reseller wrote to PDS' creditors offering 33 per cent of sums owed if they allowed the takeover to go ahead - shows one alternative to liquidation.
In this case, SCH said there wasn't the time available to arrange a full CVA, and its offer was the best chance of PDS creditors getting any cash back. If this practice becomes widespread, it will result in fewer dealers being recorded as going into liquidation, and hence statistics would show the channel as being in a healthier state than it is in reality.
Company failures would not necessarily be recorded as such. 'There may be a similar number of dealers having problems as before,' says Burke.
'But they might not suffer the final blow.' The final piece in the jigsaw, he says, is the way banks handle debt. 'If banks apply their rules in a heavy-handed way, there are more liquidations than if they do not,' he says.
The key point is that the number of liquidations in the UK channel is influenced by a range of factors, and does not always give a clear snapshot of what is really going on. The level of liquidations itself cannot be taken at face value.
The CIMC at Dun and Bradstreet is analysing the squeeze on margins at a trade-only distributor level, to give a clear picture of how resellers can also be affected.
CIMC's figures show that distributor margins have been hit, and dealers which have previously been reliable in settling accounts, are taking longer to pay (on average 44.4 days now, compared to 38.9 days in 1994). There are a number of ways to read this figure - distributors might be affording dealers the luxury of allowing them to grow, or dealers themselves might be stretched.
'People have always been saying that margins for the distribution channel have been squeezed,' says Burke. 'But we can prove it.' He says that distributor margin is dropping year-on-year by 25 per cent, and distributors are actually losing over #3 for every #100 order that they ship.
Although there is a dramatic variation between distributors, there is no doubting the way the industry is going. The bottom end of the supply chain, the small dealer, will ultimately suffer fallout from structural problems further up.
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