Hewlett Packard?s decision to prevent its kit being sold below cost highlights a fundamental flaw in the way business is done in the UK channel.
According to the terms of the 1976 Retail Prices Act, HP is justified in putting an end to this practice: the act exists to stop goods being sold at a loss just to entice customers to buy other goods and services.
In March, HP issued letters to many of its channel partners advising them that they would forfeit co-op marketing funds unless they stopped selling HP products as loss leaders. It has now decided to audit its distribution channel in an attempt to discover who ? if anyone ? is still selling at a loss. (PC Dealer, 20 August).
The problem facing HP is not unique. Like many others it is a high-volume hardware vendor with a wide distribution channel. Having a large number of wholesale partners competing to win reseller business is bound to lead to a high degree of price discounting.
Only a few years ago, distributors? discounts were a reasonably well kept secret.
This is no longer the case. Resellers now have a clear picture of the discounts they can get from each of the major distributors and the level of discount that they in turn are getting from the vendors.
The net result is that resellers are now able to demand bigger and better discounts on major brand names than ever before, using the threat of buying elsewhere to close the deal.
Why would anyone want to sell HP kit at a loss over a prolonged period of time? It sounds like out and out financial suicide ? which is exactly what it can become.
In the short term, if you can sell lots of HP (or anyone else for that matter), the margin you make becomes less important. If you are using a factoring company to handle sales invoices and you are able to implement early payment discounts from the vendor, you can gain a substantial cashflow advantage.
Supplementing the loss of margin with soft dollars can also ease the pain of selling at a loss. Of course, when it goes wrong, it goes horribly wrong and it is only the big boys of the indirect channel that can play the game according to these rules.
Jackie Raybould, operations director at Elcom International, feels that a vicious circle has developed. ?Distributors have found they have to do this because of the degree of competition. If they don?t, someone else will. You can only really make money in distribution if you?re selling products that have a restricted circulation.?
For many in the channel, there is a kudos to be had from selling major brands such as HP, which may have encouraged the channel to overstretch itself.
But if HP has all its partners falling over themselves to sell high volumes of kit, why should the vendor concern itself with their internal business dynamics? If distributors choose to put undue pressure on themselves, why should HP care?
For HP, this practice of selling at a loss is undermining its product range. If HP?s channel finds itself having to eat into its soft dollars to soak up a loss on a product range, it will, by definition, have less money left over for marketing. HP cannot afford to find itself in a position where its products are not being advertised simply because the channel has bled itself dry.
Martin Clarke, Lapland UK sales and marketing director, thinks HP?s position is clear cut. ?Why should HP be bothered? Because it has to be seen to be exhibiting some form of channel control,? he said.
It raises the question of over-distribution of product in the channel. There?s a fine line between getting good coverage and spreading your products too thinly.
Margins are already incredibly tight, and if resellers can shop around and get the same products from any one of a number of outlets, they will push for greater discounts.
But if the channel decides that it will do whatever is necessary to win business, it may find that in the long run it will dig itself into a hole which it cannot climb out of.
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