Small Vars and dealerships in the UK have a problem, according to specialist IT credit checker Graydon UK. Around a quarter of Vars are technically insolvent ? they have a negative net worth which has usually been accumulated over a number of years.
The 25 per cent of technically insolvent Vars is skewed disproportionately towards the smallest. And Romtec analyst John Ses says the channel split is increasing, with the larger players doing better and the smaller ones doing worse.
?There has been a polarisation,? says Ses. ?Many of the smaller resellers have been going out of business, even though the overall picture for the channel is healthy.?
While sales through all dealers are increasing, he says, the lion?s share is going to the biggest dealers. His view is backed up by the 1996 Banner survey into computer buying trends which shows that it is the larger businesses, those with 50 or more staff, which are increasing their spending through resellers.
Part of the problem for small dealers is that they do not have the buying clout with distributors and manufacturers to enable them to get economies of scale when they buy, so they have to pay more for kit than large resellers ? and then pass this extra cost on to the customer. ?Buying capacity is the biggest single issue for small dealers,? says Graydon representative Brian Burke. ?Buying power affects price.?
According to Burke, this raises two issues for the small reseller. The first is how distributors, manufacturers and third-party credit companies can help dealers with funding; the second is how dealers can help themselves, for instance by forming buying groups.
?The credit side is positive, with distributors helping dealers to grow? says Burke. ?But if the PC industry had developed differently in the UK there would have been no need for distributors at all.? He says it would have made sense for dealers to form regional buying groups, a form of co-operative, to get volume discounts directly from manufacturers.
?It?s only games retailers that have done this,? says Burke. ?I?ve no idea why more general resellers have never picked up on it.?
There are logistical problems for resellers grouping together to buy, such as dealers tending not to hold stock and buying only when they have concrete orders. Differences exist on a cultural level, too. Dealers tend to see each other as bitter rivals, particularly those in the same locality. They tend to deal with their suppliers in isolation and guard their independence jealously.
But buying groups can and do work, at least for some. One of the most successful groups has been running for more than two years and brings together specialist computer retailers from all around the country.
The Network Buying Group was set up in 1994 by half a dozen members of Nascr ? National Association of Specialist Computer Retailers ? which acts as a lobbying group for independent retailers. ?We wanted to do group buying as well, so we started a spin-off group,? says Martin Briggs, who runs independent retailer MCB, and was a founder of the buying group.
The Network Buying Group was set up as a company. All the independent retailers had a seat on the board and a shareholding. The group initially signed with Frontline as its official supplier but moved to Ingram after just a year, in November 1995. Briggs says the year spent at Frontline was ?not beneficial? for the group but the partnership has developed with Ingram.
?The benefits for members are the ability to buy at a more favourable rate than we would be able to if we were buying in isolation, and also the ability to discuss common problems and to brainstorm together,? says Briggs. He says the margin improvement isn?t massive ? it?s single rather than double-digit ? but the biggest improvement is in dealing with a sole distributor and allowing that distributor to target a number of resellers in one go. ?The main advantage in being in a group comes in below-the-line Ingram has supported the buying group by putting together a catalogue for the independent resellers. Co-operative funding comes from manufacturers including Intel, Epson and Lotus. Each member received 23,000 catalogues to distribute.
The buying group makes it easier for suppliers to target marketing funds at a number of resellers in one go, and distributors are always looking to make more innovative use of marketing funds from manufacturers. Briggs says the difference between the Network Buying Group and the other buying groups that spring up periodically is that most of them have been limited to one-off, end-of-line deals, buying up old stock and then disbanding. ?Our group is about having an ongoing relationship with manufacturers and distributors,? he says.
Although network buying sounds like an eminently sensible solution to the problems of low margin and manufacturer ?divide and rule?, Briggs admits there can be problems. The Network Buying Group is a disparate bunch of independent retailers, so some members only sell branded PCs and others assemble their own. This makes it difficult to present either clear product ?wish lists? to suppliers, or a cohesive image. The answer, says Briggs, is to develop the group to a size where each separate contingent within it can get what it wants at the best price. To do this, membership needs to double to around 40 retailers.
The success of the Network Buying Group is partly down to its wide geographic spread, so members aren?t competing for the same customers. It ?acts in the best interests of our members?, says Briggs.
The problem is that manufacturers prefer buying groups to be local affairs. For a start, it makes them easier to supply and dealers do not always have a good history of working together. Many manufacturers have reseller councils but they tend to be hand-picked, which means they often comprise the largest resellers ? who tend to get the best terms anyway.
But as the industry has moved away from resellers selling proprietary systems, and away from them being tied to just one supplier, there have been a number of attempts to bring in reseller pressure groups which represent dealers in negotiation with a range of manufacturers.
The first was the PC Dealers? Association, which floundered due to lack of interest in the mid-1980s. In 1993, the Computer Software and Services Association (CSSA) launched its Var special interest group (Varsig) with the support of some 140 CSSA members which were also Vars.
But the idea of Vars standing together to put pressure on manufacturers outside ?official? reseller panels hasn?t taken off. Varsig has now been subsumed into a wider small and medium enterprise (SME) subgroup within the CSSA. A representative says the subgroup has a larger and wider membership than Varsig. There was talk among resellers of resurrecting the group, but that?s unlikely to happen. The fact that resellers have failed to set up and run their own pressure group doesn?t bode well for the creation of joint buying groups.
One manufacturer with a good record of active dealer participation is Apple, which has a number of dealer forums ? some it manages itself and others are independent. But Apple reseller manager Terry Martin says business dealers have never been interested in buying groups. ?Some of our resellers buy direct from us and they would not get better discounts if they clubbed together.?
He says the same is likely to be true of dealers which go through distribution, although there may be scope for improving margin depending on the individual distributor.
Apple dealers, more than those of any other supplier, have joined together in a number of ways. In addition to the Apple-managed quarterly technical forums, strategy briefings and bi-annual roadshows, a number of independent groupings exist such as the London Apple Dealers? Forum and Apple Direct Dealers Association. There are also the official UK and European Apple Dealer councils, which Apple uses as a sounding bourd for future plans. Reseller forums have the same problems of co-operation, or lack of it, as buying groups do, says one reseller. ?You?re not going to say too much when you?re sitting side by side with your competitor,? he says.
Mike Briercliffe, of channel consultancy Briercliffe Associates, says that buying groups might give resellers some buying benefits but their formation would be opposed by man- ufacturers and distributors. ?Suppliers would avoid it wherever possible,? he says.
Aside from supplier vested interest, he adds, the other problem is reseller ambivalence. ?Independent resellers tend to be independent people. They like working on their own. Buying groups have never worked in the channel for that reason.?
The combination of buying groups not being in the supplier?s interest and initial reseller hostility makes it unlikely that they will spread into the wider business reseller environment.
According to Briercliffe, there is scope for reseller co-operation when it comes to sales leads but it should be led by the supplier. ?The best way for resellers to work together is when it comes to manufacturers supplying sales leads. The manufacturers and other resellers should refer on sales leads that are ideally suited to a specific reseller in a vertical market.? The Uniforum code of practice, which Briercliffe helped to draw up, was designed to create common standards between Unix vendors but failed because the manufacturers all wanted to differentiate themselves from their rivals.
As the Network Buying Group has shown, reseller collectives come into their own when it comes to getting co-op funding from manufacturers and distributors. The two problems with co-op funding have always been that it is based on volume and so goes to the large resellers, and that if smaller resellers ever do ever get any cash, it tends to be in such small amounts that it is of little use.
Briercliffe says the only way for a manufacturer or distributor to make co-op marketing funds work is to collect cash over time and, when there is an adequate amount, to use it on a campaign that involves as many deserving resellers as possible ? that is the most effective way for co-operation.
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