More than half the PCs sold this year will be to private individuals for use at home. The PC retail market is healthy, if not booming, which means the big distributors must be having a great time supplying retail ? or are they?
Great things were expected of the UK retail market for computer-related products. In the early 90s, hardware manufacturers, software publishers and distributors looked at how the US market had grown from the beginning of the decade. They expected the pattern to be repeated here, based on the assumption that ? in computer terms ? Europe does what the US did two or three years ago.
Undoubtedly, the consumer computer market has enjoyed several consecutive years of double-digit growth. When it comes to announcing the latest annual results, Dixons Stores Group chairman Stanley Kalms often publicly attributes his company?s success to its pre-eminence in PC retail.
But most business distributors struggle at retail. The most successful rely on technologically advanced hardware peripherals that enjoy a brief time between being high-priced professional specialist products and becoming low-priced commodities. The skill lies in the timing: supplying to retailers the leading-edge pseudo-consumer gadgets that are sold to wealthy 30-somethings with sufficient disposable income. But it is equally important to know when to bale out before falling prices and numerous competitors erode profit margins to wafer-thin proportions.
In 1994, it was expected that the rise of a mass consumer market for PCs would lead to big business distributors pushing aside small specialist retail distributors as their economies of scale and superior logistics systems paid off. But it hasn?t quite worked out that way.
Despite the disappearance of the once mighty Leisuresoft ? caused by Philips? messy exit from the software market ? the original retail distributors, such as Gem, Centresoft and Pinnacle, are still thriving, and seem to be the only ones that can make money supplying software to retailers.
So what do the UK?s business distributors do with retail at the moment? And is it a market they see a future in?
?There?s no money in retail for distributors,? says James Wickes, MD of Ideal Hardware. ?People pumped a lot of money into it two years ago and it went nowhere.?
Ideal had a retail brand called Cadet, much of which consisted of retrofit multimedia kits, the core of which was a CD-Rom drive. But the faster the drives span, the faster the prices fell, and it quickly became impossible to keep up with the market. It had worked in the US in 1990, before PC vendors put CD-Rom drives in their PCs as a matter of course. Why didn?t it work here?
?We tend to think that things here will copy the US,? says Wickes. ?But for a start, there?s so much less real estate. In the US if you want to buy a box of disks, you don?t worry about driving 30 miles to a PC superstore. Here you expect them in a high street stationers.?
Ideal hasn?t abandoned retail altogether: it still profitably supplies mail-order and off-the-page vendors, and Wickes has high hopes of online trade. But the high street is far from ideal for Ideal.
?Glass-front retail involves too many liabilities in returns from customers,? he says. ?And European consumer legislation throws even more back on to the supplier.?
One of the big distributors which shouted the loudest of all about retail in the early 90s was Frontline, now part of the Computer 2000 group. Its retail adventures began with supplying Jan Murray?s fledgling PC World in 1992, and it jumped in with both feet a year later by buying Impact ? then a merchandising outfit run by leisure software veteran John Parker.
Although not a sales operation, Impact gave Frontline instant access to an army of independent retailers and key leisure multiples such as Future Zone. The decision was perfectly logical: Frontline supplied hardware to retail superstores like PC World; as the market picked up momentum, the superstores would want leisure software and the software shops would want hardware. Parker became a director of Frontline and Impact became Frontline?s retail division. Buying Impact put Frontline in exactly the right place.
But it turned out to be the wrong time. Software margins disappeared under a glut of mediocre product and the software shops didn?t take up on hardware. In 1995, Frontline pulled out of games software. Future Zone, under increasing pressure from trade creditors, sold out to Electronics Boutique and, in June 1996, Parker departed ? amicably ? with Debbie Wheeler, another Frontliner, to set up merchandising partnership Profile.
Frontline maintains a separate business unit of 13 people for retail, but the name Impact seems to have vanished. If Frontline killed it off, no one heard it scream. Perhaps it just passed away quietly in the night.
A restructure of this department in March this year saw the creation of a dedicated independent retail account manager who puts together bundles and promotions just for the indies.
?We have few specific product lines for retail,? says Steven Carroll, general manager of the retail division since Parker?s departure and eight years a Frontliner. ?We deal with top IT business lines from A and B vendors and for retail focus on certain products from those vendors, such as Microsoft?s consumer software, or Hewlett Packard?s Deskjet range.? These are successful retail products, but Frontline won?t go near games again.
?Yes, we used to do Virgin [Interactive Entertainment] and Dorling Kindersley, but our current business model comes as a dictat from Computer 2000. We can go outside that, but we would have to prove it can be very successful. If you compete with Gem and Centresoft, all you do is drive the margins down.?
This is not such a major concern for Computer 2000 in the US, so why is Europe different? ?Most people look at the retail market in the US and say how wonderful it is, and lots of them are convinced it will be just as successful here. Maybe that many people can?t be wrong, but it hasn?t grown the way people said it would,? says Carroll.
Despite the PC retail boom, manufacturers won?t talk about how much profit they make from retail, and some distributors are downright cagey about how much retail contributes to their overall business.
Even distributors that are expanding their retail business do so with a caution usually reserved for hunting dangerous animals.
?It?s an important business for us, but we will continue to take a rifle-shot approach rather than a scatter gun when it comes to devoting resources to retail,? says Nick Culley, divisional manager at Midwich Thame. ?We don?t ever see ourselves in software-only stores that, say, sell a couple of peripherals a week.?
Midwich Thame doesn?t have a separate retail team, but maintains 15 to 20 key retail accounts which range from the biggest multiples to high-turnover indies. ?These are customers we have been trading with for a number of years and have a good fit of their business with the products we carry,? says Culley.
Midwich Thame, for example, carries digital cameras from Kodak, Casio, Ricoh and Sanyo. Other important product lines for Midwich at retail are the Evergreen 486 to 586 processor upgrades, Texas Instruments and Olivetti notebook PCs and ADI monitors.
Midwich also has a fast-response sales team ? currently of eight people, soon to be 10 ? which deals with non-account business. ?They are people who see our ads and want the product the next day. That?s often independents,? says Culley.
Retail business grew at Midwich ?more by default than by design?, says Culley. Four years ago it was the exclusive UK distributor for Cyrix 386 to 486 processor upgrades, and within six months of launching, about a quarter of the sales were going through retail.
?When we realised the magnitude of the business we were doing with them, we put more effort and more product lines into those customers, for example Brother printers,? says Culley.
Business has grown, but not with the mushroom cloud of profit that was predicted in 1993. ?We haven?t enjoyed the same level of growth from retail that we have from other sectors, for example, mail order,? he admits.
There are exceptions to this ? the boldest on retail is Ingram Micro. ?I don?t agree that it hasn?t worked out,? says Bill McKay, general manager of Ingram?s retail channel. ?Retail was five per cent of Ingram?s business in 1995, 12.5 per cent last year and it will be 25 per cent this year. We have to make money on 25 per cent of the business ? and we do, or we wouldn?t be doing it.?
Ingram started its retail division in March 1994. Up until that time, computer retail was mainly games software, but other sectors ? business and multimedia ? were starting to take off.
The story is often repeated in the computer industry: pioneers collect the arrows; second-to-market collects the glory. Ingram has stuck to what it knows best, but nearly entered the games fray. ?We would have gone into games distribution, but what stopped us was the advent of the exclusive distribution model,? explains McKay.
?We expect rationalisation, a vendor replacing six or seven distributors with two, but exclusive distribution is not something we want to get involved in.?
In leisure software, sole-distributor exclusive deals are de rigueur, pioneered by Pinnacle, closely followed by Gem, Centresoft and Gauntlet. ?Frontline had a six-month head start on us, but it got into games,? recalls McKay.
?We believed peripherals would take off and peripherals are Ingram?s speciality. For example, the average hard disk size then was 80Mb ? so we carried hard disk upgrades. Second, we believed there would be a big demand for communications, it started with the rise of the internet, and we carried 9.6Kbps modems then.?
Ingram has fostered a strong relationship with the Network Buying Group, an affiliation of indies which offers multiple-like leverage. ?To put resources into a customer you need revenue, therefore we?ve encouraged groupings such as the Network Buying Group,? says McKay. ?You can put resources and deals together as if the group were a multiple.?
Another exception is Northamber, which remains bullish. ?The development of the market, especially the development of the PC superstores, has mirrored what happened in the US,? says Northamber MD Loay Lawrence.
?Where there?s a town that doesn?t have a superstore, you see the local independent dealer using his shop front to display SoHo solutions. That?s not so dissimilar from the US picture.?
When it comes to blowing the retail trumpet, any caution on Northamber?s part, he assures, is because he doesn?t want his customers or suppliers stolen, and not for lack of success. At Northamber, two teams are dedicated to retail work on multiple and independent accounts.
?We keep a low profile, except with our customers to whom we pitch special projects for vertical product sectors that give them an edge over their local rivals,? says Lawrence.
Northamber has evolved with the channel, supplying indies in the BD (Before Dixons) years, even before PC World was set up. Rather than only creaming off the retail products from its business suppliers ranges, Northamber also seeks out products specifically for retail. But on the whole, business distributors have had less of the PC retail market than was expected in the early 90s.
Independent retailers need third-party distributors because they don?t have the resources to deal with the dozens of manufacturers whose lines they stock. And manufacturers don?t have the resources to ship in ones or twos.
But multiples have their own warehouses. So although there are some products for which multiples rely on distributors, such as peripherals, most of the big-name brands that the business distributors carry formed direct relationships with the multiples in 1994 and 1995, which deprived the distributors of a chunk of business which, in 1993, everyone thought they would get. ?Many of the products we used to supply to retail, the vendors now supply direct. The big multiples insist on that,? says Culley.
Multiples are volume box-shifters and as a consequence are the force that steers computer retail. Dixons Stores Group ? which owns Dixons, PC World, Currys and Link ? is as big as all the rest put together. Comet ? part of the Kingfisher group, which owns Woolworths ? is second, and then there are a lot of others, of which Byte is significant for the volume of hardware it sells.
But multiples demand a lot from a supplier. A PC manufacturer may be happy with eight to 12 per cent operating margin, but a big multiple begins negotiating with a supplier at 40 per cent. On top of that comes the returns policy, staff training, co-operative marketing, merchandising and more.
?Retail is a great showcase for product, but it?s very challenging for the manufacturers to make money there,? says Culley.
That?s an understatement. PC manufacturers find it nigh-on impossible to make money at retail. They all say they make profit, but they hide the manufacturing and R&D costs under their profitable corporate business. If they had to spin out their consumer sales as a separate business, they wouldn?t find many investors. That?s why AST got in such a pickle and had to be bailed out by Samsung ? it was doing so well at retail it lost sight of the corporate market where all the money is made.
Packard Bell, with its consumer-only policy, ran into similar problems in 1994 and was thrown a lifebelt in the shape of $400 million of extended credit from Intel. Does Packard Bell make money selling PCs to consumers through retail? Who can tell? It would take extreme patience to unravel its figures now its ownership is enmeshed in the corporate umbrellas of NEC, Zenith Data Systems, IBM and Bull.
All the brand-name PC makers have moved up-market, selling machines for between #1,800 and #3,000 where they know they can make some money. Only the brave or foolhardy sell at retail below #1,200.
PC manufacturers may have put a ball and chain on their ankles with direct supply contracts to retailers, but McKay sees multiples swinging back in favour of distribution. And he isn?t alone in that thinking.
?Multiples are beginning to realise that distribution offers something that the manufacturers can?t: better and more flexible logistics,? says Culley. ?We can take an order at 5.30pm and have it delivered to Edinburgh for the following morning.?
A top-class manufacturer can turn out 1,000 PCs a day, but can it deliver one overnight to Norwich? Would it want to?
?The role of distributors in retail has increased significantly, even in the past three months,? says McKay. ?PC companies like IBM and AST can?t make money at retail because so much of the business is done by multiples. The vendors don?t have problems putting stock in the top 20 stores ? they can guarantee sufficient turnover ? but they have to put them in the other 100 stores all over the country, where stock moves much more slowly.?
And when PC makers are producing new models every three months to keep up with consumer hunger for hot technology, that leaves a stock liability. Old machines are always sloshing about in the channel, devalued by the new models. These have to be flushed through by slashing the price and the PC makers lose money on them.
?A store on, say, Oxford Street will have no problems flushing through the stock, but a store in Lincoln will only sell a few a month,? explains McKay. ?Retail is about availability. You have to have the stock in the stores ? even the slow ones ? for people to see, buy and walk out with. But 80 per cent of the stores are only doing 20 per cent of the business.?
So PC makers can carry on biting the retail bullet and hope that their shareholders don?t look to hard at the figures and tell them to get out of the consumer channel, or they can turn to distribution.
?What will happen is that companies such as Compaq and IBM won?t produce ranges any more, they?ll produce a box to be configured by the distributor and sent out overnight,? McKay proposes.
?This type of assembly partnerships is the future. You can?t afford to have the industry run the way it is. Establishing a long-term sustainable business is paramount.?
Retail needs tight inventory control ? which is what distribution can offer ? leaving manufacturers to concentrate on what they do best ? product development.
McKay is not the only one to see a bright future for distributors in retail, but each distributor has a slightly different vision. Added to this proposal to deal with basic PC hardware provision without driving the PC makers into the red, is a vista where distributors play the role of market-makers for products that have receded from the expensive leading edge but have yet to become commodities.
Among these are: video conferencing, predicted to drop to below #100 before the end of the year; digital cameras and video manipulation, which everybody expects to be the hot product category this autumn; and colour printers, because what is the point of having the ability to combine text and images if all you can do is show it on a screen? For the same reason that colour printers drive the sale of PC hardware, simple Web publishing will flourish.
McKay is also betting that network will take off at retail. ?People laugh now, but consumers don?t throw PCs away. They?ll keep the old 486, maybe for surfing the Web or writing a letter. But they?ll want a top-notch machine for their multimedia games or image editing. Then guess what? They?ll want to link the two together.?
As well as tipping new technologies for retail interest, the increasing number of outlets stocking computer-related goods will also emphasise the role which distribution has to play. ?The UK market is changing, but slowly, subtly ? there won?t be an explosion,? says Carroll. ?Twelve months ago, anyone walking down the high street looking to buy computer goods would automatically have thought of Dixons, but now there are lots of places you could go.
?It?s that subtle change ? it takes more and more places taking on PC-related goods, whether they are printer toner cartridges or Ram upgrades.? You can even buy Ram upgrades in HMV these days.
?More and more stores seem to be opening. A number of our reseller customers are making forays into retail either locally or on a limited national scale,? says Culley.
Distributors also have role to play at retail in forming marketing and merchandising partnerships with manufacturers, ensuring that their products are promoted in the right way. ?The days of pushing product into the channel are finished,? proclaims McKay. ?You have to pull products through.?
Promotional programmes for computer-related goods are often weak or non-existent. Retailers, particularly independents, complain that they don?t see a manufacturer?s representative from one year to the next. ?If you go into a grocery or DIY store, you know why a product is on an end cap. If you walk into one of these stores, there is always a temptation to buy something you didn?t intend to,? says McKay.
?Vendors in PC stores haven?t grasped this yet; they don?t know what motivates the customer. You have to give the customer a reason to buy ? a bundle, for example. But it has to be with a product they want, not something they wouldn?t consider buying.?
Although these distributors can still see mileage for distributors in conventional retail, Wickes is not looking to a revival of Ideal?s fortunes on the high street. Instead, he sees the rise of stockless online vendors as a new opportunity for distributors operating as fulfilment houses.
He is not putting faith in the over-hyped under-delivered virtual supermarket, but rather expects business-to-business online trading to be where the profits come from first.
?Computer retail has worked out differently from the way we all expected. The big explosion will be on the internet, and it won?t be business-to-consumer but business-to-business,? says Wickes.
?Computing is the best market in which to sell business-to-business on the internet. Dell is already doing $1 million a day and Gateway is following suit. Resellers are going on to the internet ? that?s where it will all come round again.?
And this time, Wickes won?t be selling multimedia upgrade kits. ?It?s a lesson we?ve learned: don?t pick the right time, pick the wrong time. We?ll look at this again in the future.?
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