There have always been business mergers in the IT industry. If you look at the paths taken by key distributors such as Ingram, Tech Data and Also, to name but a few, it's obvious that maintaining critical mass is an important aspect of their strategy.
There are some founding principles to this strategy:
- It strengthens one's power of negotiation with the major manufacturers; the bigger the company, the more weight it has in the negotiation process
- It increases the volume of a traditional catalogue, which compensates the constant erosion of profit margins
- It helps with conquering new markets or new skills when a product or solution moves out of a niche market
However, targets for acquisition have been a rare thing for a few years now. Niche markets are becoming micro-niche markets. A time of mega-mergers between distributors is on the horizon, because the business models have evolved. Cloud and dematerialisation have dealt the channel a new hand, but above all, new major players are emerging: Amazon, Google (with Walmart) and others are now taking a serious look at B2B IT distribution.
When talking to distributors, one gets a real sense of the dilemma their business model creates.
On one hand, good management of a point of sale takes time and resources, but there are fewer "good points of sale" (as defined by the annual turnover on a current catalogue). Mergers are common among resellers too, especially for those created in the 80s.
On the other hand, to really work what Anglo-Saxons call "the long tail" (that is, a large number of partners with a low turnover), a distributor model that contents itself with simply opening an account, almost no transaction authorisation, and marketing that is reduced to manufacturer-sponsored emailing campaigns, is simply no longer appropriate.
Following years of reducing marketing funds for their distributors, manufacturers are increasingly contributing to this phenomenon themselves.
Distributors - with the passive complicity of manufacturers - often took advantage of what seemed more like back margins than real funding for sales development.
The underlying problem is that no-one is interested in distribution managed solely via Amazon or Google - neither the distributors nor the resellers - but if things go on as they are today, that is what will inevitably happen.
Unfortunately, people learn very little from history, and the history of the IT market has plenty of examples not to be followed.
First there's Novell which, in order to save its bottom line, concentrated all its energy on the major accounts, leaving SMEs and very small companies to Microsoft. We all know how that ended...
But the example that is closest to what distributors are experiencing today is that of Dell's arrival in indirect distribution. Dell, for those who may have forgotten, initially wanted to "eliminate distribution" and was, for some time, the flagship of direct sales. To do this, Michael Dell set up a system of data analysis and, with some web development, high-performance management of online sales.
Such an efficient system ultimately met with an unexpected market of IT companies whose primary activity wasn't distribution, and who didn't want to waste time debating the margin on a PC or a server. "I'll give you the Dell price" became a sales argument.
As Dell was the champion of data studies, the firm soon realised that a growing number of its clients were in IT, and so inevitably Dell developed an indirect sales policy.
It was at first completely different to that of traditional manufacturers, being based on a direct relationship with the resellers, without distributors, and with more of a retro-commissioning approach, but the rot was setting in. It didn't take long for distributors to come knocking at Dell's door, to the dismay of traditional manufacturers.
Many didn't survive, because Dell's business model meant it could be reactive in a way that the historical models couldn't match.
What does all this have to do with distributors?
Dell started out with the long-tail approach. By developing a dynamic, cost-effective mode, based on low-value orders, it was relatively easy for Dell to then win the high-value accounts.
Major distributors today are racing headlong into a merger strategy that cannot go on much longer.
Our studies reveal that 77 per cent of resellers make less than 10 per cent of their annual brut margin with distribution activities.
Want to bet that figure is going to decrease?
The real work that lies ahead is reclaiming the "small partners", those that don't make a living from resale, but that need to have a resale activity for their services. They need a simple tool, partners that understand their profession (at least know them and their market), and the support to develop their market.
If they don't want to find themselves rapidly having to negotiate with Jeff Bezos or Sundar Pichai, manufacturers will have to think about reallocating and reconverting their MDF into MTF - marketing transformation funds.
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