You raise me up

With vendors gearing up for a second round of Brexit-induced price rises, CRN looks at what this 'death by a thousand cuts' means for the channel.

With the news from partners that HPE, Lenovo and Fujitsu could be set to announce second price rises by 1 December, it seems likely that the channel needs to brace for another round of vendor price increases before the end of 2016.

Following the Brexit vote on 23 June, the value of the pound plummeted from $1.48 on 23 June to $1.36 a day later. This saw a surge of vendors rushing to push up their prices, and following another slump in the pound, it seems vendors are gearing up for a second round of hikes.

July saw HP hoist its UK prices by 10 per cent and Dell push up its prices by eight or nine per cent. Lenovo raised its prices in the UK by 10 per cent on 1 August, and Asus warned customers in July to expect retail prices to rise by around nine per cent in October.

The pound slumped again at the beginning of October, hitting a 31-year low against the dollar when it fell to $1.22. In the same month Microsoft announced its prices for enterprise cloud services will increase by 22 per cent and its on-premise enterprise software by 13 per cent on 1 January. Apple said that prices would rise 20 per cent for UK customers with its latest product launches in October.

Partners have recently revealed that HPE is set to raise prices by between six and 12 per cent on 1 December, with Lenovo to increase prices by 10 per cent on the same day. Fujitsu's prices were set to rise five per cent for its storage products from 1 November.

Warren Peel, managing director of VAR Trams, said he thinks more vendors will follow suit and raise their prices higher if the pound continues to fall.

"If the pound keeps going down against the dollar, I'm afraid prices will keep going up," he said. "If we get to the point where it is £1 to $1 as some have forecasted, it will go up again. Nothing is going to change until the pound recovers. Prices will continue to go up and up."

Managing director of Servium, Paul Barlow, agreed, but said he believes both resellers and end users would prefer one price rise rather than "death by a thousand cuts".

"I think we will see more vendor price rises within the next quarter," he explained. "It's an interesting conundrum for vendors. Resellers and customers understand that there have been fluctuations in the dollar rate and the prices have to go up. But the ideal scenario is that it happens once, as opposed to a death by a thousand cuts. You get one price rise then another price rise, then another.

"The dollar is fluctuating but it makes for difficult conversations and management of the situation if you are continually going back and talking about price increases. That is where I have a lot of sympathy for the vendors, because they don't want to suddenly put the prices up for one big increase and think that will do."

Barlow added that customers have been understanding of the situation so far, as "there is not much anyone can do about it".

"I think everyone understands it. It is not just that vendors have decided to put the prices up. Certainly our customers understand because they are having some of the same issues with their suppliers. It is one of those things we have to face, and there is not much anyone can do about it. Vendors can't sell products at a loss; they are in the business of making money," he said.

Clive Longbottom (pictured right), founder of analyst Quocirca, said that the rises are "only to be expected" and once one vendor raises its prices again, he believes the rest will follow suit.

"They can't make a special case for the UK," he explained. "It is only as expected. They have got to make money. You will find it is not just a case of waiting for the first person to make a move; they will all be making a move - it is just waiting for the best time. I think customers should expect the rise at the beginning of the year."

Absorbing the cost

With the price rises comes the question of whether the channel should be absorbing some of the added cost or passing it straight on to customers. Robert May, managing director of Ramsac, said it is not possible for the channel to absorb the rises and still make any margin.

He added: "I don't think the channel can absorb it. Margins dictate that it isn't possible. I think end users are accepting that the prices are going up as well. They are just accepting of what the economy is. Generally, so long as you give clients notice, they are quite appreciative of that and it is making people make decisions quicker."

However, Howard Hall (pictured left), managing director of DTP Group, said that the VAR has been absorbing some of the price increases so far. He added that he is not sure how long this will be possible because there are not enough margins in the deals to make it sustainable.

"We have been absorbing some of the price rises with the projects because of the time it takes to give the customers notice," he said. "I'm not sure how long the channel can do that for. If there are more coming due to the recent fall, I'm not sure all resellers will be able to absorb it because there aren't enough margins in the deal. They will have to pass it on, unfortunately."

Sacrificing spend

As prices continue to rise, the fear is that this could reduce the amount of IT spending as customers strive to cut costs and drop non-essential projects.

But Barlow said Servium hasn't seen any cancelled projects yet. While it is likely that some projects will be postponed, he said the most common thing he is seeing is clients pushing through purchases sooner rather than later.

"We haven't seen people cancelling projects but I think it is still relatively early," he said. "It might mean that projects are being reviewed because of the price rises, which could mean delays. But the majority of the projects we are working on are needed to help customers resolve problems or help their businesses move forward. So [the clients] are caught as well in that they need the projects. I think undoubtedly there will be companies that won't push rollouts as fast as they were going to. I think it will mean some of the projects are undoubtedly revisited, especially if the prices continue to rise. But that is something we will have to let play out. It is still relatively early days.

"We haven't seen people pushing projects through early so much, but tactical procurements definitely. If they know that a vendor's prices are going to go up at the end of the month some customers have brought tactical infrastructure purchases forward."

May echoed this statement, adding that he believes the price rises actually help the channel in that customers are taking less time to make product choices.

"I think in some ways it is helping the channel in that clients are making decisions more quickly," he said. "Where we have had notification from vendors that prices are rising, we have been able to tell clients that as of this date the supplier is putting their prices up. I think there have been quite a lot of projects that have got the push ahead sooner in order to save on the price increases. So from that point of view I think it helps the channel."

But a combination of things are going to depress the UK market over the next two years, according to Longbottom, meaning that projects for future investment will be "few and far between".

"There is just so much uncertainty. I think by the time we get to March a lot of customers will say they will not be starting a new project until they know what is going to happen with the UK. I think a lot of projects will be canned over the next two years," he said.

"There are projects that have to be done. But I think the ones that are more future investment projects will be few and far between for 2017-18."