Exclusive: Major study on IT distribution market unveiled

'Eye-opening' new research shared exclusively with CRN aims to provide definitive overview of major trends in UK and European IT distribution market. Doug Woodburn runs through some of its key findings

The European distribution market is more fragmented than popularly believed, accounts for over 40 per cent of overall end-user IT spending in the region, and is still growing year-on-year.

Those are among the headline findings of a major study that aims to provide an overview of IT and consumer electronics (CE) distribution in eight of Europe's key territories, namely the UK, Germany, France, Italy, Spain, Poland, Switzerland and Sweden.

Ingram Micro and Tech Data, together with Tech Data's recently acquired Avnet TS business, accounted for 32 per cent of an IT distribution market worth €69bn in 2015/2016 in these eight key European economies, the research found.

Conducted by Bain and Company in Q1 and Q2 of 2017, the study was commissioned by the Technology Channels Alliance (TCA), a distribution body which counts regional players Esprinet, Exertis and Westcoast as its founding members. Follow this link for further information.

With Arrow ECS added into the bargain, the US-based giants have a 35 per cent share across this octet of markets, a finding TCA chief executive Robert Norum argued would confound expectations given recent market consolidation and the perception that distribution is becoming a global game.

"The information we have is that 60 to 65 per cent of all distribution is actually carried out by local and regional players, and I think that will be quite an eye opener to most US vendors," he said. "I think the perception is that if they've got Ingram and Tech Data, and maybe one or two local players, then they've got it covered. But it's actually a lot more fragmented than most people would think it is."

The TCA was set up last year with the aim of positioning regional and local distributors as a viable option for vendors. Its founding members are all former members of US-based distribution body Global Technology Distribution Council.

The study, the findings of which have been shared exclusively with CRN, consolidates data from numerous sources including GfK, EITO and the World Bank, and aims to provide a definitive overview of distribution in some of Europe's largest economies.

Share of the spoils

Total European IT and CE distribution revenues across the eight markets rose two per cent to €69bn in 2015/16, with growth driven mainly by mobility, printing, and the IT value segment, the study found. That figure accounts for 37 per cent of end-user spending of €189bn in those countries, or 42 per cent when reseller margins are factored in, which would mean that over two-fifths of IT and CE revenue travels through the two-tier channel in Europe.

Despite perennial claims from critics that distribution is suffering something of an identity crisis, wholesalers actually appear to be becoming more relevant in several of the countries studied.

For instance, the percentage share of the end-user market intermediated by distributors in the UK leapt from 40 to 43 per cent year-on-year last year, the research found, thanks in part to Apple's decision to shift some sales to distribution here. The percentage shares for Italy, Spain and Switzerland also rose, from 48 to 49 per cent, 47 to 48 per cent and 42 to 44 per cent, respectively.

The percentage of sales intermediated by distribution varies wildly by product category, however (see graph, above, for a flavour of this).

Wholesalers' share for desktops and notebooks, for instance, rose from 57 to 59 per cent and 65 to 69 per cent, respectively. This was attributed partly to Lenovo, and potentially also Dell, shifting more sales to a two-tier model.

Distributors are also tightening their stranglehold in the printer and office segment, increasing their share here from 72 to 74 per cent. Their share of the spoils in the IT value segment, meanwhile, held steady at 49 per cent, according to Bain's calculations.

Contrast that with mobility, where distributors boast a mere 22 per cent share of the spoils, albeit up one percentage point year on year, and CE, where their share was flat at 15 per cent. They're also underweight in the tablet market, where their share of the cake dwindled from 38 to 35 per cent.

The study also highlighted some growth hotspots for distribution, Norum (pictured) explained.

"One of the key take-outs is that there is a significant role for distribution at the volume end, but actually the value end - which clearly offers higher margins and brings more of a solution play - is where there's an opportunity for distributors in Europe," he said.

"There are three areas Bain pulled out as fundamental technology drivers - cyber-security, hyperconverged infrastructure and the Internet of Things (IoT), and in all these cases the whole channel needs help: vendors need help working out how to get these products to market, and resellers need help working out how to sell them. In that sense the role here for distribution is less of a box-shifter model and more of a value-add one."

Margin crunch

Distributors' profitability, however, is on the decrease, the research found, with the average margin of a ‘traditional' broadliner and value player standing at just one and three-to-four per cent, respectively.

Of the top nine broadliners, only two have seen their operating margins in the region rise over the last two years, Bain's research found. These were Tech Data - from 0.5 to 1.1 per cent - and Westcoast - from 0.8 to 0.9 per cent.

"Margin is definitely coming down," Norum confirmed.

"In the volume market, margins are minute - single digit, as in one to one-and-a-half per cent," he said. "Where we are talking more about infrastructure and more complex products, it starts to climb back up to three, four, five per cent, but it's still very tight."

Asked where distribution is heading in the event margins continue on this downward trajectory, Norum remained upbeat.

"There is downward pressure on all of the volume products," he said. "There's no way of getting away from that. But that puts pressure on all distributors to think much more about where the value-add is, and that's where cloud and as-a-service models, as well as these new technologies - cyber-security, IoT etc, have a significant role to play.

"There's no question that distribution needs to step up to the plate on as-a-service models - it needs to have a much clearer story on it. That's an opportunity, and I think from a European perspective, given the complexities of billing and infrastructure and making all the stuff work from a local perspective, the perception that you can do this all from one place in the world is a long way off."

Value versus volume

As it stands, however, it is the global broadliners that exert dominance in the value-based space, the research found, with Tech Data/Avnet TS, Ingram and Arrow holding 45 per cent of this part of the market across Europe between them.

Alex Tatham, UK managing director of Westcoast said: "The report demonstrates that companies like Westcoast, Esprinet and Also are very much under-represented in the value category and we all need to do better in that. We need to take a look at ourselves in the mirror and focus on something that we can really make a mark on."

Alessandro Cattani, CEO of Esprinet, agreed, adding that the industry needs to get to the bottom of why distribution appears to be under-represented in some countries, including France, where distributors' share of end-user tech sales is just 29 per cent.

"We as the distribution industry need to focus more on the margin-generating activities and products," he said. "More focus on value in all different ways - value products such as the datacentre, and value-added services. The industry is no longer about box moving - the way of actually being a distributor must evolve."

UK distributors boost share of IT spending

The UK houses Europe's second-largest IT distribution market by value, at €16.2bn in 2015/16, a 7.5 per cent annual rise, according to Bain's calculations.

Only Germany's, at €19bn, was larger, the study found, while the Italian and French distribution sectors are worth far less, at €8.7bn a-piece (see figure 4).

Tech Data/Avnet TS was found to lead the UK market, with a 22 per cent share, ahead of Exertis on 16 per cent, Westcoast on 12 per cent, and Ingram on nine per cent. Westcon (three per cent), Brightstar 20:20 (three per cent), Midwich (two per cent), CMS Distribution (two per cent), Beta (one per cent) and Exclusive Networks (one per cent) rounded out the top ten (see graph below).

Distribution was found to be gaining share in several product categories, including mobility, where Apple recently shifted a chunk of business to the two tier channel, as well as notebooks.

The UK has the highest IT spending incidence on GDP of the eight countries studied, the research found, at 3.8 per cent, ahead of Sweden (3.5 per cent) and Switzerland (three per cent).