Tech Data European boss: 'If you don't scale in Europe in every country, you will struggle'

Patrick Zammit opens up on sacrificing market share for profit stability and what ScanSource's hardware sale means for the distribution landscape

Tech Data will not be in the running to acquire ScanSource's hardware operations, according to Patrick Zammit, the distie's European president.

US distributor ScanSource last month announced it will sell off all of its hardware business in Europe as it begins to redefine itself as a software distributor.

All hardware assets, including warehouses and staff, across both the Communications and Point-of-Sale arms of ScanSource's business, are up for sale.

"I can tell you it's not us. And I don't know [which distributor will buy it]. But I wonder; ScanSource has a very diversified model so I wonder who will be interested in buying the whole business," Zammit told CRN's sister publication, Channel Partner Insight.

The European boss expressed his surprise at ScanSource's exit from an entire geographic region, claiming it's an unprecedented move in IT distribution.

"The ScanSource announcement was for me really big news," he said.

"There has been consolidation, but this is the first time that you have had a major player declaring they're exiting a region. And when you look at reasons for it, which is even more interesting, it's scalability, which tells me that I think there will be further consolidation in the European market," he said.

He went on to say that, without scale, even value-added distributors will fail to make a mark in Europe.

"If you don't scale in Europe in every country, you will struggle. We have some vendors who are now starting to support distributors with pan-European approaches," he said.

"Even by specialty… I'm not even sure if ScanSource had a leading position in the segments they decided to compete for. This is the one thing we believe is critical: on every specialty, you need to have critical mass."

Sacrificing market share

Zammit is confident about Tech Data's position in a turbulent distribution landscape.

"One thing is for sure: if you look at things today, Tech Data is probably one of the most stable and predictable players in the market," he said of the current state of the distribution market in Europe

Zammit's comments come amid a chaotic competitive landscape where its largest player (Ingram Micro) is rumoured to be on the brink of being sold off by its debt-laden owner, where businesses with more than €100m turnover are going into administration (Beta Distribution) and several pan-European firms are selling off huge portions of their business (Arrow and ScanSource).

Meanwhile, after emerging from its $2.6bn merger with Avnet Technology Solutions, Zammit (pictured) claims Tech Data is one of distribution's safest bets.

"We are proud to have today one of the best balance sheets in the market. Why is it important? Our vendors need reliable, credit-worthy partners. All that discipline enables us to remain a good partner for vendors and business partners," he said.

"And the Avnet acquisition dramatically strengthened our value proposition. To the surprise of many, we, in fact, reimbursed our debts very rapidly, thanks to very solid cash management. And today we are leading in many areas and we are stable."

But attaining stability and predictability has come at a cost for Tech Data. So far this year, the firm has been losing market share and growing at a slower revenue rate than the market.

And it's only predicting low single-digit revenue growth for its fiscal year ending January 2020.

Tech Data's CEO Rich Hume revealed that the distributor has been cutting ties with some of its low-margin vendor partners, slashing around $300m from its top line each quarter.

The distributor is also a year into a two-year optimisation programme to save up to $80m a year - half of which will be reinvested into the business.

The actions have already had a measurable impact on Tech Data's bottom line. GAAP operating income jumped by 13 per cent in its recent fiscal Q2 to $124.7m, with Europe enjoying 29 per cent year-on-year growth.

The distributor's investors have reacted positively to the measures, with Tech Data's share price having risen by 21 per cent since the start of the year.

Zammit claims surrendering revenues and market share for the sake of profits was the right decision.

"Let's be clear, we are not growing as fast as the market as a consequence of this strategy. And it's fine with us," said Zammit.

"We know this is a highly competitive market. Margins are low - we know that's the market. But in some cases, our level of margin with some vendors was not covering our cost. So we went back to our business partners asking for better prices. And I will tell you, in general, we got a good reaction. But in some cases we could not keep the business," he said.

This article first appeared on Channelpartnerinsight.com