Broad-based versus niche distribution

Dominic Whitehand Managing Director, Whitegold Solutions.

In order to survive in the channel you have to continually offer what your customer wants, and stay one step ahead of the game to remain profitable. This is true for any kind of technology distribution business, be it broad-based or niche – but what are the differences and are niche distributors having to become more broad-based to compete in today’s competitive distribution market?

I would venture yes and no. Some niche distributors will always be so specialised that they will retain their unique value and remain uncontested due to the nature of their technology offerings. However others will definitely need to adapt or face extinction.

Let’s take a look at what is driving this in the distribution market – and also what the pros and cons of each model are, as well as the pitfalls and rewards.

Drivers

For me, the word ‘convergence’ is the primary driver for niche distributors needing to become more broad-based – with ‘unified’ a close second. Our industry is constantly talking about ‘converged networks’ and ‘unified communications’ and so on – but what does it really mean?

Technology users today require increasingly complex solutions that are slowly bringing together what were once seperate products and technologies. The singular infrastructure needs to cater for all of their needs and interoperate for maximum efficiency. In other words – I want everything to work together and empower me – and I want it cheap, fast, secure and available all the time.

For example - I want my BlackBerry mobile phone to synchronise with my email system and keep track of my appointments and events. I want my email system that is secured by my gateway UTM device, my UTM device that is also protecting my intelligent network, including my end points, that include VoIP handsets. These need to be smart enough to let everyone else in the organisation know whether I am available or not, or just on the phone. This begs the question – Mr Supplier, can you please tell me how few devices I can achieve this with and how cheaply you can supply it for? And how quickly can I have it installed?

It’s easy to see where the buzzwords are coming from and also how we are all demanding more from less. We all want to be able to communicate and exchange information and we want to be able to do it quickly, securely, cheaply, with minimal effort and be able to store it all.

A niche distributor faces the issue of competing with broad-based distributors to supply technology that encompasses as much of these required features as possible. This is why it is apparently becoming necessary for many niche distributors to offer a broader technology range, or indeed to seek out contracts to supply those newer, smarter technologies that bring together multiple capabilities to cater for these required features.

Pros and Cons

Broad-based

Broad-based distributors obviously enjoy a more complete relationship with many of their customers, in that they can service most of their technology supply needs across all technology areas – allowing for strong relationships and loyalty to be built. This obviously can have an upside on revenues as well – if you are selling more across various technology areas then of course more transactions equals more revenue from each customer. It also means more customers overall, since holding a wider range of products obviously should (and usually does) attract more customers who start with a requirement for something specific but learn over time that they can source other technologies from the same place as well.

A huge benefit of broad-based distribution, in particular for the larger broad-based distributors, is economies of scale when it comes to logistics. If you are shipping twenty five boxes from a single vendor on a single pallet from California then your uplift/freight costs are pretty high per box.

This of course means that you potentially have the choice of either selling at a lower price than your competition to win more business – or indeed selling at the same price but with higher margin to your business. Depending on the level of consolidation and cost benefit – you can actually do both of these.

Economies of scale benefits do not stop at logistics. An incredibly important part of the distribution business is how successfully you can deal with the Foreign Exchange (Forex) – i.e. what systems and procedures you have in place to maximise the exchange rate you can get for your Aussie Dollar, whilst minimising the downside of fluctuations. Most niche distributors will be home-grown and funded from within Australia also – and therefore will need to play the Forex game well to realise any benefit or indeed merely stay even when buying in US Dollars, Pounds or any other currency. Many of the larger broad-based distributors, however, are funded by investors or large parent organisations from the US, Europe and other regions. These distributors will often have the benefit of being able to pay suppliers from a same-currency, same-country account to offset Forex fluctuations (for example a US parent will pay US vendors directly if the Aussie Dollar is weak and vice-versa), or the simple fact that the distributor is dealing with such large amounts of money when paying multiple vendors for larger volumes of products – will realise a far better rate on the Forex when buying their required currency.

Let’s not forget that these larger distributors will also, in many cases, realise a better discount from their vendors due to the volumes they are ordering – and in addition they will earn more MDF (Market Development Funds) from each vendor to allocate towards advertising, events and so on.

So, Broad-based distribution sounds fantastic, right? Well, there are some inherent difficulties to accompany the benefits of this model. Firstly – more customers, transactions per customer and revenue per customer equals more risk. Providing credit terms to thousands of reseller customers can prove very risky business, so a good finance team and credit-checking process is essential. There is also more risk in holding more stock – especially if your vendors do not provide decent stock rotation terms. What if some of your stocked technologies prove flavour-of-the-month and then quickly go out of fashion? If you do not have good stock rotation terms then you are stuck with a large pile of lemons that you will probably lose money on. Even if you are extremely adept at controlling your stock and minimising the need for rotation – if you are a larger broad-based distributor with a large customer base, you have to hold a large amount of stock in most of your technology areas to supply to your base. That means you need big financial support – thus you are locked in to the investor/parent model rather than enjoying the flexibility that comes with your own self-funded business.

A huge problem for broad-based distributors is maintaining the quality of their support and product knowledge across vendors and technologies. Holding so many products and representing so many vendors means that it is extremely hard to keep your staff from spreading themselves too thinly when it comes to pre-and-post sales and support. Larger broad-based distributors are great when it comes to getting you a product to the right place at the right time – but they are rarely renowned for their in-depth product knowledge and capability to provide you with technical support and professional services on the product when you need to/have implemented a solution at your end user’s site.

Niche

It’s easy to pick out the cons of being a niche distributor – simply by looking at the reverse of some of the pros of broad-based distribution. There are not such economies of scale for niche distributors – so uplift/freight costs can hurt, as well as volume buying power being diminished, both from a vendor discount basis and a Forex basis (it’s harder to purchase a currency forward contract at a good rate with lesser amounts of money).

Niche distribution businesses are almost always home-grown, self-funded affairs and thus fronting sufficient money and credibility with vendors to attract a good credit limit with them can be a challenge. Funding for growth is obviously also limited to your personal bank balance, without the assistance of investors, seed funding or a larger parent organisation. Marketing budgets are typically tighter as well, due to the reduced amounts of MDF that are realised through fewer vendors and in some cases smaller sales volumes. This means that it is difficult to build your own brand in the distribution marketplace and gain credibility within the channel-at-large.

So, quite a few cons – and therefore you have to play on the strengths of the pros that are typical of niche distribution. Good niche distributors have the propensity to quickly become the trusted source for their given technical speciality – and therefore they can grow extremely close relationships with their customers and indeed also their customer’s end users. Their people are, or at least become over time, knowledgeable and competent in the technologies offered – thus the Customer Experience is good due to the resulting quality of pre-and-post-sales and support. More direct control over the direction of the business is a luxury of the niche distributor, given that they rarely will be reporting to a parent organisation or investor. This means more flexibility in the way the business develops and matures. Niche distributors often have the opportunity to represent vendors on a sole distribution basis – which in turn means they do not have to fight other distributors on price, because they can effectively control the street price of the vendor’s products.

Pitfalls

Pitfalls for each model are similar in many cases – for example both models need to be careful not to back the wrong technology and/or vendors. There are so many new vendors springing up in all technology areas that it can be difficult to pick a winner, or even a performer. Pick a loser and you will end up suffering - big time.

Both models must try and avoid too few “Pillar Vendors” – those which hold up their business by providing the majority of revenue. If you only have one or two vendors that account for most of your revenue and thus support you – what happens if you lose one or both of them? It hurts a great deal – and in some cases may well put you out of business for good.

Both models also need to stay on top of debtors, to enable good cash flow. It’s a sad fact that many resellers in the channel expect distributors to be their virtual bankers, by allowing them to take longer-than-agreed-to credit terms. Setting the expectation early is the best practice here.

Both models should avoid vendors that enforce a “Sell-In” model – where local vendor representatives are rewarded for selling stock direct to the distributor, rather than the “Sell-Out” model where they are only recognised on stock that is sold by their distributors to resellers. Effectively, the Sell-In model promotes “stuffing the channel” with stock – a practice that is antiquated and simply counter-productive.

There are probably more pitfalls for niche distributors, given that the larger broad-based distributors usually have the stability and support of larger parents or investors.

Funding a niche distributor can eat money – and it will be your own if you start a niche practice, so beware and prepare. Credibility is a big pitfall – if your niche distribution business doesn’t work – you probably won’t look too good to your peers in the industry. Finally – if you are a niche distributor you often need to work harder for your dollars, given that you are likely to be in a self-funded business that has less than 30 people or so. This can affect your lifestyle by eating into your personal life through expenditure of both your time and money.

Conclusion

Let’s look at our question again – “are niche distributors having to become more broad-based to compete in today’s competitive distribution market?”

Once again – I would venture yes and no. Given what we have looked at above and the state of the ever-changing market out there – there are actually two major options open to niche distributors.

1. They can continually improve in their given niche and look to exit via a sale to or merger with a larger, broad-based distributor.

2. They can indeed choose to diversify and become more broad-based themselves, taking care to avoid the pitfalls and heed the cons of their business model. If you are a successful niche distributor, you have the capability to grow organically into other areas.