DISTYS’ SHRINKING MARGINS

“Prices drop due to an over-supply of goods, forcing traders to liquidate their stocks at low margins”

Bimal Jhaveri, Director, Hardtrac  CEO, RR Systems

Supply is more than demand...

Supply and demand determines market rates as well as margins and service
quality. For the last two to three years, MNCs have flooded the market with
goods, and hence, supply is more than the demand. This has led to diminishing
margins for both, distributors and traders. If distys correctly forecast the
right demand and accordingly streamline their supply, this industry has very
good potential.

Too many people in the trade...

Another reason for reducing margins is that there are too many people in
this business. Every other person finds the the IT trade very impressive and
jumps in to it. Most of them don’t even have the required technical knowledge
or skills to provide proper service or value-adds. At the same time, prices of
goods drops very fast. This pressurizes them to liquidate their stocks at
whatever price their can. Finally, end-users benefit at the cost of the entire
channel community.

Traders do wrong things to cover risks...

Vendors cover distributors for most business risks like product obsolescence
and manufacturing defects. But this benefit is not passed on to dealers. To
protect themselves from such risks, partners are forced to do things that
ideally should not be done, such as discounting. Distys must realize that if
goods are dumped at all levels of the channel, it will lead to pressure sales,
as partners will try their best to meet the set sales target.

Value-adds will help to improve margins...

This business can survive only with value-additions, where one has to sell
technical expertise, knowledge and service. Right now, almost 80% of the market
is filled with traders not wanting to do value-adds.

Wrong approach to ‘handling charges’...

When distys introduced the ‘handling charges’ to cover-up for their
overheads, the reseller community protested, as they thought that they will have
to bear these charges. If these distys had known how to pass it on to the
end-customer, then there would not have been an issue at all.

They should have negotiated with vendors about introducing the new charge and
come out with a better, commercial approach. The introduction of this charge
could be the disty’s indirect way of communicating to vendors that their
margins are too less.

“High expectations of vendors from the Indian market is increasing competition and sales pressure”

Rajesh Goenka, Divisional Head, Rashi Peripherals

Increasing competition reduces margins...

As India’s economy is opening up, vendors are increasingly aware of its
immense potential. There is an influx of goods in the market, which obviously
gives rise to increased competition, creating a pressure on the distributor’s
margins. Profits are also decreasing because of the increasing competition among
distys. It eventually leads to a price war, affecting not only margins but also
sales at times.

India is a huge market...

Since India is a huge market, vendors have very high expectations from it.
The overall PC market, which was almost stagnant for the last two years, is now
showing signs of improvement. But this has resulted in a wide gap between
expectations and reality, that has increased the pressure of sales at all
levels.

Overheads is one factor that is directly proportionate to business revenues.
Increasing competition means more efficiency, in terms of quality infrastructure
and manpower. This obviously implies higher overheads. However, if overheads are
controlled and effectively utilized, vendors and traders will get compensated
with higher returns.

Pressure sales are results of high targets...

The ‘pressure’ fear has forced many to scramble for sales target. The
moment the gap between expectations and reality increases, it is bound to create
pressure on margins. In fact, we at Rashi try to maximize channel partners’
profits through monetary and benefits in kind. Our current Australia program for
Sony products and Logitech Incentive Programs (LIP) are standing examples of the
same, which brings in profitability, not only at the tier-one, but also at the
tier-two level. In short, effective utilization of resources is the key to
profitability.

Better ways to increase margins...

Innovative marketing and sales coupled with value-addition will help to
increase profitability. Also, complete ownership of the brand and products will
strengthen the entire business and give better results.

Channel consensus important to bring new charges...

The decision of some distributors to introduce ‘handling charges’ to
cover up for the increasing overheads is purely an independent business decision
that any organization takes. The only thing that has come to the fore in this
issue is the implementation approach, which could have been done in a better
manner by taking the channels into confidence. Even vendors could have played an
important role in guiding distributors, based on their international
experiences. They must show effective ways and means to distys to be more
profitable.