Consolidation keeps niche distributors on their toes

IT distribution is a cutthroat business. The most recent proof is that niche players are merging, being bought or seeing new competition.The only certainty is that the distribution landscape will continue to change.

The enterprise server and storage distribution business, for example, has seen upheaval over the past year. Earlier this month, Arrow Electronics Inc.completed its acquisition of KeyLink Systems Group from Agilysys, gaining 800 resellers out of the deal.

Arrow’s Enterprise Computing Solutions division is now in a better position to compete against Avnet’s Technology Solutions unit, its biggest rival in the enterprise server and storage space. And they’re now the only two distributors left that offer the full range of enterprise products from IBM and Hewlett-Packard.

This follows on the heels of earlier acquisitions. In November Arrow acquired Alternative Techno-logy, which specialized in infrastructure, networking and security. Through this deal, it added Citrix, Novell, SonicWall, Wyse Technology and Blue Coat Systems to its product portfolio.

Avnet hasn’t been sitting still, either. In November it acquired General Electric’s Access Distribution business, which was the largest distributor of servers and storage for Sun Microsystems. Prior to this, Avnet didn’t have much of a presence with Sun. It not only added 600 resellers to its roster, but most of those hadn’t dealt with Avnet before.

These deals have served to eliminate other competitors in the market. But this is a good according to Kevin Gilroy, president of Arrow Enterprise Computing Solutions. “In Arrow’s distribution model we have intimacy with our customers,” he said. “Last time I looked, 75 or 80 per cent of orders that come into a broadliner come in via a Web site, so if somebody needs 100 laser printers they order those on the Web site. There’s not an intimacy component to that.”

In North America, there’s been a maturing and a consolidation of value distribution over the past 10 years. Arrow’s latest acquisition, he said, makes this the right amount of distribution in the value space. “You don’t want to over-distribute in the value distribution space because basically the intimacy I’m talking about would go away,” he said. “We’d have to go to a portal-based ordering system if margins had so much pressure on that you couldn’t afford to deliver the services that we deliver.”

There still needs to be more consolidation in Asia and Europe, he added. One supplier, for example, has 18 distributors in Germany. “That’s really not a good model for the reseller,” he said.

The acquisition of KeyLink gives Arrow more horsepower with its vendor partners. KeyLink was a strong value distributor, with an enviable storage engineering practice – and there’s a limited amount of that talent in the marketplace, said Gilroy. The acquisition has also created more cross-selling opportunities for VARs: Arrow picked up Oracle, for example.

Now Arrow and Avnet will be of similar size, both with strong HP and IBM practices. “If you look at IBM, Sun and HP, all their enterprise-class products [are offered] through value distribution and not so much broadline distribution,” said Jack Morris, vice-president of business innovation with Avnet Technology Solutions.

Not only does he see consolidation among distributors, but also in the reseller channel. “We’re trying to make sure we keep a pulse on what’s going on in that market as well,” he said. That affects Avnet, because one reseller could be an Avnet customer and the other could be a competitor’s customer. “So when they consolidate they have a choice of where they would like to put their business,” he said.

For some product lines, Avnet is one of two value distributors left in the market. There’s always a concern with that kind of lack of competition in the market, said George Goodall, research analyst with Info-Tech Research Group of London, Ont.

“It changes the pricing game a little bit and your ability to negotiate, frankly, if there’s only [two] providers.”

But there’s always consolidation going on among distributors, and when you get down to a channel of two, that introduces new opportunity for someone else to step in. “Certainly the OEMs are very aware of that and have relatively open policies on how to support and build out those distributor networks,” he said.

Facing a strain While distributors have faced shrinking hardware margins for years, there’s also the strain of sustaining current business levels with resellers and trying to ensure they have a sustainable business model, said Michael Hyjek, research director of customer segments with IDC Canada.In some cases they’re dealing with new competition. In others they’re dealing with stronger competition from old sources. There’s increasing competition, for example, from direct marketing resellers, who are reinforcing their vendor relationships.

Credit and financing are changing, as are marketing, sales and tech support. “They’re trying to be more proactive, [to] get better information to resellers,” said Hyjek. At the same time, they’re trying to distribute and avert some of the risk, while still allowing resellers to sell their wares.

Distributors will continue to look for new opportunities outside of traditional markets to grow their business, said Hyjek, and we’ll see distributors become more engaged in configuration work on a larger scale.

Lynn Smurthwaite-Murphy, vice-president and general manager of convergence with niche distributor Westcon Group North America, also sees regional distributors under pressure because they don’t have a global support structure.

She sees three key differences between a broadline and a niche player. Typically a broadline carries between 750 and 900 different manufacturers, where a niche will carry 40 to 60. A broadline tends to be a one-stop shop, and often drives operational efficiencies by using a call centre approach or driving people to their e-commerce site.

Then there’s the approach to partnering, which is one-to-one versus one-to-many. “That’s not to say that a broadline won’t do a custom relationship, but it does tend to be with the larger-scale reseller,” she said. “We’re focused on a specific set of technologies [mobility, security and convergence] so we tend to have a core manufacturer with complementary solutions.”

Paul Constantine, vice-president of solutions and services with ScanSource Inc., agrees that its focus makes it different. “We don’t try to be all things to all people,” he said, adding that it does a lot more than your typical distribution function, such as logistics and credit. For example, it has one technical support person for every three sales reps.

Have to add value “We don’t want to distribute something where we can’t add value, and if a product already has good distribution in the marketplace, we’re not sure there’s really a role for us to play,” he said. “Many manufacturers in the broadline space have built infrastructure to add the kind of value that we as a distributor do.”Niche players like ScanSource are seeing increased competition from specialty divisions of broadliners. Tech Data, for example, distributes HP’s enterprise storage, which competes with Arrow and Avnet. In the U.S., Tech Data recently rolled out the Advanced Infrastructure Solutions division for server and storage products.

Meanwhile, Ingram Micro just launched a managed services offering for VARs. ScanSource has a managed services offering, said Constantine, though it’s specifically designed for retail rather than taking a “come one, come all” approach.

“We’re all going to figure out what our value is and if we can compete,” he said. “I expect change. What form that change will take I do not know. We spend a lot of time trying to figure out what that change will look like.”

While the smaller niche distributors tend to focus on higher-end specialized products and services, we’re see a blurring of that line with what some of the full-lines are doing now, said IDC’s Hyjek.

“It’s a moving marketplace,” he said. “All of that leads itself to who’s doing what well and how can they improve their business, not just across traditional markets but across broader markets as well.”

Arrow’s Gilroy says Tech Data and Ingram Micro will do a good job of providing plug-and-play solutions for smaller businesses. “But do I think they’re going to be good at ERP for a 500-bed hospital with 400 employees with complex storage and redundancy based on government regulations of the health-care industry and security applications and virtualization?” he asked. “No, I don’t think that’s where their DNA is.”

The sweet spot for niche distributors is information technology shops with 10 to 50 tech employees, according to Info-Tech’s Goodall. Smaller shops are usually primitive from a process perspective, and have no problem buying from a Tiger Direct or Staples. Any larger, and vendors tend to step in to provide direct sales. This sweet spot is where the role of niche distributors becomes important to value-added resellers.

But if they ever lose their “touch” or higher service levels, then it will become a margin game – or a race to the bottom.

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Jim Love, Chief Content Officer, IT World Canada

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Vawn Himmelsbach
Vawn Himmelsbach
Is a Toronto-based journalist and regular contributor to IT World Canada's publications.
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