VAR health, financing are key distributor challenges, says IDC

With a challenging role to fill in the channel as the link between manufacturers and resellers, an analyst from IDC Canada says distributors will be increasingly challenged going forward by the health of the VAR community, hampering their ability to extend financing and credit.

Ricky Mak, an analyst covering SMB and channel research with IDC Canada, says that in his discussions with distributors, financing has emerged as their major concern, resulting from the poor health of many VARs. It’s getting more and more difficult for many disties to extend credit to VARs that are poor credit risks.

“Finance and credit is one of their major functions of distributors, extending credit,” said Mak. But they’re having a hard time financing these distributors at little or no cost, given their very poor credit standings.”

It goes back, says Mak, to VAR business models, and the margins they work with. Too many VARs are clinging to low margin businesses like hardware, and aren’t supplementing those low margin areas with higher margin businesses such as software and services. As a result, there’s a consolidation trend occurring in the VAR market.

“The big guys are getting bigger and the small guys are getting smaller,” said Mak, noting Softchoice purchasing much of the NexInnovations business as an example.

The consolidation trend can be a mixed bag. On one side, bigger and more stable VARs emerge, but on the other side there’s less competition and choice for customers.

“The distributors are trying to address this issue by creating new and innovative financing and leasing tools,” said Mak. “They’re making an effort to address this issue, because the health of the resellers does have an effect on the health of the distributors.”

However, he adds that many distributors are moving from a model of risk bearing to risk aversion, working with fewer low credit resellers and taking a more critical look before deciding to extend credit.

“It’s no longer feasible for distributors to sustain these levels of risk when working with low credit resellers,” said Mak.

Besides financing, Mak says another challenge is consolidation at the distributor level, as well as the entry of new players into the market, such as D&H Canada. In response, he says distributors are shifting their functions and adding new lines of business, such as Ingram Micro’s consumer electronics play.

“When they add on these additional lines of business outside their core strengths, how sustainable is that?” asks Mak. “I think that’s something we’re still waiting to see.”

A solutions-based approach is the strategy that value-added distributor Avnet Technology Solutions is taking to address these challenges. Gavin Miller, general manager and vice-president, Avnet Technology Solutions, Canada, says probably the biggest challenge Avnet is facing is to define the distributor value proposition between their two masters, the manufacturers and the VARs.

There’s a margin squeeze, says Miller.

“The manufacturers are trying to maximize their footprint in the market and the VARs are trying to maximize their return on their sales efforts,” said Miller. “Distribution often gets squeezed in the middle of that.”

As a value distributor, Miller says Avnet’s strategy is to focus on partner enablement and solutions-based selling. The distie is focusing on six key solution sets, such as content and document management and virtualization and consolidation, as well as key verticals such as health care and government.

“The idea is for the partner to see more opportunities in their pipe and close them more quickly, as opposed to just manning the phone lines and taking orders for products,” says Miller. “We see those solution sets as high-growth areas for the next three to five years.”

He adds Avnet is also responding to the increased distributor competition by becoming more broadline. However, rather than adding competing manufacturers, he says Avnet is adding complimentary software, peripheral and appliance offerings and wrapping them into solutions, allowing a VAR to purchase it all from one source.

On the financing front, Miller says Avnet has always looked at the financial stability of their VARs, and is careful not to overextend credit, something it is now examining more closely.

“You can easily get a small VAR turned upside down quickly,” says Miller.

To help VARs on the financing front, he says Avnet has a number of different financing vehicles, including some that look more at the end user’s credit versus the VAR’s.

While he says he doesn’t want to be a contrarian, Greg Tobin says he can’t support some of the conclusions around financing challenges. As the general manager of a new player in the Canadian market, D&H Canada, Tobin leads a company in growth and investment mode, but still he says financing the little guys is the job of a distributor.

“Our job is to be creative to give them the financing,” said Tobin. “There’s always room to give them more credit, and have more options available.”

D&H has a sophisticated credit scoring model in place that helps them asses credit risk. The company has been doing its own underwriting in Canada to date, and Tobin says he hasn’t had to turn down a deal yet that he was comfortable with. Describing his approach as lenient but not silly, Tobin says VARs need flexibility and if you work with them they’ll respond kindly.

“I’m not seeing any more increased risk at all,” said Tobin. “I’m always of the belief that if you’re good at what you do and you have a core competence there’s always room to make profit in there.”

Would you recommend this article?


Thanks for taking the time to let us know what you think of this article!
We'd love to hear your opinion about this or any other story you read in our publication.

Jim Love, Chief Content Officer, IT World Canada

Featured Download

Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

Related Tech News

CDN in your inbox

CDN delivers a critical analysis of the competitive landscape detailing both the challenges and opportunities facing solution providers. CDN's email newsletter details the most important news and commentary from the channel.