HP culled as Tech Data Middle East slashes brands

Tech Data Middle East has dramatically brought the axe down on its relationship with primary vendor partner HP, citing discord with the vendor’s compensation model for its shock decision. The broadliner has also cancelled a local contract with Acer in a move that signals its intent to reduce exposure to the PC distribution space.

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By  Andrew Seymour Published  March 19, 2007

Tech Data Middle East has dramatically brought the axe down on its relationship with primary vendor partner HP, citing discord with the vendor’s compensation model for its shock decision. The broadliner has also cancelled a local contract with Acer in a move that signals its intent to reduce exposure to the PC distribution space. The split with HP has huge implications for Tech Data’s business in the Middle East. HP was Tech Data’s largest vendor in the region and accounted for as much as US$90m of its annual sales, according to Channel Middle East estimates. It is understood that the separation was completely initiated by Tech Data and local management officially told HP bosses of their decision last week. Tech Data gave the following statement to Channel Middle East: “We decided to exit the HP business on the grounds of meeting our profitability objectives and unfortunately we weren’t in a position to get the profitability targets that we are aspiring to. We are interested in distributing HP’s products in the future when the channel and the compensation model reflects our mode of operations.” Market sources claim the decision could be a reaction to HP’s drive towards stronger in-country distribution as well as profitability challenges that Tech Data faced with HP’s compensation model in the Middle East. HP declined to give an official comment, but a senior source at the company confirmed that it been “informed all the way” by Tech Data and understood the “rationale” for its decision. “We are unhappy to see such a partner leave the relationship and not represent us in the market place,” added the source. “We understand the decision and are trying to make it as painless as possible for both companies.” Although the move only has a Middle East impact, worldwide executives of both parties will no doubt be examining why the relationship broke down given the strong global alliance that the pair enjoy. HP products contributed 27% and 28% of Tech Data’s worldwide sales during the past two years, illustrating the scale of their partnership. The fall-out also raises the issue of how reliant distributors are on vendor compensation models and the challenge that they face to meet their targets in a profitable manner. “HP has rebates for different areas such as sell-out rebates, sell-in rebates and logistics efficiency,” commented one market source. “There are different parameters for rebates. If you add up all those rebates and really manage it, you can end up making a lot of money — about five or six points. But, normally what happens is that if you lose out on one they are all slightly interlinked.” Mathew Thomas, vertical head for IT distribution at Redington — one of the largest HP distributors in the Middle East — said the structure of compensation programmes remains a topic that it routinely discusses with all its vendor partners. He says that price decreases, coupled with the level of competition in the market, are putting more pressure on distributors to exceed their targets and secure a larger rebate in order to compensate for the lack of margin on the product sale. Thomas said: “Can compensation models get better? Yes. But is profitability not happening because of a compensation model or because you do not get an opportunity to make transaction margin? Compensations are normally a combination of what you can make — buying low and selling high — and getting rebates from the vendors.” “I’d definitely say that with the distribution structure in the Middle East and the lay of the land, transactions margins are no longer seen,” added Thomas. “What then happens is that you become fully dependent on the vendors’ rebate structure to augment your profitability.” Amer Khreino, general manager at Emitac Distribution, says negotiations to make compensation programmes more attractive are a common part of the company’s dialogue with vendors. “Compensation programmes — or what we would call back-end rebates — are fully driven by the vendors,” he said. “We continue to highlight any major concerns that we have. There is always an argument for higher compensation when it comes to value addition, particularly in terms of in-country value addition. Operating expenses do get inflated, especially in smaller regions, so we would expect compensation to be tied to return on assets and operating expenses.” Meanwhile, Acer MEA boss Krishna Murthy told Channel Middle East that the vendor would now be taking a close look at its distribution structure following Tech Data’s decision to cancel its contract with the company. He would not be drawn on whether the notebook specialist plans to appoint a replacement distributor or utilise its existing distribution network, however. Fujitsu Siemens is also believed to have been impacted by Tech Data’s cuts, but the vendor’s local management team could not be reached to confirm this.

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