Killing Me Softly

The notebook market is growing at an astonishing rate in the Middle East, pleasing vendors and distributors alike. The channel however, is telling a different story. Margins are being squeezed so tight that making a profit is almost an impossibility, and resellers are crying out for some help to try and solve the problem that is threatening to kill their business.

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By  Colin Browne Published  March 29, 2001

Introduction|~||~||~|The concept of being able to work anytime, anywhere, is made possible by the notebook. With the average notebook becoming lighter and smaller, incorporating features such as wireless, Bluetooth and biometric technology to improve security and connectivity, it is no wonder, with the same specifications as a PC that the notebook industry is beginning to take off in the Middle East.

It is not just road warriors that find notebooks indispensable, home users are catching on fast, enamoured with the ability to use the laptop anywhere in the home, or garden for example.

It is this change in lifestyle and the acceptance of technology, including e-commerce and its benefits that have accelerated the sales of notebooks in the region. “The notebook market has definitely grown with the passage of time, and I think the future is the notebook,” says Usman, showroom manager for ARC, a notebook reseller.

The general euphoria at the uptake of notebooks by businesses and home users alike, is shared mainly between the vendors such as Compaq, IBM, HP, Fujitsu-Siemens, Acer etc, whose machines grace the showrooms of every reseller. Distributors are happy with the situation as they shift large volumes of branded notebooks down to the channel. Resellers however, do not seem to be happy with some aspects of the notebook market.

As a notebook passes from the vendor and then down to the distributor, both parties take their margins. By the time the notebook reaches the reseller, the margin has been cut substantially. However, notebooks supposedly retain a relatively high-margin for the channel, irrespective of the downward spiral of margins overall in software and hardware. “Notebook margins are still high where partners are concerned, compared to PC prices,” says Mike Smith, customer services manager, Compaq MEMA.
||**||Margins not what they should be|~||~||~|In theory, notebook margins should indeed be high—maybe higher than PCs—when in actual fact, this is not true, at least for resellers. “We make about 25 Dirhams on each notebook that we sell,” Ashok Harpalani, managing director of Computronics told CRN.

“Usually the margin for notebooks is between 25-50 Dhs,” agreed Sivaram, showroom manager at Supertech.

With a reseller such as Computronics selling on average four hundred notebooks a month and making around 10,000 Dhs (less than three thousand dollars), the margins from selling notebooks are clearly not what they should be. “The money that we make from notebook sales is absolutely nothing,” says Harpalani.

One of the reasons for this situation some dealers believe, is vendors now allow more than one distributor to sell their products. Previously, a lot of vendors had one distributor, and that distributor had its channel. Nowadays, vendors have any amount of distributors, allowing any reseller to get their hands on the products. On the one hand, this allows resellers to decide which distributor to use and to command better pricing.

“The distributors are fighting between themselves, so the customer [reseller] can take advantage of the situation,” Harpalani told CRN.
On the other hand, as a consequence of this, walk into any reseller that sells notebooks, (and that is the vast majority) and exactly the same brands of notebooks will be found. “Everyone is keeping the same products, and the market is not that good as there are so many players now,” says Harpalani.

And it is for precisely this reason that a lot of the problems plaguing resellers maintaining low margins from notebooks, arises. Because everyone sells the same brand notebooks, customers are able to go from one shop to another, getting each reseller to drop prices. Which they do. On top of this, the competition between each reseller in terms of selling a notebook means prices are already at rock bottom in an attempt to make that sale.

“It is competition [between resellers] that spoils this, nothing more than that,” says Sivaram.

“If we had an understanding that we would not go below a certain price, come what may, then maybe it would be different,” he added.
||**||The distributor's role|~||~||~|The more enterprising members of the channel do make up some of the margin lost on notebooks by selling accessories to accompany the product. Consumable goods such carry cases, software, printers and scanners are the likely add-ons to a notebook sale, without which, a lot of resellers would find that they would go out of business fairly quickly. Others use consumable goods as an attractive ‘freebie’ in order to entice customers to buy.

“On some accessories we are making a margin but on others such as the bags, we offer free with the notebooks,” says Usman.

“This is to beat the competition,” he added.

Whilst resellers agree that the competition between them plays a major part in the low-margin notebook scenario, some also blame other factors such as the distributors and vendors themselves, for not looking after the channel, and putting them in a position whereby they have to compete with each other on price. “The distributors need to control who they sell to. They sell to everyone and not equally. It is the distributors fault, they should know the capability of the resellers,” says Harpalani.

Distributors however, maintain that the margins resellers sell notebooks for, are decided by the reseller, and not the distributor. “It is not our role to control prices that our resellers work at,” Steve Lockie, managing director, Tech Data Middle East told CRN.

“It is their responsibility to add service or value to justify the price at which they sell,” he added.

Lockie also believes that resellers have not kept up with business practices as the market has matured in recent years. “I am not saying that the traders are bad, merely showing that the market continues to evolve and we must all evolve with it. Believing that the market owes us all a living is naïve, and we must all continue to work harder to meet the needs of the ever-changing requirements of the end-users.”
||**||Hiking up the price|~||~||~|Both the distributors and the vendors are attempting to help resellers become more efficient at selling, by bringing new revenue streams to the channel. Compaq, HP and 3Com for example have set up call centres to assist resellers and end-users and Tech Data is continuing efforts to improve its ‘three-ring policy,’ according to Lockie.

Ventures such as CompaqPlus, the company’s online end-user service also brings resellers in to the equation. However, these initiatives from Compaq were as a result of sub-standard service provided by some partners. “Talking about notebook services in the region, in the past we recognised that services provided by some of our partners were not up to our standards,” Compaq’s Smith told CRN.

“To help our end-users and the SMB market, Compaq launched the three initiatives to help them receive better services and technical support; CompaqPlus, Call Centre and ‘The Source’ web site,” he added.
In spite of the solutions offered by vendors and distributors, all three need to work together—not as separate entities—as one.

The problem, according to one businessman who asked not to be named, is that most dealers (and even some distributors) are unable to separate sales from margin and profit, assuming that more sales must mean more profit. Simply put, low sales with high margins, or high sales with low margins generate little profit. An easy equation, but one that eludes a lot of resellers.

It only takes a few dealers to start hiking the price of notebooks back up resulting in a higher margin for themselves to begin the ball rolling. Those that do, also need to find a way of adding value in terms of service and support for the customer, in order make that sale. “I have met with two new resellers recently that care about their customers, go the ‘extra mile’ and respond to their customer wishes in providing an excellent service,” says Lockie.

“I can also tell you that they have a higher return in financial and repeat business than many of the classic traders,” he added.||**||

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