Scaling up

Distributors and resellers that want to survive any Middle East channel shakeout in 2006 need to figure out exactly how they will scale up their organisations to achieve economies of scale. There are various options available: buy, partner or even set up a joint venture. Each one has its own set of pros and cons.

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By  Stuart Wilson Published  January 3, 2006

Distributors and resellers that want to survive any Middle East channel shakeout in 2006 need to figure out exactly how they will scale up their organisations to achieve economies of scale. There are various options available: buy, partner or even set up a joint venture. Each one has its own set of pros and cons.

In recent years, the European distribution landscape has been radically reshaped through a flurry of M&A activity that led to the creation of genuine pan-regional broadline giants. That trend continued apace with a number of deals in the fourth quarter of 2005 such as Esprinet snapping up Memory Set in Spain and top Finnish distributor GNT buying SMG.

These names may not mean much to the Middle East IT channel but the important thing to understand is the consolidation trend that forms the foundation of this European trend. In the volume distribution space it is all about scale now. With everyone offering a similar set of value-adds in the volume arena, it is only through the development of economies of scale that distributors obtain a competitive advantage.

This way of thinking is also now starting to filter through to the value-added distribution sector for complex hardware and software solutions as more and more of the big volume players enter the European market, looking for incremental opportunities to boost sales and profitability. Arrow Electronics recently snapped up Sun distributor DNS, which operates in the Nordics, Central and Eastern Europe, marking Arrow's transition from a pure components player in Europe to one also involved in the value-added distribution space.

So what’s this got to do with the Middle East IT channel? Well, I’ll freely admit that there remain massive differences between the whole culture of channel business in this region compared to Europe. And that extends to the propensity for distributors to sit down with each other and strike a deal to work together where it makes sense for both parties.

Undoubtedly, there are distributors operating in the Middle East making losses. In some cases these losses may be covered by other business activities within a wider group, but they are losses all the same. Similarly, there are distributors whose ability to grow is currently hampered by financial constraints. There are also distributors that want to achieve genuine international expansion within the region but possess neither the financial muscle nor the local in-country knowledge required to turn this dream into a reality.

All these scenarios lead to one logical question: why can’t Middle East distributors see the business benefits that can be achieved by teaming up, be it through a straight acquisition or even a joint venture?

I know for a fact that many vendors would love to reduce the number of distributors they need to work with in order to achieve deep and meaningful coverage in each national market in the Middle East.

A hybrid channel model that pitches remote regional distributors against smaller in-country distribution partners is a recipe for reseller confusion and channel conflict, yet it remains the dominant go-to-market model for most major IT vendors in the Middle East.

In fairness, there are some talks regarding possible joint ventures underway at the moment. One major Dubai-based distributor is closing in on a deal with one of the largest distribution outfits in Saudi Arabia, which, if it ever comes to fruition, has the potential to create a powerful combined entity.

However, a joint venture is far from ideal when two distributors look to join forces. In other markets this type of structure frequently fails to deliver the anticipated results. The lack of clarity in the ownership structure, an inability to introduce sweeping reforms to streamline the entire organisation and persistent confusion regarding the purchasing model from vendors can often create ongoing tensions and inefficiencies.

The cleanest way to achieve scale is through a straight acquisition. Admittedly, acquiring a distributor is not without risk. You typically get a warehouse, a bit of stock, some staff, a customer database and hopefully a massive amount of goodwill — and you’re asked to pay a hefty premium for this privilege. There are no watertight guarantees that the acquired business will continue to flourish — vendors can renege on contracts, key staff members can leave and the customer base always has the option of purchasing from another source.

The Middle East IT distribution channel needs to spend 2006 working out exactly how best to approach the consolidation conundrum. The current situation is doing nobody any favours and it is breeding massive inefficiency in the market. Don’t get me wrong, there are a set of unique factors at work in this region that necessitate a very different channel structure to Europe or even the US. However, these factors are not strong enough to stop the consolidation trend and everyone needs to formulate a game plan.

If you want to be bought, a dose of financial transparency and some audited accounts would be a great place to start. If you’re interested in buying, get the word out into the market, take your time and don’t make hasty decisions. And if you’re pursuing joint ventures…well, good luck with that.

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