Margin, margin, margin

When Channel Middle East compiled its inaugural Power List in early 2005 profiling the largest Middle East IT distributors, some seemed a tad pre-occupied with top line sales growth and rather lackadaisical about the need to actually make a profit. What a difference a year makes. It’s all about the margin in 2006.

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By  Stuart Wilson Published  February 15, 2006

When Channel Middle East compiled its inaugural Power List in early 2005 profiling the largest Middle East IT distributors, some seemed a tad pre-occupied with top line sales growth and rather lackadaisical about the need to actually make a profit. What a difference a year makes. It’s all about the margin in 2006.

While revenues have continued to climb at a healthy double-digit percentage for the vast majority of distributors operating in the region, there is a growing understanding that there are deals that it actually makes sense to walk away from.

It’s an impressive change and highlights the increasing maturity of the Middle East distribution market. The introduction of sophisticated internal IT systems and processes that check the margin potential of each and every transaction — coupled with strict credit control procedures — has created a sector that is now focused on sustainable growth. In recent weeks, I have met distributors that are now calculating staff remuneration packages based on the gross margin of sales as opposed to the pure top line figure.

There’s a growing realisation in the market that cutting margins to the bone to hit a stretch sales target is a pointless exercise that not only damages the company pursuing this policy, but also creates problems for the entire Middle East distribution channel in the process.

Vendors are also playing their part in driving distributors to develop strong business models and protect margins. The introduction of channel programmes that reach out to the second tier reseller base has encouraged more of these players to purchase from authorised distributors and put pressure on the regional distribution players to reach in-country and broaden their customer base.

As always, taking the decision to move in-country — setting up dedicated stocking points and on-the-ground staff resources in the process — is far from easy for regional distributors. It is a case of carefully weighing up the advantages of such a move against the disadvantage of significantly higher operating costs.

Jebel Ali will continue to play a vital role as a stocking hub and trading centre for the wider region — especially in terms of the product that is destined for markets where it is still difficult for vendors to take an active role in-country. Some vendors remain reluctant to drop ship in-country in the Middle East, preferring instead to dump product in Jebel Ali and hope for the best. These are typically the ones with the shortsighted approach to building up an operation in the Middle East.

Don’t get me wrong, tracking product flow in the Middle East can still be horribly complex — but it is getting better. When I hear about a distributor setting up stocking points in Riyadh and Jeddah and managing to make a double-digit margin on certain products by serving the genuine local resellers and proximity dealers direct, you start to realise that this process can only accelerate even further during 2006.

There are some sub-distributors, re-exporters and traders that will continue to prosper as long as they remain focused on specific markets unlikely to be influenced by the rise of in-country distribution for the foreseeable future. Those not focused on these markets and sectors need to change their model now, or face up to the very real threat of rapid disintermediation from the channel chain.

This year’s Power List is bigger and better that ever before. The quest for financial transparency and greater understanding of the product flows that dominate the Middle East IT channel is ongoing.

As the overall market size increases and distributors start thinking more and more about their long-term business goals, there will undoubtedly be greater clarity in the market. Those distributors hoping to be acquired or harbouring long-term IPO aspirations know that financial transparency is a pre-requisite.

It’s margin, margin, margin all the way in 2006 and this year’s Power List will explore how the major players in Middle East IT distribution plan to grow and evolve their business strategies during 2006. Don’t miss it.

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