Super Shankar

Redington picked up top spot in the 2006 Channel Middle East Power List. With an IPO in India scheduled for later this year, what better time for director Raj Shankar to share his opinions on the development of the distribution channel.

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By  Stuart Wilson Published  April 2, 2006

Moving in-country|~|1ss200.jpg|~|Raj Shankar, director at Redington|~|Redington topped the Channel Middle East 2006 Power List. With Middle East and Africa sales for its financial year ending March 2006 in excess of US$450m, the regional distribution giant has demonstrated impressive growth during the last 12 months.

With an IPO scheduled to take place later this year in India and an ongoing commitment to in-country distribution, Redington is leading the evolution of the Middle East channel. Raj Shankar, director at Redington, created a window in his hectic schedule to talk in depth about his theories on distribution and plans for the remainder of 2006.

CME: Redington has set up in-country operations across the Middle East. How do you decide where these should be located?

RAJ SHANKAR: Redington operates an extremely clear model right from the outset. We understand that any investment we take in-country in the form of a logistics centre, sales office or service centre will need to be up and running for between two and three years before we start to see a return. We are convinced that in the Middle East it is very important for us to provide a range of services on the ground for in-country resellers. This means making sure that the product is available close to the customer and ensuring the post-sales service quality is excellent. It takes time to pursue this model and there is a cost involved but we believe that it is worth it and we are willing to make the investment in the Middle East.

CME: Redington has achieved excellent sales growth in Saudi Arabia. What are your views on how the Saudi market is developing and can you replicate this growth elsewhere?

RAJ SHANKAR: If you look at the Middle East, Saudi Arabia is an important, large and fast-growing market. If you look at local business in particular, this is one market that has been growing in leaps and bounds. So, to the extent that we have been able to garner a reasonable market share for ourselves, then yes, Saudi Arabia has been a good market for us. Will we be able to emulate a similar kind of growth in other markets? I am not so sure. I am optimistic about other markets such as Kuwait and other countries in the GCC. Iraq remains plagued by political uncertainty but I am still sure that eventually there will be a positive outcome.

CME: Does Redington harbour any long-term ambitions regarding distribution in the CIS market?

RAJ SHANKAR: CIS is definitely a region that Redington would like to target. But as we have taken on Africa — especially during the last two years — we are pretty busy trying to set up the business model there. We have an in-country presence in both East and West Africa; our focus is on the English speaking sub-Saharan Africa. The operations in Africa will probably take one more year before we are able to stabilise the business and make it more predictable, after which Redington will be keen to look at CIS. Does that region offer opportunity? Most certainly, yes. It is our belief that just like Africa — where a great deal of product used to be grey from Europe or the Middle East — CIS is another region that is plagued by grey that makes its way into the market. If you look at the business model of Redington, we have the capability to establish an operation that will encourage the grey buyers to purchase from a legitimate distributor. You can only accomplish this when you are present in-country, and this is where we try to outperform the grey traders in terms of our ability to negotiate with the vendor and make the products available — to persuade resellers to buy from us as opposed to other sources.
||**||Building breadth|~|2ss200.jpg|~|Shankar: "It is very important for a reseller to be able to pick up the phone, place an order and expect a delivery in his warehouse the same day."|~|CME: Do the resellers really appreciate distributors having local touch? Is it still not a case of just hunting out the cheapest price regardless of where the product is coming from?

RAJ SHANKAR: It is very important for a reseller to be able to pick up the phone, place an order and expect a delivery in his warehouse the same day. The turnaround time between point A and point B — if you take say Jebel Ali to Egypt or Jebel Ali to Saudi Arabia — is a long time. So Redington is not only investing in terms of people and infrastructure on the ground in-country, we are also taking the risk to move the product, make it available locally, bill in local currency and take a credit exposure or risk with the customer. This is probably what differentiates us from most other distributors.

CME: How can you do all of that, control your operating costs and also maintain competitive prices in the channel? What if resellers still want to purchase from Jebel Ali?

RAJ SHANKAR: We found it very difficult ourselves to come to terms with this. Let me take Saudi Arabia as an example. Until about three years ago, 100% of the business that we did in Saudi Arabia was done through the offshore business model — that means orders executed and fulfilled out of Jebel Ali. It was easy to manage and there were no logistics issues; we didn’t have to invest in-country — it seemed a lot simpler. Now whether we got the right margin or not is another issue. But when we decided to go and invest in-country we took the long route. There was a very clear migration where the offshore business model started to move towards an onshore model — by that I mean local fulfilment within Saudi itself. Many of the customers were initially reluctant because they would take the price available from our operation within Saudi and simply say that it was not competitive. So, there was some conflict and not much cooperation.

CME: What is the situation now within Saudi Arabia?

RAJ SHANKAR: Today, three years later, almost 95% of our business happens onshore. Only 5% now happens offshore for Saudi. This clearly demonstrates two things that we have done: number one, we tried to convert the sub-distributors and importers buying out of Jebel Ali and supplying Saudi into our customers; number two, we started to go downstream and address the local resellers in Saudi towns and cities by making the product available to them the same day in terms of delivery. They were willing to pay a price and a premium in return for us making product available and also the risk we were prepared to take. So, it took us two to three years to make this shift happen and now the resellers are extremely satisfied. We are able to match the margins that we were earning out of Jebel Ali despite the cost of transport, infrastructure and people incurred.

CME: Moving in-country helps build up reseller breadth for a distributor. How important is that in terms of overall business stability?

RAJ SHANKAR: I want to take the example of the supplies and consumables business. In the past these products used to be bought only by the major sub-distributors. If you want to look at our profile, about three years ago we probably had 30 to 40 active customers in supplies and consumables and about eight of them would contribute 65% to 70% of the total business. During the last three years we have seen some of the big sub-distributors appointed as authorised distributors by HP. In spite of this, we have been able to accomplish breadth and if you ask me today, I am a lot more at peace with myself and very satisfied with the business model because there is a fantastic breadth — that means more stability in the business and no over dependency on a few customers. Many times in the past, because of that greater dependency, there was margin erosion because we had to support those customers with some very aggressive prices. Today I am not under duress — it is a willing buyer-seller relationship rather than a vulnerable seller-buyer relationship.
||**||Volume and value|~||~||~|CME: Do vendors appreciate the efforts Redington is making to develop an in-country distribution model in the Middle East?

RAJ SHANKAR: Vendors have definitely seen merit in our business model to the extent that, in my belief, they have gone and asked other distributors to emulate a similar business model. Having said that, has it given us any special benefits, privileges or rewards? The answer is no. The reward and the benefit is in our business model. The vendor would definitely have encouraged us to take this step forward, but we do not as yet get anything tangible from the vendor for taking this initiative. At the moment we don’t get compensated and indeed this has been one of my points with certain vendors — explaining that if there is a distributor willing to adopt an in-country model and willing to invest, there should be a way by which vendors support this initiative in some form or another.

CME: What have you seen in terms of the evolution of margins as Redington has moved towards in-country distribution?

RAJ SHANKAR: It is a very tough proposition for us, because as I mentioned, the onshore business model takes two to three years before we start seeing benefits. If one was therefore looking at a gross margin level, I can only share with you that our gross margin has been by and large at the same level as it was in the recent past. Five years ago one could dream of making a gross margin in excess of 6% and over time there has been a clear depletion of this gross margin percentage. For Redington, during the last two years, since most of the onshore business model has started to mature, we are starting to see a little stability in the gross margin level. However, from 6% to 7% five years ago there has been a gradual margin decline.

CME: How does Redington plan to expand its product portfolio moving forward?

RAJ SHANKAR: The way we are now looking at it is to split the business into two spaces — the volume space and the value space. Redington has so far been a very active player in the volume business and in this area we do not yet really have components, so you will see developments in that direction in 2006. However, when you look at the value space, which is an area Redington is very keen on, we are now actively working on it. In the next three to five years you will see a solid portion of our business in this area — from network products to software and value-added services.
||**||Business positioning|~|3ss200.jpg|~|Shankar: "Our whole idea is to become a supply chain solution provider and we want to look at many verticals."|~|CME: There were many distributor IPOs in the European channel in the run up to 2000 and during the internet bubble. Many pitched themselves as IT companies rather than distribution companies. With Redington planning an IPO, how are you actually positioning the company?

RAJ SHANKAR: There is a tendency to look at distributors as IT companies. We are very clearly positioning ourselves as a supply chain solution provider. Now the reason we say this is because today, while IT is clearly one of the major areas we cover, we are also into telecommunications. Our whole idea is to become a supply chain solution provider and we want to look at many verticals. At the moment it is a plan very much in its infancy, but we are also looking at consumer electronics and home appliances.

CME: People say that it is easy to grow the top line by sacrificing the bottom line in the Middle East. What is your view on overall distribution profitability in the region?

RAJ SHANKAR: If you look at it for a minute, with global companies like Tech Data, which is a listed company, it is difficult to get access to a specific P&L sheet for the Middle East because it is all consolidated with EMEA. Whereas if you look at Redington in the Middle East we have to have a balance sheet and P&L for this region because this is the basis on which we get bank facilities and showcase our credit worthiness to vendors.

CME: What is Redington’s total active reseller base in the Middle East and Africa?

RAJ SHANKAR: Our total customer base would be in the vicinity of about 1,500 to1,600 customers. What would be active out of that is about 50%. We evaluate our sales people by one factor called channel breadth, and within that there are the concepts of ‘hunting’ and ‘farming’. We have a concept where sales people have to constantly look for new customers and at the same time make sure that the current customer base and channel breadth is maintained.||**||

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