Straight from the channel's source

Dubai-based mobile handset, accessories and IT-peripherals distributor SourceIT is carving a niche in the Middle East channel sector providing value-added support to its network of retail partners.

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By  Aaron Greenwood Published  July 3, 2006

|~|SourceIT200.gif|~|SourceIT directors Chris Rae and Ahmed Al-Azzawi.|~|Established in January 2004 by Tech Data veterans Ahmed Al-Azzawi and Chris Rae, SourceIT has grown to become one of the GCC’s leading distributors of mobile technology devices. Passionately outspoken proponents of the regional channel sector, Al-Azzawi and Rae have managed to create a dynamic business that provides value-added services to vendors and retailers while remaining faithful to the traditional channel distribution model. Rae explains that the partners’ strong channel distribution background with Tech Data provided the impetus to branch out on their own in the Middle East IT and telecom sectors. “At the time, we felt that the distributors operating in the sector weren’t doing a very good job catering to either market,” says Rae. “We felt there was a gap in the market for a distributor that offered an end-to-end retail distribution solution. “Ultimately, we have managed to position our business as an advertising support mechanism for our retail partners. Most vendors operating in the Middle East rely on their distribution partners for promotional support by signing exclusive distribution agreements. We’re a bit different to that; we’re a broad-based distributor that tries to promote the brands that we carry by pulling in minimum order requirements to ensure we cover the costs of the advertising.” Rae believes that providing a point of difference has been fundamental to the company’s success. He remains highly critical of what he calls the ‘sell and forget’ mentality demonstrated by many of SourceIT’s competitors in the channel distribution sector. “We maintain effective channel inventory and control,” he says. "Because the channel distribution market is so competitive in the Middle East, many distributors just concentrate on shipping as many units as possible. “Say there are five distributors stocking a single brand vying for business with a retailer. The retailer is having all the fun in the sun playing these distributors off against each other. “The situation ends up being that the distributor doesn’t really care about the retailer or what happens to the product because they’re worried about their numbers at the end of each month. We differentiate ourselves in this regard. We are trying to take the product to the retailers in the ‘right’ way,” he adds.||**||Distinct divisions|~|i-mate200.gif|~|SourceIT boasts distribution agreements with a range of vendors including i-Mate.|~|SourceIT boasts three distinct divisions that are charged with clearly defined goals. The regional IT distribution division represents the company’s core business and purely focuses on trade transactions. The retail channel marketing division is the company’s ambitious promotions and advertising department, offering logistical support to retailers’ shop floor campaigns. The company’s newest division purely targets the mobile channel sector, and is supported by a new service centre established in the Dubai Airport Free Zone. The centre not only services handsets sold by SourceIT but refits recycled handsets for retail distribution. Al-Azzawi confirms that the UAE and Saudi Arabia remain SourceIT’s core markets in the Middle East. He says the company has significant plans for the Saudi market, despite the logistical challenges that face foreign-owned companies operating there. “We have had an ex-CompuME staffer working for us in Saudi Arabia for the past year covering the whole country,” he says. “We plan to establish an office and warehousing facility there which will ensure SourceIT becomes a Saudi entity. It’s very important for us to service our Saudi partners. At the moment the country’s ‘big guys’ are placing massive orders and we need to tap this market.” “There are no free zones in Saudi Arabia, which makes it difficult to set up a business there without a sponsor,” explains Rae. “We have considered working with a logistics provider, because they have the in-country operations already organised. That may be the interim solution for us, because it’s a costly process arranging a sponsor. “Saudi Arabia represents a true consumer market. Product that goes into the country rarely comes out again. There’s a high income population. Iran and Kuwait are other countries in the region that boast potentially lucrative consumer markets,” he adds. Al-Azzawi confirms the company also has plans to expand its geographical reach beyond the core markets of the GCC countries. “Our current stable of distributor contracts cover the entire North Africa and Middle East regions. We are already shipping products to these regions from Dubai, but the next step is to establish in-country representation in various locations so we can provide greater service to individual markets,” he says. “We are currently looking to open an office in Iraq. There may be no business there initially, but to have that presence and to make a name for yourself, it will be crucial for when things settle down there. In a year or two everybody will be rushing to Iraq. However, counterfeit goods remain a major challenge for channel distributors looking to set up business there.” Counterfeit goods and grey market distribution in particular are two topics that stir strong emotions within Al-Azzawi and Rae. The partners believe the latter in particular is causing immense damage to ‘legitimate’ channel distributors trying to establish a viable channel to market for electronics goods in the region. “The grey market represents a major challenge to our business,” says Al-Azzawi, offering a range of scenarios to illustrate his case. “A number of distributors based in countries such as Australia and the UK get preferential pricing for certain products, such as PDAs, because the competition is so fierce in their domestic markets. They view Dubai as a potential goldmine, and subsequently ship a percentage of this product here to make some quick cash.” “As a brand manager, how do you convince a retailer to deal with legitimate channels when they can source the bulk of their product from Singapore, for example, for 25% less?” asks Rae. Al-Azzawi cites recent negotiations between SourceIT and a mobile phone accessories vendor to represent the company’s product range in the Middle East. “But when we looked into it we found their products available on the grey market for 30% less,” he claims. Rae adds: “We told the vendor we could overcome a 10% price differential but 30%? You have to be kidding!” Rae believes responsibility for ensuring legitimacy in the channel and nullifying the impact of parallel imports ultimately lies with vendors. He claims that local product customisation could prove a crucial factor in this process. “Retailers need to ask and consumers need to be aware of why boxes are not branded in Arabic for example. Vendors could and should use this as a key differentiating factor,” he says. “Why can’t the channel police itself? Why can’t retailers be involved in the process? “Vendors need to ask how many more units they could ship if they ensure there’s a legitimate channel to market for their products in this region.” Rae claims that retailers must also accept some of the burden for ensuring the ongoing development of a legitimate channel in the Middle East. He claims that many retailers fall into the trap of believing that commercial success equates to offering the cheapest prices. “We’re trying to move them away from this position, to show them that they can create a successful business by providing quality service and added value to their customers,” he says. “In Western markets, retailers develop their strategies based on recommended retail pricing. The scenario is reversed here, where the industry standard is represented by a cost-plus model. “For example, if a retailer in this region buys a product for US$100, they’ll typically sell it for US$101, because their competitor may do the same. There are retailers who are willing to work to our model but it’s still a challenge. “Still, we’re enjoying success because we have the backing of these retailers and we’re working with them in a positive way to try and reshape the sector to create a ‘real’ channel for these products to the market.” Al-Azzawi claims the region’s retail sector has yet to realise its full commercial potential, including the booming markets of the UAE and Saudi Arabia. “You look at Europe, Australia or America – each country’s retail sector is in a completely different league compared to the Middle East,” he says. “Some businesses call themselves retailers here but they are more like market traders and this creates issues for legitimate retailers trying to progress the cause of the industry in general. The market simply isn’t mature enough yet in this region. “We all need to work together to ensure a bright future for every member of the channel.” Rae says the company is looking to broaden the base of mobile devices and accessories it offers, including peripheral products such as wireless home networking systems. He explains that the company does not have any authorised contracts in the mobile channel sector, which means it operates “within the channel and around the channel, while working with no vendor in particular.” “We try to buy direct from the vendor where we can using a traditional channel model,” he says. “We are trade only. We have no plans to go into retail. However, we are not averse to sub-distribution deals where we would buy from a distributor that has exclusive distribution deals. “Our retail channel marketing division complements our core distribution business. We employ promotions staff and merchandisers to encourage retailers to promote our brands on the shop floor. It also enables us to capture and tabulate information in regards to consumer preferences in each store. “Ultimately, it places us in a unique position compared to our competitors. On the downside it does represent a time consuming process and you have to disseminate a lot of misinformation in the marketplace. However, it does ensure we gain immediate access to competitor activities. “We also package products in conjunction with our in-house designer. We take products that we distribute and those from outside our portfolio and package them together to provide added value to our retailer partners. It enables us to dictate our margins and selling price, and basically gain some level of exclusivity in regards to brands we don’t necessarily have agreements with. Lately, we’ve taken this a step further by packaging the products in the colours of our retail partners, including Plug-Ins in the UAE and Jarir Bookstore in Saudi Arabia.” SourceIT currently boasts three warehouse facilities in Dubai including space outsourced from logistics partner Aramex. The company offers tailored logistics supply solutions to its customers across the GCC using specific freight forwarding services. It currently boasts in-country support services in Saudi Arabia, and is weighing warehousing and office space options in Kuwait. ||**||

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