Do retailers need distribution?

The notion of vendors and retailers trading directly is not as straightforward as it sounds

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Do retailers need distribution? Several PC vendors are weighing up if a direct logistics agreement with key retailers would lead to better results.
By  Andrew Seymour Published  July 25, 2010

The concept of vendors working directly with power retailers has never really been something that the Middle East channel has been overly comfortable with.

Although the model is common throughout the US and Europe, especially where the mass merchandisers and larger volume retailers are concerned, scepticism has tended to plague its viability in the Middle East.

Until now, the only PC vendor that has truly managed retailers directly in the Middle East is Sony. All retailers - including the retail operations of its regional partner Jumbo - purchase VAIO products from Sony Gulf. The verdict from several retailers is that this particular set-up operates perfectly well because the rules are the same for each player and true account management is carried out by Sony.

Elsewhere in vendor land, the only other direct buying relationships that appear to exist are those involving Jarir Bookstore. The Saudi powerhouse has been the proverbial exception to the rule in the regional IT market, due largely to the enormous volumes it does and the fact that it struck agreements with vendors long before some of the now-established power retailers and hypermarkets emerged on the scene.

But with HP beginning a similar arrangement with Extra earlier this year, and a number of the top PC suppliers evaluating whether a direct logistics arrangement with certain retailers would make more sense than going through distribution, there is a growing feeling that the market is headed for a shake-up in the months ahead.

The vibe from the channel is that vendors are eager to work directly with the Middle East's largest accounts if all their terms are satisfied. The reality is that such partnerships will only take off if retailers can be convinced that they are actually going to see tangible benefits from them.

The idea of vendors and retailers transacting directly is nothing new after all.

One retailer I spoke to this week said it had held numerous discussions with HP on this subject during the past five years, even receiving formal business proposals to begin a direct agreement on more than one occasion.

Engaging in a direct buying relationship would certainly appear to promise considerable cost and time advantages on the surface, but there are also drawbacks to it - which could explain why retailers have been reluctant to pursue it over the years.

For a start, it is important to remember that retailers receive a tremendous amount of support and service from distributors. Having a single point of contact for multiple brands is something that many of them value highly and would not wish to compromise.

Retailers also benefit from the fact that most vendors operate with more than one distributor. This means they are more likely to get the stocks they need when they need - vitally important during times when promotions or special offers are running - and from a price perspective it offers them the opportunity to negotiate.

In addition, working directly with a vendor would require a stronger commitment to forecasts, essentially shifting the emphasis from sell-out to sell-in, which even the most competent retailer might not feel all that comfortable with.

Interestingly, the results of a live voting session that took place during the Middle East Retail Academy Forum at this year's Digital Consumer Channel suggest it is actually the retailers that are more enthused by the prospect of working directly with vendors.

Out of around 20 retailer executives who were asked whether they would prefer to have a direct trading relationship with vendors or buy from distribution, 66% selected the ‘direct from vendor' option.

In contrast, when a similar number of vendors were asked whether they would prefer to have a direct trading relationship with retailers or work through distribution, just 30% said ‘direct with retailer'.

As vendors and retailers work out the best solution for their businesses, it is only right that a thought should be spared for the distribution companies that are left wondering if a customer they have spent years serving might be tempted to procure directly from the manufacturer instead.

Some distributors could be hit quite hard if the market gravitates towards this direction, while others could simply see their role in the supply chain redefined, particularly as most vendors are still proposing that a mixture of direct and indirect fulfilment is best.

It is important to remember though that this is not a vendor-wise topic. At the moment it is very much limited to the PC and notebook vendors, and therefore it is the distributors that generate a big portion of their sales from selling consumer PC hardware that theoretically have the most to lose.

Vendors selling accessories, peripherals, software - even printing equipment and consumables - will still depend on distribution as their primary route to the channel. Just as significantly, there are only a handful of retailers with the volumes to justify a direct trading relationship with vendors. Again, the rest will need to be served through distribution.

There is no doubt that this issue has legs. But vendors and retailers have both got to want the same as one another if further significant developments are to happen.

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