Imperatives for Middle East technology distributors
Faisal Sheikh, principal, Booz & Company on why Middle East IT distributors need to refocus their mission to stay relevant in the market
Faisal Sheikh, principal, Booz & Company on why Middle East IT distributors need to refocus their mission to stay relevant in the market.
IT distributors in the Middle East geography have found themselves at the crossroads. Given the urgent need to refocus their mission, distributors have been compelled to think about all of the options that will allow them to build scale quickly. Distributors that have already gained critical scale may opt to go it alone, whereas those that still need to create scale should consider partnerships and alliances with existing distributors, or with multinational companies. Another option is to enter another part of the value chain, in addition to distribution, and that involves the most risk. This second strategic recommendation involves integrating vertically, either backward into manufacturing or forward, into retail to lift distributors out of the middleman position into a segment where they ‘own’ something sustainable.
More tangibly, vertical integration offers the chance to enhance profits. For every $1 profit in the MENA pharmaceutical industry, for example, manufacturers get 55 cents, retailers get 30 cents, and distributors get only 15 cents. The figures are even lower for distributors in the food and beverage industry (8% for distributors). By becoming involved in other parts of the value and supply chain, distributors’ profits would be given a significant boost.
Distributors that integrate forward into retail can make use of their knowledge of inventory planning, warehouse management and logistics network optimisation to gain efficiencies. Likewise, distributors that integrate backward, into manufacturing, start off with some advantages, such as an existing distribution scale to allow them to quickly penetrate markets with products from their own assembly lines. Their marginal cost of distribution is typically quite low. In addition, if they start manufacturing products, companies that operate as distributors can get prominent placement for those products in stores, because they already have deep relationships with retailers.
If they go into manufacturing, distributors will find just as many gaps. Typically, they will need to add a research and development capability, a raw materials sourcing capability, and a production capability, because running a manufacturing plant is a highly specialised skill. Although a distributor may already have some of the requisite capabilities in-house, it won’t have them all, as one of the region’s pharmaceutical distributors realised when it set out to manufacture generic versions of prescriptions.
The Basamh Group is a regional example of backward integration; a few decades ago, this now almost 80-year old Saudi Arabian trading company started manufacturing its own food products under the brand name Goody. Axiom Telecom furnishes an example of forward integration; having started out as a distributor of mobile devices, it is now a highly successful retailer of mobile phones with more than 900 outlets in the region.
Although the stage is set for consolidation and it is likely to be intense, most MENA IT distributors can’t, and don’t need to transform their businesses overnight. They need to accept that the market is changing and to start thinking about how they can adapt to keep up, while determining how quickly they need to embark upon a new path to ensure continued profits.