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Middle East channel fears worse slump than usual

Senior executives predict severe sales and inventory challenges in the coming weeks

Disappointing sales in May and June have left some members of the channel wondering if the third quarter will be even more difficult than they expected.
Disappointing sales in May and June have left some members of the channel wondering if the third quarter will be even more difficult than they expected.

Roll on September! That's the verdict of channel executives in the Middle East as they contemplate the challenges that the seasonally-low summer period is likely to bring.

While the channel is used to a drop in demand during the middle of the year, there are concerns that the next few months will be tougher than usual due to the softening of markets throughout the region over recent weeks. 

Senior sources contacted by Channel Middle East cited a gradual slide in business since April, blaming everything from the falling Euro to the weak performance of local stock markets for the sluggishness.  

One major reseller based at the heart of Dubai's Computer Street district said both May and June sales had been uncharacteristically weak: "Most of the neighbouring markets, such as Saudi Arabia, Kuwait, Qatar and Iran, have all slowed down, so a lot of the re-exports have come to a standstill. Even business from the African countries has gone down due to currency depreciation of 15% to 20%. We are expecting a further slowdown in the next two months because of the summer period and the start of Ramadan in August."

The big issue, according to Raj Shankar, CEO of broadline distributor Redington Gulf, is how well the channel inventory situation is managed. He predicts that some companies will face "serious hardship" in the coming weeks if they fail to get their forecasts right.

"I am very concerned about some of the established vendors which have huge inventory in the channel," admitted Shankar. "If quick decisions and timely decisions are not taken to flush that inventory out, not only it is going to bring about losses for everybody concerned but it will result in being completely ill-prepared for GITEX because the distributors are not going to sell out their inventory. And more importantly, they won't have the gumption to be able to invest at that time, which will mean a lacklustre GITEX for that brand."

Hesham Tantawi, VP MEA at components distributor Asbis, also voiced concerns that the lowly summer period could bring lingering inventory concerns to a head.

"Nobody can deny that the market is over-stocked, and the situation is very obvious in markets such as KSA," he said. "It is weakening the whole channel as it is obstructing the cash cycle and accounts receivables are being extended because second-tier partners cannot pay. They do not have the cash flow that they used to and it is only going to cause more players to fall."

For many channel companies, such as Computec IT, there is an urgent need to identify markets that will offer relief over the coming weeks. "We have to admit that Q2 was bad and we now need to find suitable markets," said general manager, Rashwan Arabi. "The GCC markets will be difficult considering the channel stuffing and cash flow problems in addition to the nature of the summer business."   

What the channel can expect is a blitz of sales promotions from vendors looking to stimulate demand throughout the summer. Mohammad Jweied, country manager for the Gulf at storage vendor Iomega, said it had a number of activities planned, but pointed out that it was not enough for vendors to just let the channel get on with it.

"Vendors need to take more care of their partners and they cannot just keep chasing them for orders without looking at their sales and their pipeline," he said. "We are spending a lot of time, not only to sell to the distributors, but also to work with them to find the good deals and grow the market."

The popular consensus is that the retail sector faces more of a struggle than the corporate landscape. That view is certainly endorsed by Steve Lockie, managing director of Cisco distributor Westcon Middle East, who says there is still evidence of a steady flow of infrastructure projects even though companies continue to manage their CAPEX cycles carefully. 

"We closed our Q1 at the end of May so we are just in the first month of the second quarter and it is actually pretty buoyant," said Lockie. "The order book is strong and we have good project visibility."