Issue of the month: From many to few

Consolidation is a word that gets bandied around the channel on an extremely regular basis. Thanks to Tech Data and Azlan, the...

Consolidation is a word that gets bandied around the channel on an extremely regular basis. Thanks to Tech Data and Azlan, the term is once again on everyone’s lips.

It is a fact of life that when times get tough, the options for those playing in the market are either to grit their teeth and hope they succeed by going it alone, or to put the ‘for sale’ sign up and hope that a larger company comes along and lifts them out of their predicament.

The consequences of consolidation can be difficult for the companies involved, as it often involves job cuts and numerous teething pains as the businesses merge, and can also cause difficulties for their suppliers. For resellers there is a natural concern about their future — fewer suppliers naturally means less choice.

The first reaction is from a reseller which viewed the changes as inevitable, but not necessarily a trend that is going to feature prominently at the dealer end of the market.

“Consolidation is going to happen and there’s no imperative for it not to happen as companies strive to get bigger for reasons such as global reach and product functionality,” said Mike Beale, business development director at Fox IT.

But he suggested consolidation could create a vacuum in the market where customers or resellers want to deal with someone small and receive a personalised service.

“Smaller companies cannot offer the breadth of service that the bigger corporates can offer, but they have different values
and advantages, so consolidation creates an opportunity for the smaller guys,” Beale added.

As for consolidation among resellers, he believed it would only happen when businesses had complementary skills and services. “For my part, I would say a formal relationship with another reseller would be an easier option because it avoids the turmoil of a merger, but offers the benefits of shared resources.”

Ian Kilpatrick, group managing director at distributor Wick Hill, added his voice to the argument that consolidation is inevitable, pointing to the sheer number of players in the market. “I think there will be consolidation because there are too many people. Some of the guys at the moment saying they are security distributors put a list of products together and claim they are in the security market, but that’s not what security distribution is — it’s about the environment, and if you don’t understand it, even if you have the products, you are not going to make it,” he said.

Alan Norton, head of intelligence at Graydon UK, admitted he “wouldn’t be surprised” if there were more acquisitions or a “big failure” this year. “There will be further consolidation because there is over-capacity in distribution. The problem is there are not many acquisition targets left, and Computacenter and SCH are the only companies that seem to be buying,” he said.

With any discussion about consolidation there are always comparisons made with other industries, with the experience of the automotive sector regularly used as an example of where many manufacturers, and ultimately distribution players, have been reduced to a small number.

Talking Japanese
Chris Devlin, Emea channel manager at Computer Associates, revealed consolidation was a phrase used as an expression in many other languages: “The Japanese call it Kiretsu: large multinationals merging to broaden market reach.

“The consolidation by Tech Data and Azlan shows both evolution and maturity in IT. Look at other industries, such
as the automotive one: in the early 1900s there were over 200 companies, 20 years later there were six, and today there are just three major players.”

Devlin added CA was enthused about the potential merger. “Azlan is a specialist with some excellent value-added services and its absorption into Tech Data means a simplified and more effective combination of both specialist and global remit.

“This will continue, as IT [in this case distributors] evolves from regional to continental and eventually to global players.”

It is almost impossible to find someone who does not believe consolidation will continue to happen.

Ian Snadden, director of channel and SMB sales at Fujitsu Siemens, suggested market shrinkage was on a roll. “[IT] is a mature market now and the rates of growth for a mature market are considerably down. With the difficult economic conditions, to which there is not really a clear end in sight, I do not think [the industry] will return to the rates of growth we have enjoyed in the past,” he said.

Snadden suggested the winners would be the companies that were focused on controlling costs and that they would be the purchasers: “Those being acquired will not have foreseen the future.”

He predicted the next consolidation in the manufacturing sector would be in areas of over supply.

On the channel side, Snadden said there would always be room for customer-centred suppliers, adding “distributors need to find a balance between efficient supply chain and service and proximity to resellers”.

David George, CEO of Crane Telecommunications, revealed it had been expecting changes to the market for a while.

“We have been predicting this consolidation for some time as we have seen evidence of a trend by these large distribution players to struggle to maintain the entrepreneurial organic growth that characterised their early years. Acquisition is their easiest route to growth and new technology skills.”

Looking up the supply chain from the chalk face, there is an acceptance that what has started to happen with Tech Data and Azlan will continue, and there is a need to work out how it will affect dealers.

David Hurley, managing director of Anglia Business Systems, predicted consolidation would continue at some pace. “We are seeing this at a vendor, distributor and now business management systems level.”

As a result, he believed there would be fewer players and the impact would be “less choice” and “those businesses left will really have to know their products”.

Hurley suggested there might be some opportunities for niche players, but pointed out the problem with niche areas was that “if they become mainstream, all the big players get involved”.

So what about consolidation in the reseller channel? “I think it is inevitable. The [resellers] with product focus have got nowhere to go in the long term, as users look for those with deployment skills and those [product-focused resellers] will be the ones that are taken over,” Hurley predicted.

Independent view
Even those working outside the channel as independent analysts agreed with the views of the vendors, distributors and resellers.
Ovum Holway analyst Heather Small agreed consolidation in the channel would continue. “Because margins are wafer thin, the only way of avoiding pressure is to win market share though acquisition. We see the IT and software industry as a maturing market and one of the characteristics of that is
fewer suppliers,” she said.

Small added consolidation presented less choice to users, but that it was “not necessarily bad” because it guaranteed suppliers were “all solid players”.

Sukh Rayat, vice president and managing director for Europe at Avnet Applied Computing Components, believed the next wave of consolidation would come from the developing markets such as Eastern Europe. “Consolidation in mature markets has been strong over the last few years and we are down to large pan-European distributors with only pockets of companies that are worth buying.”

The most obvious impact of consolidation on dealers, Rayat reasoned, was “less choice”, but the flip side was there were more one-stop-shops offering more products than ever before.

“It’s still very competitive out there and margins are tight, so no one is being complacent because there is less choice. Consolidation enables manufacturers to better control their pricing and gives them more visibility of what is happening in the market,” he argued.

But Graeme Watt, president for Europe at Tech Data, believed there was even more consolidation to come, with distributors looking to get into new markets, banks trying to recoup their money and manufacturers wanting to work with fewer partners.

Watt admitted the fallout of consolidation was fewer partners to buy from, but argued: “Will it negatively impact resellers?
No. Will we have a healthier channel that can provide a good level of service? Yes.”

For some in the industry, the idea of more consolidation was seen as a mixed blessing. “Bad for new vendors wanting to create a market as broadline distribution is not renowned for creating market demand, good for demand fulfilment,” said Bernie Dodwell, UK sales and marketing director at European specialist security distributor Allasso.

“For existing vendors, bad: less/diluted focus on their product/technology, smaller fish in a much bigger pond. For the channel, bad: less competition/choice (unless vendors appoint  replacements). For the user, what does it mean to them? Probably nothing. For the distributors involved, probably good: greater buying power, different markets, economies of scale,” he added.

“Market conditions dictate that broadliners cannot continue to survive in their traditional markets, they need new, higher-margin opportunities, hence the interest in the specialised distributors. However, unless they change their business models, those higher-margin opportunities will rapidly disappear as they all jump on the bandwagon and adopt their current model of high volume, low value, low margin — not all markets can sustain such models,” Dodwell concluded.

Continuing saga
What is almost certain is that the consolidation will continue and, in the short term, will be at the distribution level. The ‘for sale’ signs are going up across Europe as the market downturn continues to bite. The spectre of the car industry is looming large and the channel is changing.

For resellers, it is going to be a testing time as they try to read the tea leaves to work out which partners will disappear and which ones will continue to succeed.

The story that got them all talking

Just a few weeks into the year, the question of consolidation was put firmly on the map with the takeover offer for Azlan by Tech Data. It will still be a few more weeks before the shareholders have to make up their minds about the deal, but already the channel is treating it as an inevitability, writes Simon Quicke.

As the initial reaction of shock over the deal fades, thoughts in the channel have turned to what the deal will mean. The message the proposed takeover sends out is that market shrinkage is coming and it is going to be extremely difficult to predict who it will affect and when.

For vendors it provides a chance for them to reconsider their distribution arrangements, for distributors it either gives them the idea of buying a rival or sends shivers down the spine, but for resellers it raises worrying concerns about reductions in choice as supplier numbers dwindle.

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