Cover Story
Evolution of Sub-distribution
 The role of sub-distributors in the IT value chain has often been questioned. But today they have emerged stronger becoming an important part of every vendor’s expansion strategy
By Ramdas S
As distributors and vendors try to increase the width and the depth of their channels, sub-distributors have been forced to adapt, hone and reinvent their business model. While the business model itself has survived, market dynamics have forced sub-distributors to adapt to some new business equations.
Historically, most of the sub-distributors started their business by addressing the assembler market in the mid and late nineties. Since the organized distributors were reluctant to extend credit to the vast majority of resellers and systems builders, sub-distributors with their local strengths and risk-taking abilities were able to create an additional tier that catered to the needs of the market.
Despite the fact that most national distributors have adopted the strategy of micro-selling and are focusing on increasing the breadth and width of their channels, sub-distribution seems to have survived. “Four to five years ago there were signs that the attempts of both vendors and distributors to reach resellers could potentially eliminate sub-distribution. However, sub-distributors continue to thrive in India, unlike the situation in more mature markets where this middle-tier seems to have disappeared,” says H Ramesh, Senior Manager with distributor Ralco Synergy.
Over the past five years the assembler market has steadily dwindled while the branded MNC PC market has grown, mainly thanks to the growth in the notebook market. Most sub-distributors have been quick to realize the trend, and also quick to associate themselves with the PC vendors.
The vendors themselves have been eager to associate and build on the strengths of sub-distribution. While HP was the first to build the consumer volume partner channel by roping in some of the top sub-distributors in each region, Dell appointed leading sub-distributors as its first-tier distribution partners in early 2008 for its consumer PCs. Then earlier this year Lenovo revamped its distribution model to appoint 50-odd regional distributors.
Explains Alex Li, VP, Transaction Business, Lenovo India, “Regional distribution (sub-distribution) is important to Lenovo since we are growing the length and breadth of the channels, and our volume partners can get us connected with almost 5,000 resellers across the country.”
Unlike HP, Dell and Lenovo, Acer India has looked at sub-distributors to cater to C and D-class cities, but has refrained from appointing sub-distribution partners in major cities. “We see real value in our Master Reseller program, and have partners who are catering to upcountry markets. We are banking on our distributors to reach the city-based resellers,” says S Rajendran, CMO of Acer India.
“Today, branded desktops, notebooks and servers account for as high as 60 percent of our revenues in certain months compared to less than 15 percent a few years back,” informs Dinesh Nair, General Manager, Sogo Computers.
Major shift
The shift to branded PCs has also resulted in vendor consolidation and vendor realignment among sub-distributors. Today, top sub-distributors in each city prefer to deal with only the top brands. They have in fact dropped ‘volume partnerships’ with many vendors with whom they enjoyed strong relationships in the past.
“It’s quite natural that the top sub-distributors will align with the biggest brands and product lines which can ensure healthy top-lines,” observes Suresh Pansari, Managing Director of Rashi Peripherals. “As a result, a brand which cannot assure a decent top-line is sometimes forced to align with smaller sub-distributors in the territory.”
Again losing out to MNC PC makers, it’s the component players who have to settle for smaller sub-distributors. The top sub-distributors are increasingly picky about choosing their vendors, and love to bet only on market leaders. “We are clear that we want to associate with brands that are leaders in their space because, in the distribution business, volumes and faster rotation are paramount,” states Sampath Kumar, CEO, Positive Systems, Kochi.
Pansari also feels that with the number of vendors increasing, no distributor or sub-distributor can do justice to all vendors. “While as a national distributor I’d like to do business with more brands, it’s not practical because we cannot possibly give enough attention to everyone. For this reason some of the other brands need to find smaller distributors. Similarly, top sub-distributors work with the most preferred brands.”
Vendors and distributors feel that in such cases they target sub-distributors who can be more focused to push their product lines. “We are into distributing gaming and high-performance PC building-blocks and components. The larger sub-distributors may not have the focus for a low-volume, high-margin product line, hence we opted to work increasingly with sub-distributors who see value in the association. A classic example is Delta Peripherals in Chennai which has dedicated resources to re-distribute and resell gaming peripherals,” says Abhishek Kejriwal, General Manager with Tirupati Enterprises.
In addition, smaller and nicher vendors have opted to sign on sub-distributors as their first-tier regional distributors. Since import laws have also been relaxed, and duty structure simplified, more and more sub-distributors are happy to import directly. “The number of sub-distributors turning to imports has grown exponentially since 2005,” notes Pansari.
Sharadindu Nath, Director, Sales & Marketing, Aadrika IT Solutions, a Bengaluru-based distribution startup, agrees. “Many sub-distributors now want to move up the value chain. They find a natural ally in many of the smaller and nicher vendors who are eyeing the Indian market.”
Nath also feels that many of the sub-distributors, in pursuit of growth, will increasingly look at creating brands of their own, or introducing new vendors into the country. He cites the example of Kolkata-based sub-distributor Lalani Infotech, which created its own peripheral brand, Kanry. “And why not? A large sub-distributor has anything between 500-2,000 resellers, and many of these resellers do exclusive business with the sub-distributor. With good planning and investment in resources, any large sub-distributor can turn into a vendor.”
Retail switch
Another interesting trend is that more sub-distributors are joining the retail bandwagon. “Retail seems to be a natural extension to the existing business model for most sub-distributors,” feels Sudhir S, Managing Director, Inspan Infotech.
According to George Mathew, Director of the Bengaluru-based ER3 Solutions, retail comes naturally to a sub-distributor because the basic premises of both businesses are similar. “When thinking of a diversification, most sub-distributors would consider retail since the business model is not as complicated or resource-intensive as, say, solutions provision or systems integration.”
In addition, many vendors themselves have been cutting down on the number of volume partners in key cities either due to changing market dynamics or because of strategic shifts. Intel, for example, has reduced the number of channel suppliers (sub-distributors) in cities such as Bengaluru and Hyderabad. Samsung has also revamped its Elite Business partner program.
Upcountry market
Many sub-distributors have been building regional strengths and are setting up branches in other towns within the state or in satellite towns nearby.
Pansari of Rashi feels that this is the most important strategy which city based sub-distributors need to adopt to grow in the long run. “Both national distributors and vendors would like to work with partners who can micro-distribute products across a few districts where a direct distributor branch may not be feasible.”
Umang Lalani, CEO of Lalani Infotech, says that a key reason for their growth over the last year has been the company’s entry into smaller markets such as Chhattisgarh.
Upcountry presence is also perceived as a show of strength, and enables a sub-distributor to easily negotiate with vendors and create a larger impact.
“We were the earliest to enter the upcountry market almost a decade back. Today, it’s our biggest strength,” feels Nair.
Because sub-distributors have increasingly invested in systems, this has helped distributors and vendors to work better with them. In fact, almost a dozen of the largest sub-distributors in the country are known to have implemented full-fledged ERP solutions. Even smaller sub-distributors have implemented accounting and inventory solutions. “Because sub-distributors have been investing in systems, it’s helped business considerably. Gone are the times when distributors and vendors had to spend days in accounts reconciliation,” observes Sudhir of Inspan.
Value addition
Some of the sub-distributors have also been involved in value addition to grow the business, whether it’s organizing road shows, running schemes, or even providing additional technical support beyond what
the vendor provides.
“I am extremely impressed by the work of partners such as Supreme and Devraj Computers of Chennai,” says Pansari. “The way they go about the business, supporting partners and providing feedback to both vendors and distributors to proactively run the business is an example for other partners in sub-distribution.”
Kochi-based sub-distributor Aldous Glare set an example by running a scheme of its own called Monsoon Miracle, whereby 30 performing partners were taken to Thailand. “This was the first time a Kerala-based sub-distributor ran a vendor-independent scheme and sponsored resellers for a foreign location trip,” says George Thomas, CEO of Aldous Glare.
Credit control
The biggest reason for the emergence of sub-distributors in the nineties was their ability to offer credit to smaller partners, and this continues to be the major reason for them to exist in 2009.
Many sub-distributors have managed to set up credit lines which are built on strong principles with very limited and calculated risks. In fact, many of the sub-distributors do periodic credit rating exercises, including visits from their sales representative or manager to the reseller’s premises and cross-checking of the balance sheets and bank statements of partners.
“The only way to grow and enhance profit in our business is to ensure faster inventory turnover and stronger credit management,” analyzes Lalani. “A credit rating exercise helped us weed out partners who were not timely with their payments and didn’t have a proper record. Thus, we were able to unblock our working capital and invest in partners who were worthy.”
Adds Sampath of Positive, “We have a strong credit control policy, and we rely on constant market feedback about the partner’s credit-worthiness. As in any other business, we do not tolerate frequent check dishonors.”
Since the recession set in a year ago, many sub-distributors have also moved away from end-of-the-month purchases. “Perhaps our biggest strength is that we don’t do bulk purchases, but buy stock on a daily basis. This has eased cash flow, and ensured that stock pile-ups do not happen. We’ve noticed that several partners across the country are moving toward this model,” says Sampath.
Value-added sub-distribution
Quite similar to the trend of value-added distribution, many partners are trying value-added sub-distribution. Instead of focusing on a wide range of products they are focusing on a specific segment such as security, power systems or mobile accessories. Apart from distribution, these partners are investing in support and services.
“A good example is Universal Electronics of Hubli, which re-distributes UPS and power accessories from many vendors in North Karnataka,” says Nath of Aadrika. “They work through resellers, provide a number of value-added services, and have invested in resources, including manpower.”
Another example is Bengaluru-based Rx Solutions, which focuses only on mobile computer accessories, and partners with almost all major mobile accessory manufacturers and notebook computer manufacturers.
The future of sub-distribution
Despite thinning margins, most sub-distributors are continuing to thrive because they have managed to reinvent themselves and focus on their strengths. Larger sub-distributors have figured out the right product mix, while smaller sub-distributors are trying to move up the value chain by associating with nicher brands.
With more vendors entering the market, and consolidation happening among national distributors, sub-distributors will be seeing more opportunities in future to become tier-1 distributors. |