Issue #0604/1 - As the channel gears up for more changes, one vendors reduces the number of distributors while another aims to treble its resellers and e-tailers look for more.
Traditional channel partners are under threat not just from traditional competitors but from online suppliers and also from an ever-changing channel structure as two printer manufacturers and online suppliers announce major changes to their go-to-market plans.
While Hewlett-Packard talks of ‘right-sizing’ its channel because of over-distribution; Xerox is talking of ‘streamlining’, which may result in a trebling of the number of resellers able to sell Xerox products; newegg.com ($1bn US e-tailer) is said to be preparing to launch into the UK; and more manufacturers are turning to Tesco as a channel partner because of its huge market reach.
Talking mainly of distributors, Hewlett-Packard has recognised that its products are available through too many distribution channels, all fighting to gain adequate margin. This situation has existed for at least a decade when small resellers of Hewlett-Packard printers could expect to achieve a margin well under 5%, making it barely worth their while to sell.
However, they couldn’t ignore Hewlett-Packard products because of the demand. The only weapon in their armoury was to try and sell a different brand with a better margin but, at the end of the day, if the customer was set on a Hewlett-Packard printer, it was a case of ‘make a sale at a low margin or make no sale at all and risk losing the customer entirely’.
More recently, a supplies distributor indicated that it is prepared to sell inkjet cartridges to resellers at a profit margin of just 10 pence on cartridges costing around £15! That equates to a profit of only two-thirds of one percent – not a lot!
So, while Hewlett-Packard took over the position as the biggest printer manufacturer in 1991, and has since established itself as the immovable market dominator, it has also dug itself into a hole that may prove painful to climb out of.
Aiming to reduce the temptation to sell purely on price, Hewlett-Packard recognises that the number of distributors may need to be reduced, focussing the channel in terms of the products sold. Some players will lose out on some products – Hewlett-Packard accepts that fact – but hopes that those players remaining will benefit from the ability to make better margins.
Ultimately, the company’s goal is to improve its own profitability. Despite the fact that it is the largest printer manufacturer in the world and largest IT company in Europe, with group annual revenue up 8%, it is feeling the pinch with a reduced operating profit in IPG (down 23%), resulting in many job losses in its attempt to control costs and maintain the profitability it has enjoyed.
In almost total contrast, Xerox is looking to increase its exposure in the market with a potential three-fold expansion of its reseller base.
Described as ‘streamlining’, the action would seem to be anything but! In a program dubbed ‘SMARTer Distribution’, Xerox plans to achieve sustainable growth by offering customers a wider choice of products and services from a broader base of resellers – working on the economies of scale principle.
Streamlining does feature however. Currently, the distribution model for Europe is country based and involves a two-tier arrangement with 49 distributors servicing around 8,000 resellers. However, most of the 49 distributors belong to three major distribution groups, Ingram Micro, Tech Data and Scribona.
This effectively results in inefficiencies for Xerox, supplying product to 49 locations when most belong to just three companies.
So, the plan is to create three regional ‘master distributors’ under the SMARTer Distribution model. Ingram Micro and Tech Data will serve the majority of Western Europe while Scribona will focus on the Nordic region. This will allow Xerox to economise on distribution costs and to work more closely with the small number of master distributors.
Rather than Xerox shipping goods on-demand to distribution locations on an ad hoc basis, the master distributors will be able to collect product directly from Xerox’s warehousing network in loads that are economical to transport.
In addition, the ultimate plan is to allow the channel network to draw in the majority of Europe’s 30,000 resellers, rather than being limited to the current 8,000, so that Xerox products can be found almost anywhere right across Europe.
By accessing the full range of resellers, Xerox hopes to gain entry to vertical markets that it has failed to penetrate effectively so far. The particular market quoted by Xerox in this respect is the Graphic Arts market.
Resellers will gain access to a wider range of printer and copier products and all will be able to offer customers the benefits of Xerox’s PagePack contract that provides fixed cost-per-page printing.
Also looking to expand in the market is US e-tailing giant, newegg.com, which is reported to have plans to make a move on the UK. One might imagine that the UK is saturated with e-tail suppliers already, with a veritable host of companies, large and small, involved in the market but, one could argue that the number of giants is very limited – dabs.com and Amazon probably being the prime examples.
Newegg does not appear to be alone in believing that the UK market is still open for newcomers and expansion. Tesco, the UK’s leading supermarket chain is expanding its activities both in-store and online with Tesco Extra. It is now possible to purchase equipment online as diverse as: PCs, printers, digital cameras and MP3 players; through domestic white goods, pressure washers and dehumidifiers; to hairdryers, razors and DIY tape measures.
In store, however, the IT related products are heavily restricted. In most stores, electrical goods are limited to domestic goods and personal entertainment items. Even inkjet supplies are limited to just a couple of the most popular cartridges from Hewlett-Packard and Lexmark while a slightly wider range of Tesco branded cartridges are available for Canon and Epson in addition, along with some refill ink packs.
Furthermore, Linksys/Cisco has been quoted in the press recently as selling its product through Tesco, and actively promoting sales of its home networking starter pack at a knock-down price through e-tailers, in an environment where resellers are struggling to find margin on products they sell.
In actual fact, the Linksys product cannot be found on Tesco’s web site but US Robotics has its network starter pack selling through the store at £80.
Right at the moment, it does not look as though established e-tailers need to be overly worried by Tesco. The £80 price tag on the US Robotics pack is not competitive by any stretch of the imagination. The accompanying charts show how Tesco’s pricing stacks up against other e-tailers.
In only one instance, the Brother DCP-310CN AiO, is Tesco’s price lower than the bulk of the competition. Even here though, there is one other source for the same product that is advertising a price even lower than Tesco’s – and significantly so. With a price tag of £80, Tesco is undercutting the majority of the competition by between 20% and 25% but, some competitors have set their price such that Tesco is only 6% lower while others are so expensive that Tesco is 30% cheaper.
Brother DCP-310CN
Tesco certainly does not have a wide range of printers available. Currently, there are only three models available – one 3-funtion Brother AiO, one 4-function Brother AiO and one Samsung fax machine.
Most bizarrely for Tesco is that the only consumables listed on the web site are Lindy branded and to fit Epson printers only. As indicated, in-store Tesco cartridges service a tiny fraction of the inkjet printer models on the market and do not even including the Brother LC900 series for the AiO machines sold through Tesco Extra.
On a similar vein to the pricing example given above, purchasing a Sony Vaio VGN-FS315B laptop through Tesco Extra is not the most cost effective route. Nor is the purchase of a Toshiba M50 130 laptop.
Sony Vaio VGNFS315B
Toshiba M50 130
On the subject of the network starter packs, again we find a range of prices available online; of which Tesco is actually the highest – by as much as 27%!
US Robotics Network Starter Kit
Perhaps Tesco is at such an early stage of its expansion into the IT market that its bulk-buying and selling potential has not fully got off the ground yet. If this is the case, prices may well fall as the goal is achieved.
One further disincentive for users to buy from Tesco Extra is the delivery time. Although on many products delivery is quoted as 1-3 days (acceptable on domestic appliances and a lot faster than many other online outlets), for these IT items delivery is quoted as being direct from manufacturer and may take as long as 11 working days. This delivery time is in sharp contrast with the likes of dabs.com and others where delivery is usually next day.
However, Tesco is an increasingly multi-national corporation that is very actively seeking out suitable new locations around the world. Tesco operates in 15 markets in Europe and Asia and has the potential to become a major player in the IT retailing scene across the region.
To emphasise Tesco’s commitment to customer service and understanding its customers: in the Czeck Republic, Tesco is the only hypermarket operator to offer 24-hour shopping; and, every new Tesco Express store (small neighbourhood supermarket) in Thailand opens at exactly 9:09 on its first day of business because those numbers are considered to be lucky.
For Dabs or Amazon to fear the arrival of Newegg or expansion by Tesco probably would not solicit much sympathy from the public. It may result in further impact on prices (always good for the customer), especially if Newegg attempts to buy market share with exceptionally low prices, which may in turn prompt an increase in volume sales as prices come within reach of wider audiences.
But, however one looks at this issue, it is the small resellers that are most at risk because the retail and e-tail channels are becoming so strong, especially for ad hoc hardware and supplies purchases. These companies must focus their attention on winning customers that require services, infrastructure and maintenance packages in order to achieve long-term profitability.
With Hewlett-Packard and Xerox taking such opposite stances in the channel, we see the contrast between a giant fighting to retain its share and profitability and a long-standing competitor that has just emerged as if from the grave and is looking to paint its mark right across the market place.
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