Surviving the recession: A channel primer

The triple whammy of shrinking prices, contracting margins and reduced volume is hurting the Canadian IT channel, but insiders say that resellers willing to roll with changing times are positioned to survive.

The biggest problem—in Canada and elsewhere—is cash. “”There is a massive liquidity

problem spreading throughout the supply chain,”” said Denise Sangster, president and COO of Global Touch, a market research firm. “”What happened with Kmart foreshadows what may happen in a lot of industries.””

Global Touch, in conjunction with the Morgan Stanley Technology Group, recently released the latest edition of its tracking report, which it has been publishing quarterly since June 1999. The first 2002 edition is based on data from 500 IT companies in North America and Europe, and the picture it paints isn’t pretty.

Global Touch ran a set of enterprise and volume product scenarios based on numbers culled from 2000 and 2001. These were measured against an ideal scenario. The results for the third and fourth quarters of 2001 showed great slippage in net revenue. In the scenario, gross margins were halved, unit prices were sliced significantly and net revenue was off by 48 percent. “”There are highly compressed margins, declining average sales prices and lack of demand,”” Sangster said. “”When you add all that up, it’s a disaster in the making.””

While the study did not break out the Canadian results, insiders — including Sangster — feel that the situation is not as dire here as in the United States. “”Canada is somewhere between the U.S. and what is happening in Europe,”” Sangster said. “”If the U.S. is a 10 and Europe a one, Canada is a seven, eight or nine.””

Canadian players hope the country will not become a 10. Most of the doomed dot-coms, a key driver of the channel problems, were in the U.S. In general, pressure on VARs and other middlemen is greater in urban areas where manufacturers can more effectively run field teams, said Paul Edwards, an analyst with IDC Canada. Canada, of course, is less urban than the U.S. and might gain some immunity from this.

Moreover, recessions historically end after no more than 18 months, which means the current downturn doesn’t have too long to run. This, coupled with the expected bounce caused by the changeout of PCs bought for Y2K bodes well, said Jim Estill, the president of EMJ Data Systems, a distributor/wholesaler in Guelph, Ont.

Finally, a number of cross-border issues create a residual need for channel partners to serve American manufacturers that have no facilities in Canada, said Larry Keating, president and CEO of Keating Technologies, a branch outsourcing company in Markham, Ont. These include currency conversion, French/English issues, import procedures and the desire of Canadians to buy locally.

Whatever the precise reasons, experts see a winnowing process. Proactive and entrepreneurial partners will survive, they say, while less focused players fade from the scene. “”It is becoming increasingly difficult for partners to just offer logistical capabilities, just getting product to the company with little or no service support,”” said Edwards.

Even before the recession, the dynamics of the PC sales were changing. PC prices were plummeting and the success that Dell and other manufacturers enjoyed selling direct was already threatening the middleman’s role. It is up to resellers to convince enterprises that partners are still necessary, Estill said. Surviving resellers will be under more financial scrutiny, he said, and need to accentuate the benefits they bring more fully.

It may pay for resellers to look beyond large enterprises, said Peter Diniz, the vice-president and general manager of Markham, Ont.-based distributor Bell Microproducts Canada. “”Resellers have to recognize where their space is,”” he said. “”The challenge is for VARs to recognize this and ask, “”Okay, where do manufacturers need me?’ The answer is in the medium enterprise space . . . because there are too many customers and the total available market is too small in individual medium-sized enterprise companies.””

While Canadian channel players may avoid the worst of the recession-induced problems, it is no time to sit back. “”The key is they have to bring something unique and valuable to the table,”” Keating said. “”There are no free rides. We are in the middle of a fundamental reorganization of the industry.””

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