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The state of the distribution market

In the old days, distribution was a good game to be in; you moved some boxes, made a decent margin and all was well. But times changed and today the market is much different. The concept of ‘value-add’ has become synonymous with distribution, with the result the companies are now stocked with many technical and project skills in addition to products.

But how is the distribution market faring in reality in an age where some vendors are happy to provide stock directly to SIs (or to large customers), or they spread their distribution over many companies, avoiding ‘exclusive’ scenarios which make it worthwhile for distributors to invest in stock and skills to support a product range?

Left to right: Nick Grange, Quintin Van Den Berg, David Shapiro, Ian Jansen van Rensburg, Stuart Perry, Phillip de Waal, MJ Oosthuizen and Zane Greeff.

In addition, with the growth of the cloud and related ‘X-as-a-Service’ offerings, is there still a future for the distribution market as we know it? And of course, the component shortages only exacerbated the Covid slowdown, impacting the market in its entirety.

Hi-Tech Security Solutions hosted a round table discussion to find out what the current state and future of the distribution market is. We invited a mixture of vendors, SIs and distributors from both the physical security world as well as the IT industry to share their thoughts.

Stuart Perry, Dark Horse Distribution

Stuart Perry.

Coming from the UK, when Perry started in the local distribution market in SA, it was a traditional box-mover business where a company held stock and sold it at a margin and that was it; and for certain products, that is exactly what is needed, but it depends on the brand and the people you sell to. For box-mover companies, all you needed was enough telephone lines and people to take orders and the customers came to you and you took orders and shipped stock.

Companies trying to retain that approach are not doing too well at the moment, he notes. When he and his partners started Dark Horse, they were not in a position to wait for the phone to ring, but had to go out and build relationships with the entire channel, including the end users. In this way, Dark Horse is able to get business and fulfil the end user’s requirements with one of the SIs they have a relationship with. That type of two-way relationship benefits everyone, especially as the distributor is not reliant on waiting for business to come to them.

This type of deal, where the distributor is involved throughout the project also helps (but can’t completely avoid) the scenario where price-sensitivity leads an SI to ‘shop around’ and opt for whomever offers them the best price. Additionally, when the products and solutions required for a project are not carefully specified to meet the requirements of the customer, there will always be a cheaper product or someone willing to cut their margins to the bone because they haven’t done any of the pre-sales work. This is where relationships and understanding the needs of the end user count.

Adding value in understanding and specifying what will work for the client, while maintaining good relationships with users, SIs, consultants and manufacturers is therefore critical for today’s distributor, because simply trying to win business on price is not sustainable. Using the American market as an example, Perry says we hear of installers (and even users) buying products directly from Amazon, which offers a good price, but the skills to support and maintain the kit are not there. What does the client do when something goes wrong?

He ends by saying that working with the channel as a whole and upskilling your own people as well as the clients’, adding value to the equation and solving pain points is the only way forward unless one wants to play the margin game.

Quintin van den Berg, Bosch Building Solutions

Quintin van den Berg.

Van Den Berg has spent many years in the industry in different roles, from distribution to system integration and manufacturing. He notes that the sub-Saharan African market is unique in the challenges it faces and effective distribution needs to cater for this. While South Africa is more traditional in its approach to the channel, manufacturers often have a hybrid distribution model in other countries in the region to cater for the dynamics of this market – and this is not unheard of in SA either.

To develop the business requires significant investment as well as a broad knowledge – especially when looking at first-tier products when one can’t just sell a number of boxes and move on. An additional requirement for the hybrid model is that professional installers with the broad knowledge base to serve the user base effectively is limited and the number seems to be constantly shrinking. This is a challenge and opportunity for the distributor to add value through skills and project management options.

Van Den Berg adds that, as Perry also noted, being involved in the project work ‘from the ground up’ is more important to ensure the work is done and the client gets what they want and to limit the chance of someone coming in and stealing a project after a lot of work simply by offering a lower price. Of course, every market has its lower tier products and suppliers that do work on price and these are not going to vanish, but in the high-end project space there is opportunity for those companies adding value through consulting, technical and project management skills.

Looking ahead, Van Den Berg says it’s going to be an interesting few years for the channel as nobody actually knows exactly what will happen. Some companies that have become synonymous with the security distribution market may vanish while others may make the right decisions and end up leading the pack. As with most things in the world right now, the future is a bit challenging, which is an opportunity for those able to make the right decisions now.

Nick Grange, XtraVision

Nick Grange.

Grange is another person who has worked in the industry for many years, working in distribution many years ago and then moving to the integration market before returning to the distribution market in recent years. He says the difference between distribution in the ‘old days’ and now is significant. The margins distributors make today, as one example, is nothing compared to the past and the way business is done with some manufacturers going direct to end users has also impacted the market as a whole.

The way XtraVision deals with the changes is by having a range of niche products aimed at various projects where convergence is key. Grange says there are many volume products that can be sold to end users directly, but when one starts integrating and focusing on convergence, the old box-mover model does not work. XtraVision has a lot of highly trained technicians on board which are able to add value and assist SIs and others in their projects to achieve this seamless integration which makes projects a success.

He also believes in relationships with the whole channel, including end users, to understand their requirements and what the solutions need, but as with others, the rollout is done with channel partners.

David Shapiro, Regal Security

David Shapiro.

Apart from his role at Regal, Shapiro also chairs ESDA (Electronic Security Distributors’ Association), which provides him with additional insights into the state of the market at the moment. He says the distribution business has become more challenging than ever before and says going forward things “will never be the same’”.

He says some companies (in all industries) have capitalised on the pandemic and component shortages – which he calls the ‘Covid excuse’ – in terms of component and product availability as delivery times are stretched. This means it is extremely difficult for distributors to forecast effectively and get the products they need within definite time frames.

For project work this is not a major issue (although it has become more concerning), but for distributors’ daily run-of-products it is a nightmare as they can wait three or four months for a product to arrive and one doesn’t always get the number of units ordered. As noted, for distributors who have relied on being the source of products at short notice, or those with retail outlets, this obviously has a significant impact on business.

He also notes that there are online distributors popping up out of nowhere, not associated with any specific company, who are only focused on moving as many products as possible at the lowest price. Quality and warranty issues are a problem in this game and in a price sensitive market loyalty is also suffering. Some loyal customers of many years are moving to these companies that have little to no overheads because of the lower unit price without considering long-term issues like support etc.

Shapiro mentions quality specifically when it comes to products. While we would normally think of quality and warranties in terms of more expensive items like cameras or access control readers, he say there are companies that take products people don’t normally pay much attention to, like network cabling, import huge amounts of low-quality cables and sell it at low prices. Saving a buck now seems more important than the long-term reliability of the solutions installed.

However, it’s not all doom and gloom as he says things will improve and distributors are now learning how to deal with the shortages and adapt their forecasting and buying to manage the situation.

MJ Oosthuizen, G4S

MJ Oosthuizen.

Oosthuizen started out in the IT industry before moving into security distribution before moving on to different roles in the security industry. He agrees that when he started in distribution it was a different market with decent margins. In those days customers came to a distributor because not only did they have products available, but they could afford to hire technical and product specialists to assist their channel partners. The partners had the security of knowing that their distributor was there to support them and was actually the representative of the manufacturer in the country.

Today, he is a customer of distributors or manufacturers that have a direct presence in the country with sales or technical skills ‘on the ground’. G4S is a large global company and therefore has a number of direct sales agreements with manufacturers, but Oosthuizen notes this depends on what resources the companies have in the country. When something goes wrong, technical and warranty support (and stock availability) is critical to the SI as a distributor doesn’t have problems or SLAs (potentially with penalties) to fulfil. The SI does and these companies need to know they have the support required.

The question for the SI is whom to buy from and what are you buying? There is always someone willing to sell at a lower price, which is good for the end user and the SI initially, but what about a couple of years later? If there are serious problems, the user blames the SI and the brand, but it is the SI who takes the penalties and has to potentially spend more to make sure their customers are getting the service levels promised, because the integration business is also just as competitive, with someone always getting a bright idea and offering a cheaper price or service fee.

Zane Greeff, Elvey Group

Zane Greeff.

Elvey looks after the project as well as the ‘run-rate’ market. The race to the bottom is a key challenge to the distribution market, again because of the price-sensitivity in the market and the availability of alternatives. In the project market this can be overcome by having the technical support, expertise and experience available from the distributor. However, there is a ‘price point expectation’ in tenders and it can be difficult to explain the value of not opting for the cheapest option.

It can also be difficult for the distributor to get access to the end user as installers and consultants etc., often prevent access as they try to keep the sale and information of the project to themselves. A regular occurrence Greeff experiences is losing contracts at the last minute because either the manufacturer (directly in opposition to its distribution partner/s) or someone else approaches the client directly with a cheaper product rate, despite whatever else may have gone before in planning and designing the solution.

While Covid has exacerbated challenges in terms of supply and stock availability, Greeff says this would have happened at some stage, the pandemic simply accelerated the process. And while all distributors feel the pain, the market does not seem to realise the challenges being faced and seems to feel there is always another avenue to use to get stock, again focusing on unit price rather than the long-term efficacy of the installation.

Phillip de Waal, Nutanix

Phillip de Waal.

De Waal has worked in various roles in the IT channel over his career and is now with a vendor. Nutanix works on a project basis and due to the nature of the software industry, their distributors don’t hold stock, the company sells software licences. Of course, software still needs hardware to run on and this presents challenges relating to the component shortages at the moment. Most people don’t realise that the hardware cost of an enterprise software solution is usually much more than the software fees.

De Waal notes that one of the biggest threats to the channel is the cloud-based services model where the end user buys the service directly from the vendor. In this scenario there is no work for resellers or distributors, which is obviously a challenge. The way the IT distribution channel is adapting is by building their own cloud infrastructure (either their own, or more likely using the major cloud vendors as a service provider) and selling managed services to customers. [We have seen the same adaption starting in the physical security space over the past few years. – Ed.]

Ian Jansen van Rensburg, VMware SSA

Ian Jansen van Rensburg.

Jansen van Rensburg has been with VMware SSA (sub-Saharan Africa) for 15 years and has seen the channel change over the years in both positive and negative scenarios. Today’s distributors can no longer function on the model of taking orders and sending out products (except for the basic consumer or run-rate products and of course, where users think they can get top-tier products over the Internet cheaply and hope they can make it work). He agrees that the cloud is becoming far more important in the software world, which will naturally have an impact on the distribution market.

While the cliché of ‘cloud first’ is commonly used when talking of organisations’ move to the cloud, Jansen van Rensburg notes that he sees the market taking a more ‘cloud smart’ approach. Looking at what cloud they want to run on. The key issue is not the technical aspects, but commercial – who do they sign up with for a long-term contract.

He sees the distribution market taking on this role by signing up with cloud service providers and then reselling services on to the client. This means the distributor takes the risk of signing long-term contracts for the client, which offers them the knowledge that they can more easily get out of one contract and move to another if so required; and it removes the admin burden from the client.

Those distributors who decide to stay in the box-moving space will find they can address at most 30% of the market by around 2025. VMware’s message at its recent global conference stressed that the future was about multi-cloud and being ‘cloud smart’. What this means in reality is that instead of offering ‘this or that’ options to clients, distributors need to be able to offer ‘this and that’, offering reliable, secure, but also flexible solutions.

The future is cloudy

Loyalty often came up in the discussion, primarily the lack of it even after relationships lasting many years. Price sensitivity is one of the reasons for this, driven by an under-performing economy, but there are also other reasons. When the lockdown initially hit, SIs found that their customers still wanted their security systems and services functioning at full capacity, but couldn’t pay for it and asked for better terms. Some distributors would not help the SIs with similar extended payment terms and consequently lost SI customers as they went with distributors who were prepared to ‘come to the party’.

So it would seem a successful distributor today not only needs to have stock as well as technical and project skills, they need to also ‘stock’ a bit of cash to facilitate extended terms and assist their SI clients in tough times. Of course, having a cash pile to do this is not possible for every company, which simply adds to the distributors’ dilemma of how to get through the mess of the pandemic, component shortages, supply chain delays, price-sensitivity and more and come out fighting fit at the other end.

A key comment on this topic was that distributors have evolved into companies that offer stock holding, expertise (technical, project and general advice on what products and solutions would work in various projects) and support. However, as margins are eroded, ‘something has to give’ and the market is finding that skills and support are diminishing because the money is no longer there to keep the same level of human expertise within the company. While the channel, including end users benefit with lower prices from competitive (or desperate) companies fighting for a piece of the pie, the medium- and long-term warranty, support and maintenance services will prove much more costly.

Fortunately, it seems that while distribution market has taken a few knocks it has adapted (or is adapting) to conditions out there – the dreaded cliché of the ‘new normal’. And while security is necessary and will become more so over the next few years as governments and policing globally deal with their own issues and the supply chain tries to recover, the competition and challenges distributors face are significant and getting through will require nerves of steel – and the ability to get past the large number of fly-by-nights that will pop up with great deals on suspect products, only to vanish in short order.

And when one consider the ‘as-a-service’ component of the market, where the IT industry is far ahead, this will present even more challenges. We do not have space to cover this aspect in this article, but (to use another cliché) the service economy will also impact the way distributors operate and will require a change in their business model to either revert to simply moving boxes at the lowest margin, or updating their skills to become a value-adding partner in the services game.

Hi-Tech Security Solutions would like to thank all the participants in the round table for their contributions. Being a fly on the wall in this discussion might have been an interesting wake-up call for many in all areas of the channel in South and southern Africa.

For more information contact:

• Dark Horse Distribution, +27 10 442 1111, [email protected], www.dhdistribution.co.za

• Nutanix, +27 12 004 2347, www.nutanix.com

• VMware South Africa, +27 11 513 4800, ssachannel&[email protected], www.vmware.com/za.html

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