Market survey – Broadliners go niche

After years of worrying that their role will be taken over by massive IT distributors (in the trade parlance, ‘broadliners’), specialist a-v distributors are convinced they are coming back into fashion and their future is secure. Some of them are even flying in the face of recession and forecasting 10-20 per cent turnover increases this year.

‘There are a lot of vendors, including Sony and LG, which have moved from broadline back into specialist distribution and others will follow,’ says Midwich director Darren Lewitt. ‘They want to do more than just sell an entry level product, they want us to educate people about new technology.’

He observes: ‘We do not seem to have the same level of competition that we used to have in the past. History has shown that the real threat will always be IT distribution treating a-v solutions in the same manner as PC products. There is no need to halve the margin in the channel, if you have a long-term strategy.’

Broadliners have suffered, he adds, ‘by buying too much stock that they are then unable to sell, and this just turns resellers off a specific brand until the manufacturer realises its mistake’. Even without adding in the turnover of Midwich’s relatively recent acquisitions and joint ventures, which include Owl Visual Systems, True Colours and home a-v specialist Invision, the company is by far the biggest ‘specialist’.

But there are specialists and specialists. Just Lamps, for example, is extremely specialist – it does only what its name suggests.

‘It’s still an OK market for us because we are selling a spare part, rather than a capital purchase,’ says Just Lamps md Dave Bethell. ‘People are used to using projectors and when the lamp goes, they will buy a new lamp, but, at the moment, they won’t replace the projector.’

Looking at the wider market, Bethell argues that ‘a-v distribution is split into two camps. There are the box shifters who jump from one sector bandwagon to the next, quoting glorious marketing sound bites, but with little substance in terms of actual service, since their only real regard is for turnover on the lowest margin possible.

‘In the other camp there are the true value-added distributors, which specialise in discrete sectors of the market, have spent years developing a reputation for quality, understand what their customers want, tailor their product range and service to meet that demand and ensure margins are healthy for continued investment.’

For Bethell: ‘The market outlook isn’t healthy, with reducing revenues available to the channel as a whole. The likelihood is that the former group will incur casualties as they compete for diminishing sales and drive margins lower to the point where one or more can no longer compete. The latter group will prevail by continuing to specialise in the niches that haven’t had the margin stripped out of them yet, since they are too specialist or sufficiently small.’

Technology to the rescue

There’s another option, which almost all the dozen distributors we talked to were beginning to embrace – starting to sell new technologies such as digital signage, interactive presentation technology, and videoconferencing in the hope that revenues from them would replace lost general display sales.

There’s some doubt as to whether that can work for everyone, but the biggest of the videoconferencing distributors, Imago, is doing well.

‘Our Polycom business grew by 60 per cent last year and videoconferencing is 20 per cent up, overall,’ says Imago Group md Ian Vickerage.

‘Customers are spending to improve their productivity, but we are still seeing projects cancelled or postponed.’ He says: ‘Conferencing is different from a-v, there is a lot more IT and cost-justification work involved.’ The sales environment, which Imago knows well, is also helping growth in allied areas such as streaming and IP television.

On the digital signage front, mid-sized distributors such as Anders+Kern and True Colours have done well.

‘Our reliance on traditional a-v brands has changed,’ says True Colours director Iain Campbell. ‘We have seen signage double to 40 per cent of our business and providing content and audience measurement services to go with it has brought us a different client base. This year will see us offer more trade services and we are upping our training-course programme.’

Competition in that area is bound to increase, with top-tier distributors such as Imago and RGB heavily involved in the digital signage installation market, and much depends on the continuing take up of ‘wayfinding’ signage by educational institutions, which are the biggest buyers of interactive technology.

Interaction and education

Although there are fears the ‘traditional’ interactive whiteboard market is nearing saturation point, new products such as the three-in-one Polyvision Eno boards, which A+K launched at BETT, and the value-for-money own-brand boards being sold by Sahara are making headway.

However, neither Sahara or A+K are putting their eggs in one basket. A+K has done well out of signage and third-party installation services and md Derek Kuziw says it is now ‘putting all our energies into brands that we have exclusive distribution agreements with because we can then invest heavily into the marketing of those brands and see a return.’ He is also investing in videoconferencing demo and training facilities.

Sahara, which ran down its distribution profile in favour of own-brand manufacturing, is also changing, says md Kevin Batley. ‘Recognising that promoting its own product line to the exclusion of others was probably something it should have addressed two years earlier. The adoption of well-known brands has seen the company grow its business substantially.’

With £5m of its turnover coming from interactive boards and displays, Sahara is a major player in the market for interactive education, but its dependence on that sector pales besides the commitment of the UK’s second-largest a-v distributor, Steljes.

‘The introduction of new technologies such as visualisers and voting systems to support learning is changing the market,’ says Steljes group product and marketing director Graham Wylie. ‘And things such as Building Schools for the Future (BSF) is changing the nature of procurement in the education sector. We are seeing changes in the channel mix to include more IT companies and we have set up a capital projects team to compete with those partners.’

Steljes and its biggest brand, Smart Technologies, are looking to big, long-term contracts to boost sales and the trading consistency that tends to evaporate during recessions.

Outside education, Smart’s introduction of ‘enterprise’ products for use in collaborative communications are also having an impact. Wylie says: ‘Some of our channel partners are having significant success in those markets, although confidence in that sector has softened. Collaborative technology is pushing the boundaries of how enterprises work and they are working with our channel partners to integrate these products. The rewards are there, but it takes time and effort to develop them.’

Steljes adds that it is focusing its energy on developing market teams and working with resellers. ‘We are working with the channel on lead generation, on raising skills levels and increasing product understanding, investing in tools and resources that they can use, rather than just writing a marketing support cheque.’

Steljes is also building up its portfolio of ‘complementary products – things the channel can use to increase its wallet share of an installation, like audio and lighting.’ Wylie believes that ‘having lived through a number of recessions, one of the things that we have learned is that you have to focus on what you are good at and add value to it. The channel partners want good solid products.’

But they also want ‘propositions that offer a reasonable level of margin’, he says. And that’s where things are starting to go wrong, even for the specialist systems distributors, which have stayed out of the low-margin displays business.

Margin calls

‘The market is healthy, but distribution is being strangled by the need for integrators to make more margin,’ says Tukans md Andrew Popely. ‘The USP of being a technically led distributor and offering good pre- and post-sales support is less important now as integrators will make buying decisions based on two-to-three points difference in price.

‘We have never faced a situation where a distributor is willing to “buy” business at three per cent margin on high-end value-add products, but this is now happening.

‘We can’t compete at that level. We will ensure that our revenue streams are generated from products where our value-add technical expertise is required. However, it puts us in a difficult situation as we are known for our technical ability and the integrators have relied on this support in the past. But we now ask for serial numbers on products before support is given. If it didn’t come through Tukans, we don’t provide support.’

At the AV100 event last December, Popely reminds us that Lamberhurst Corporation director Philip Garner told the audience that ‘a business activity that doesn’t contribute to the bottom line is an expense’.

Gordon Innocent, md of RGB Communications, is facing the same kind of pressure, with the falling pound having a detrimental effect on gross margins. ‘To avoid the ever-decreasing margin bun fight in the lower-and medium-specification (price) area, we plan to stay in the higher-specification area,’ he says.

‘Our key goal is to retain our customers, while finding new ones. We have recently created a team of sales people who are working our entire customer base. This is something we never felt the need to do before. It’s working well and we will continue to invest in their efforts. Gaining new customers in new markets is next on the list.’

However, it’s important they are ‘good’ customers, which mainly means creditworthy customers and vendors.

‘The biggest, single issue for a distributor is the massive cull in customer insurance limits from the credit insurance companies’, says Medium md Ian Sempers. ‘The market is healthy for the buyer, but challenging for the distributor.’

Maverick md Jon Sidwick, who defined much of the current specialist distribution pattern by coming up with the adage ‘get big, get niche or get out’, says attracting purchasing credit and offering channel credit are two of the biggest challenges facing distributors.

Products are not the issue. ‘Manufacturers from around the world will continue to struggle to find resellers who are prepared to represent their product and take on the responsibilities that this entails,’ says Batley. ‘I do not think distributors will be lacking opportunities in the coming months and years ahead.’

But, he adds, ‘the financial strength of resellers has weakened in the current climate.’

Credit and the channel

Suddenly, things don’t look so good. Superficially, the future is potentially rose-tinted, with new product areas and technologies being developed that need to be marketed via distribution. But existing products are being commoditised and margins are reducing at a time when resellers’ finances are under pressure.

‘The true value-add areas are becoming more niche,’ says Sidwick. ‘The driving forces for volume are becoming cash, credit, efficiency, logistics and e-commerce, so the major players will have to get these right.

‘To be successfully niche, distribution has to offer true value-add or a unique product set. Over the next two years, I predict a more marked move in distributors towards one camp or the other, with the potential for one or two to deliver both scale with value-add.’

Maverick, he argues, has the potential to become one of those ‘one or two’. But then, he would say that, wouldn’t he.

JOINING FORCES

Niche distributors tend to be focused on specific markets and technologies, but a band of them have set up a working group, Distribution Partners, which should help them research user needs and grow.

RGB Communications, Paradigm AV, Imago Group and Just Lamps are working on the project.

‘We have been frustrated by the fact there are distributors who claim to have specialist divisions that don’t deserve that title,’ says Imago md Ian Vickerage. ‘We want to get panels of dealers and users together to get their opinion on the products and services we offer and set directions.’

‘We are all specialist distributors who care about quality and service and have good reputations,’ says Just Lamps md Dave Bethell. ‘We all function in a technical fashion and we are happy to refer our customers on to one another.

‘By forming a group we can get better feedback and the members of the group can evaluate new products and services and look to see what they could do better.’