The Big Distribution Rebound

That became clear after a number of events during the past few months put the spotlight back on distributors: It began during the summer when people began to whisper about product sales climbing steadily. Rumors of improved technology demand also made the rounds. Suddenly, upstart distributor Synnex went public just before Thanksgiving, and around the same time, the industry's top two players, Ingram Micro and Tech Data, began reporting financial results with double-digit sales growth that demolished Wall Street's expectations.

There's more. At press time, networking distributor Westcon Group was readying its IPO after posting significant gains in areas such as security and digital convergence. Arrow has also generated revenue gains in the

storage market as its stock climbs near a 52-week high. Smaller distributors such as D&H Distributing have grown on the heels of expansion into consumer electronics and the white-box channel. And Synnex, in its first quarter as a public company, saw its revenue rocket 37 percent recently (see "Following IPO And Impressive First-Quarter Financials, Synnex CEO Reveals What's Next,").

"Certainly, business is improving, and we feel very confident this year," says Ken Lamneck, who was recently tapped as Tech Data's president of the Americas.

How has distribution staked such a strong comeback after two-plus years of struggles? Besides pent-up demand for IT and the growth in emerging technologies, many successful distribution houses altered their models and incorporated more value-added services for their solution-provider customers. Indeed, VARBusiness' own research shows that distributors feel superior service, not just competitive pricing and product shipping, is the No. 1 reason that solution providers stay loyal to them.

"We realized that just being a purveyor of hardware wasn't going to help us make a living," says Jim Markinsohn, vice president of business development at Arrow. "Now we're a purveyor of information, training and services, too."

VARBusiness goes inside the distribution market to see how companies have transformed themselves in the face of the recession to capitalize on new and emerging technologies to stage a remarkable rebound.

Market Makers
Digital convergence. Security. Storage. Wireless. Those are just a few technologies that have helped power distribution's comeback and those cited in a recent VARBusiness survey of the top distributors as the fastest-growing product segments. Take Westcon Group. The Tarrytown, N.Y.-based distributor has been laser-focused on convergence and home networking in hopes of becoming the earliest of adopters. In a recent interview with VARBusiness, CEO Alan Marc Smith stated that he expected convergence to be one-and-a-half times as large as the separate voice and data markets combined. To that end, Westcon Group, in the midst of its IPO, has aggressively rolled out a number of technology seminars for security and convergence, which has fed the market and helped generated business for its top vendors, such as Cisco and Avaya.

Dan Schwab, vice president of marketing at D&H Distributing, echoes Smith's view and says his company's fastest-growing business is digital convergence and consumer electronics. D&H has stepped up its promotion of flat-panel displays and televisions, gaming systems, wireless and home-network technology during the past year. The company, which has achieved double-digit growth in recent years, also launched a dedicated Web site for its convergence business, which features technology white papers and technical training and education. "We'll become a more likely destination for VARs that are just getting into the digital convergence and consumer-electronics markets," Schwab says.

Even broadline distributors have tweaked their business models to accommodate the swelling interest in complex technologies and emerging markets. Tech Data has added new Specialized Business Units (SBUs) for its point-of-sales solutions, convergence technologies and consumer electronics. The industry's second-largest distributor also realigned its SBUs with a new Advanced Technologies Group, which houses its POS/Data Capture and Digital Environment SBUs. "We still are providing the usual broadline offerings," Lamneck says, "but we're also providing niche services and value with things like our SBUs."

Open source is another area attracting distributors. During IBM's PartnerWorld event earlier this year, Ingram Micro unveiled a wide-ranging effort for Linux and other open-source technologies, bolstering its product lineup while offering technical education, sales training and marketing support through its Emerging Technologies Group.

If the intent is to get deeper with technology, then by most accounts distributors across the board are executing. For example, Graybar's Verified Independently for Performance (VIP) program provides resellers with third-party testing from Intertek Testing Services that verify cabling products' performance in both technology labs and in the field.

"We've changed our model significantly," says Dick Offenbaucher, senior vice president of sales and marketing at Graybar. "We're trying to move beyond just pick, pack and ship services for the channel."

Training has been an especially powerful drawing card for many distributors. The No. 1 reason Arrow's VARs have been growing so fast, according to the company, is training, particularly deep technical courses on complex, emerging technologies such as storage. Lewis Johnson, president of Siwel Consulting, an IBM Premier Business Partner based in New York, says his company buys most of its IBM products from Arrow's SupportNet division not just because of the distributor's superior supply chain and delivery services, but also because of SupportNet's breadth of training, co-marketing and sales support. "SupportNet really helped us develop our Linux strategy," Johnson says.

Superior Services
Distribution has gone through something of a metamorphosis since 2001; whereas the focus was once on product supply and delivery during the sales booms of the late 1990s, many distribution houses then turned their attention to expanding their services and support for all matters technical, financial, business consulting and everything in between.

At Tech Data's recent TechSelect event in San Diego, members raved about the event's business-skills training. Dave Gilden, partner of TechSelect member Acuity Solutions in Tampa, Fla., says training sessions such as these are tremendously valuable to solution providers and commends Tech Data for providing such additional services to its VARs. "They're not just teaching us to drive more of their vendors' products; they're really looking at our business model, sales strategy and operations to make us more effective," Gilden says.

Synnex wasted little time after going public before making a similar charge into so-called value-added services for its reseller customers. The Fremont, Calif.-based distributor acquired BSA Sales, which provides outsourced sales and marketing services to technology companies, for $4.5 million. Cathy Chiu, senior vice president of corporate development at Synnex, says the distributor wants to offer more than just low prices for its resellers in order to build "sticky relationships" with solution providers. "[BSA] was a very strategic move for us because we need to provide these types of services to help customers get better margins and sales," Chiu says.

VARBusiness research indicates that those services are becoming more and more prevalent in the distribution community. According to the survey, 92 percent of distributors offer both presales technical support, and credit and financing programs, and 81 percent offer field-sales assistance, demo programs and postsales technical support.

Financial assistance has also played a key role in luring more solution-provider customers and keeping them healthy. In rolling out its Government Systems Group last year, GE Access enticed its federal integrators by offering a 1 percent list price discount and 60-day interest-free financing on security hardware and software for the government market. The distributor also created a new Terms Reward program that provides 60-day interest-free terms in the third quarter (July 1 through Sept. 30) for network security resellers who do at least $250,000 in sales for select vendors in the second quarter.

Demand generation is also playing a role in distribution's makeover. For example, Agilysys, formerly known as Pioneer-Standard Electronics, recently stepped up its contribution to marketing and "enablement" services for its reseller customers.

Pete Jensen, senior vice president of Agilysys, says his company's distribution arm, Keylink Systems Group, uses "opportunity-identification" programs to bring business to solution providers. For the company's white-hot IBM business, Agilysys recently developed a plan that identified customers with old IBM hardware and began marketing new pSeries servers with resellers. Such programs helped Agilysys propel its revenue 22 percent year-over-year for the company's third quarter this year.

Threats Ahead?
What, then, could threaten a newly revived distribution market? Most VARs seem to think rivals such as Dell and CDW are the biggest enemies for both themselves and their distributors. But some distribution officials see other negative forces in the market, such as the potential for increased direct selling from top vendors, namely Hewlett-Packard.

Joe Burke, general manager of Arrow's enterprise business group, has seen an increase of VARs under its keep that are getting so-called agent or influencer fees; in other words, the solution provider gets credit for making the deal with the customer, but the vendor actually sells the product direct, which is not an ideal situation for distributors. "It's not pervasive, but it is something that we're concerned about and that we'll keep an eye on," Burke says. "You can't have vendors cherry-picking your deals."

In reports on both Ingram Micro and Tech Data issued last November, Merrill Lynch analyst Steve Milunovich identified direct sales as a major competitive threat to distributors, but wrote that Merrill Lynch's survey of enterprise PC sales indicated that direct purchases had flattened. In addition, officials at the top two distributors in the industry have stated publicly that they've seen direct sales level off from their top vendors. That's a good thing, because a direct sales revolt is about the only force that could keep distribution's rebound down. "We've moved beyond cautiously optimistic," Agilysys' Jensen says. "Now we're solidly optimistic."