Distributors: The Era of Expansion

"This business is no longer about logistics, cost controls and shipping," says Mike Long, president of Arrow, a high-end products distributor based in Longmont, Colo. "That stuff isn't a competitive advantage today because every distributor that is still around is already fast and efficient. It's about solutions today, and that's a big shift for this industry."

The shift is occurring along several fronts. For starters, distributors across the board, from Arrow to broadline companies like Ingram Micro and Tech Data, are adding to their line cards, pursuing new alliances and building out new services. On the product front, they are bolstering their line cards by signing up new vendors and by acquiring new companies already into specialty products. That's helping distributors reduce their dependency on commodity products and increase their emphasis on high-margin, cutting-edge technologies, such as Voice over IP (VoIP), security, consumer electronics and, of course, radio frequency identification (RFID). The outwardly tiny technology is having such an enormous impact that one distribution executive affectionately refers to it as "bar codes on steroids."

In addition, distributors are expanding overseas into regions such as Europe and Asia-Pacific. In fact, since the start of 2004, five of the biggest distributors have made at least one acquisition, while six of the top 10 have entered a new region abroad.

Roy Vallee, CEO of distribution powerhouse Avnet and 2005 chair of the Global Technology Distribution Council, says the push overseas by U.S.-based distributors is building more diversified and more stable American employers.

"You have to win the scale game or you will not survive in distribution," he says. "That has driven the industry to go global."

So far, the strategic shift in focus has had a positive impact on the nation's top distributors. Nearly all of the 10 largest distributors posted double-digit revenue growth in 2004, for example. The growth has added more than $10 billion to the aggregate total revenue for the top 25 distributors, which now approaches $75 billion annually--the highest total in three years.

Despite price wars, indifference from Wall Street and changing customer buying habits, the nation's distributors have survived, evolved and, finally, matured. In this exclusive focus on distribution, VARBusiness looks at the companies driving change, the technologies inspiring them to grow and the efforts they are making to enhance their influence in one of the nation's most important industries.

Going Global

Perhaps the biggest growth accelerator for distribution leaders today is international expansion. In the past 18 months, Ingram Micro, Synnex, Avnet and Bell Microproducts have all entered new regional markets outside the United States, while others, such as ScanSource, have made recent acquisitions abroad. The reason U.S.-based companies are expanding overseas is simple. They want to both reduce their exposure to the vagaries of the U.S. IT economy, and they don't want to miss out on the lucrative, high-growth opportunities associated with emerging markets. So far, their expansion is paying off. The majority of distributors with a presence in Europe, for example, saw their sales grow by double digits in 2004. Tech Data, which made two acquisitions in Europe during 2003, enjoyed an 18 percent sales hike in Europe, Middle East and Africa (EMEA) in fiscal 2004. Bell Micro, which previously purchased OpenPSL, an enterprise-storage and security distributor based in the United Kingdom, has also seen its overseas business grow. And it has recently purchased Net Storage Computers, a storage distributor based in Sao Paulo, Brazil, to fuel additional growth.

While Europe's macro-economy is still weak, IT spending in the Asia-Pacific region remains strong. Ingram Micro, for one, made an aggressive splash in the region with its $493 million acquisition last September of Tech Pacific, an Australian technology distributor. That helped drive sales up in the second quarter by 115 percent over last year to $1.2 billion in the Asia-Pacific region.

Avnet has also seen sales for its distribution arm, Avnet Partner Solutions, explode at least 56 percent in Asia in its two most recent quarters. Vallee believes it's all part of a natural maturation and progression of IT distribution.

"It's not a matter of how such expansion is changing the distribution model," Vallee says. "Instead, I think it's the distribution model that is creating the expansion and need to aggressively scale the business."

While overseas sales growth has little direct impact on the North American reseller, it does offer some indirect benefits. For instance, the growth in some regions has helped offset weakness in North American IT spending that has helped distributors continue to increase revenue and stay profitable rather than subject VAR customers to cutbacks in customer service and benefits. In fact, if anything, distributors have greatly increased their customer-service programs and business tools as their overseas operations have grown.

Whether it's Westcon Group introducing its first bona-fide government VAR program, dubbed GOVx, this year or ScanSource launching a new RFID program after posting record sales for its international business, foreign expansion is creating a stronger distribution market in the United States.

Adjacent Markets

In addition to geographic expansion, distributors have grown their businesses through domestic acquisitions that have expanded both their line cards and vertical-market capabilities. Along with Tech Pacific, Ingram Micro has also purchased two additional companies to expand its share in emerging technical markets. They include Nimax, a small distributor focused on point-of-sales (POS) technologies, and, more recently, AVAD, a privately held collection of 12 regional distributors that specialize in products for the home and consumer market.

Keith Bradley, vice president of Ingram Micro North America, says AVAD fits Ingram's home-technology strategy perfectly: to make the most of the increasing interest of mainstream VARs and solution providers to sell consumer-oriented technologies to home and small-business customers. To wit, a lot of mainstream VARs and IT consultants have helped ScanSource, a specialty distributor focused on POS/automatic identification data capture (AIDC) products, achieve double-digit growth during the past eight quarters.

As interest in their technologies and capabilities grows, a number of specialty distributors have branched out. Westcon Group, a networking distributor based in Tarrytown, N.Y., has beefed up its offerings in such emerging areas as wireless, security and VoIP.

"Our line card is much bigger today," says Westcon Group chief executive Tom Dolan. "We've added a number of new and alternative vendors that want to embrace the channel and, therefore, rely heavily on distribution, so it's a perfect match."

ScanSource has also invested heavily in VoIP through its Catalyst telecom unit, which sells Avaya's VoIP products, as well as RFID via its RFID Edge program, launched last October. The latter is the company's efforts to aggressively pursue opportunities involving RFID technology. ScanSource CTO Greg Dixon says only a small number of the distributor's customers are currently deploying RFID, but many more are actively trying to break into the market. "We're trying to create a path for resellers with RFID Edge," Dixon says.

Tech Data has expanded its own POS and telephony technology businesses via its own Specialized Business Unit (SBU) strategy, which uses dedicated business units to concentrate on driving emerging products with resellers. Tech Data chairman and CEO Steve Raymund says such products have helped reinvigorate his company and the industry at large. "There are a number of segments that didn't exist for us not too long ago," Raymund says, "but today they're adding nontrivial amounts of revenue to our bottom line."

They're adding profits, too. While margins have sunk on commodity hardware, distributors have found that lesser-adopted product segments, such as VoIP, security and home technologies, are much more profitable for both themselves and their customers. Not only are the margins better for such products, but the products also allow VARs to create more unique and specialized solutions to better differentiate themselves from competitors.

"Any of the new niche players that Tech Data brings on, we'll give a good, hard look at," says Dave Gilden, partner at Acuity Solutions of Tampa, Fla. "Tech Data has done a pretty good job finding those types of companies and bringing them to the channel."

The Net Effect

While it's impossible to assess who among the nation's largest distributors will benefit the most from this new emphasis on growth, it's already apparent which companies are going after which avenues of growth. Arrow, for one, has pursued line-card expansion with tier-one vendors.

"We used to be primarily servers, but we've aggressively added to our storage business with companies like EMC and Network Appliance," CEO Long says.

D&H Distributing has made a similar move, adding Cisco Systems to its line card. Dan Schwab, vice president of marketing at D&H, says the Cisco relationship will be "the key initiative that will drive this business for the next five years."

Other distributors have made similar efforts during the past 18 months: Tech Data, for example, has added EMC, while Synnex has brought on Avaya to expand its networking business. But like a stone cast into a lake, these and other strategic moves are likely to have far-reaching ripple effects through various markets and segments of distribution. Among other things, they are radically altering the competitive landscape that has existed for several years. For example, Ingram Micro's Nimax subsidiary and Tech Data's POS SBU are now going up against incumbent ScanSource in a crowded POS/AIDC market. ScanSource and Synnex may also be competing for some of the same Avaya turf with Westcon Group's Voda One division. And don't forget Westcon Group's Comstor unit, which specializes in Cisco; it's likely to face increased competition from Cisco's newest distributor, D&H Distributing.

Some believe the battle for market share may be overplayed. D&H's Schwab, for one, says, "We're trying to take Cisco to our customers rather than trying to take Cisco share from our competitors. I'm sure that will happen to some degree, but that's not the strategy."

Perhaps, but competition for VAR dollars is likely to get fierce. Vendors certainly don't want their numerous distribution partners competing for the same patches of land, which could result in lower prices and reduced margins for all.

"We don't want to simply move a vendor's sales from the right pocket to the left," says Synnex CEO John Paget, "but there will be some share shift and diversion of business from one distributor to another."

No matter. It's clear the boundaries between broadline, enterprise and specialty distribution are blurring as companies pursue the same lucrative emerging markets and rainmaker vendor partnerships.

There are other forces at work, too, Avnet's Vallee says. For example, the plethora of vendors that are moving to the lower end of the market and courting small and midsize businesses, coupled with the rise of industry-standard enterprise products that have suddenly been made affordable and adaptable for the SMB market, has created pockets of intense competition among various types of distributors. "There's definitely a lot of overlap today between specialty, enterprise and volume distributors," Vallee says.

Access Distribution CEO Anna McDermott agrees, although she's skeptical about the ability of volume distributors to move into the value game. "We've seen some interest and some movement by the broadline players in the enterprise space, but we haven't seen any success yet," McDermott says. "Their expertise is in logistics, and logistics isn't the business that you're in when you're an enterprise distributor."

Nevertheless, distributors are eyeing the same turf, no matter what their core competencies are. Synnex, for example, recently began moving upstream toward the enterprise market by adding high-end HP products, with aspirations of becoming a sort of volume/value hybrid player. Paget says his company has begun aggressively adding other enterprise products and may have anywhere from 150 to 200 new vendor partners by the end of next year.

"We're changing our profile, and you'll continue to see us add more enterprise products," Paget says. "We do compete with a lot more distributors today, and we'll compete with just about everyone by the time we're finished."

With the expansion of line cards, resellers now have more sources for not only market-leading vendors, but emerging technologies as well.

"I'm starting to see a lot more new storage lines and emerging solutions at the distributors," says Jim Sacco, founder of Iovations, a storage-focused integrator headquartered in Burlington, Mass. Sacco says his company has been able to find cutting-edge vendors with his primary distributors, Bell Micro and Info X Technology Solutions, which has helped drive his business.

And with so many different types of distributors carrying the same vendors and technologies, solution providers can better select the source that has not only the best pricing, but superior service programs. One VAR, who wished to remain anonymous, says his business has added several new distributor partners beyond its primary partner because of all the new vendors and product segments these distributors have recently added.

Concerns exist, however, that the intense pricing pressure and competitive overlaps will hurt earnings and trigger further consolidation. Gartner analyst and research vice president Michael Haines, for example, predicts that at least 20 percent of North American distributors won't survive the rapidly changing market and will either be acquired or put out of business by 2010.

Distribution leaders believe that, for the near future, the market growth in emerging technologies and foreign regions will be enough for top distributors to feast on and fuel strong growth, even in a new competitive landscape. But it may not be long before today's hot new technologies are commoditized, creating another major shift for distribution.

"You're seeing the distribution market mature rapidly," D&H's Schwab says, "and, as a result, there's going to be a shakeout."