Cutthroat competition cuts customer care

The increasing cost of operations, combined with declining prices due to technology advancements and customer price resistance is putting pressure on computer resellers to decrease prices, which is deeply affecting their profitability. "We make a maximum margin of 3% on branded computers," says Rohit Bachani from the marketing department at Soft Magic Systems LLC, a Dubai-based computer reseller. As they try to regain profitability, resellers are shifting from branded products to local assembly and reducing after sales support and stock levels, which affects the end-user experience, and the market as a whole. As the alert is sounded both from the channel and from end-users, vendors, distributors and resellers are looking for solutions.

In recent months, more and more resellers have been moving away from the low profit business of branded computers to the more lucrative market of local assembly. "We assemble computers and have our own brand that gives us at least a 10% margin, which is not applicable to branded machines," said Bachani. Although this boosts the components channel and hikes profits for resellers; it also affects the quality of the products and the after sales support that are delivered to the consumer. Vendors and distributors are trying to curb this problem by supplying competitive branded products to the channel. Recently, Tech Data and HP announced a multi-million dollar deal to supply more than 2000 laptop computers with specs and prices to compete with the "no brand" notebooks. Similar deals in the channel could steer prices down, ensuring higher margins for resellers and at the same time, giving customers better service and quality. "Cheap products make you sell to people, and the turn your back on them," said Eng. Mazen Al Sa'ad, General Manager of Wahab Technical Supplies, a Dubai-based computer reseller.

"Resellers who have adopted this system sell more and make better profits than us. They offer the lowest pricing because their cost is lower and when the customer finds lower prices he won't come to us". High quality PC components and branded computers achieve greater profit margins for resellers. "I always keep a margin of 8-10% and this is because of the quality of the products that I sell," added Al Sa'ad.

High operating expenses and reduced margins are also leading resellers to focus on increasing sales rather than providing service. On the service side, resellers refrain from providing customers with value added services especially when these require relatively high levels of investment. "We sell 8 to 9 systems a day and we offer full technical support. But these are cash and carry because the margins do not allow us to do on-site installations," commented Bachani.

The result is worse customer support and greater end-user frustration, which represents a concern for distributors: "A large share of our business is still components based, but whilst we will continue to support these sales the reseller must make more investment in service and support or adopt the branded model where these requirements are shared by the vendor," said Eliot Shepherd, marketing director at Tech Data.

Although resellers are aware of the need to secure end-user satisfaction, many of them are citing high operating costs to justify the lack of support. "Rent in Dubai is high, and other expenses such as telephone bills and transportation are major burdens; even the mobile: my monthly bill is not less than 4,000 DHS," added Al Sa'ad. Additional operating expenses come from after sales and customer follow up, leading resellers to try to minimize their interactions within the channel and limit their relationships to a few distributors. "The main advantage that we have in our relationship with distributors is that when we face problems with certain computers, we don't have to go through many records to identify which computer should go back to which distributor. We can therefore decrease the number of people working on following up on these issues," added Al Sa'ad.

Some distributors are taking the resellers' costs into consideration and trying to come up with alternatives to increase profitability for their channel. For example, Tech Data has introduced many new policies in the past few months to support resellers in their business. "The latest of these initiatives was the introduction in July of a web-based pricing model is to provide our partners with a cost effective and fast access to information, thus limiting their lengthy negotiation and information gathering by phone, fax or mail," says Shepherd. "Our second aim is to limit our own costs and those of resellers. By implementing this system online, we cut down on telephone, fax expenses, and free our sales staff and that of our resellers to concentrate on other issues. The market reaction has been very positive."

Certain resellers also try to cut costs by reducing the size of their orders. "If the market needs 50 pieces of a certain product we order 30 as a way to protect ourselves against global price changes. But if the demand is high, the next client who comes and can't find what he needs may go to someone else," said Al Sa'ad. This means lost business for resellers and could ultimately lead to higher market prices because of supply shortages. "As distributors, we really act as the reseller's risk-free warehouse," comments Tech Data's Shepherd. "We have setup our warehouses to offer the fastest and most cost efficient delivery possible. From our hub in Bahrain, we deliver in 24 hours to Bahrain, Kuwait and Qatar, and from our Jebel Ali warehouse, we make three to four trips a day to resellers in Dubai and next day to the rest of the Emirates and Oman. This reduces stocking requirements and therefore risk."

Reseller profitability is a growing concern for the market as a whole: cutthroat competition and razor-thin margins mean a worse deal for everyone in the long run. The margin squeeze has resulted not only in frustration for the channel, which is trying to remain profitable by concentrating only on volume sales, but also in limited support and rudimentary services to end users. Vendors, distributors and resellers are trying to address this issue. It is up to resellers to keep their expenses down, but it is up to the whole industry to create and stick to policies that can stimulate resellers to provide services and deals that do not increase expenses and provide higher margins.
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