Distribution
Is distribution leading both the technology industry and the general economy out of the recession doldrums?
The technology distribution sector is reporting substantial gains despite the sluggish economy. It’s a reflection of the strength of distribution and the value it brings to the channel. Here’s why: Nearly every leading technology analyst firm says IT spending peaked in 2008 just before the financial markets crashed. Even as Wall Street melted down, technology spending continued along at a relatively healthy pace through the end of the year. It wasn’t until 2009 that the entire market unraveled and IT spending plunged nearly 9 percent year over year.
While money is flowing back into technology budgets this year, analysts say IT spending will not return to pre-recession levels until 2012. The exception to this rule is distribution, which is reporting healthy – if not stellar – results. Where the rest of the economy is fretting a double-dip recession, the Global Technology Distribution Council says the level of sales through distribution in the second quarter exceeded 2008 levels.
“Businesses are clearly spending more on a broad range of IT products and solutions,” said GTDC CEO Tim Curran. “Second-quarter U.S. distribution industry sales increased steadily across many product categories that are now exceeding the peak levels achieved prior to when the downturn hit in September 2008. In Europe, June sales finished up 20 percent over the same period last year.”
It’s an amazing report considering that many of the technology vendors are being hammered by currency fluctuations, longer sales cycles and inconsistent demands. Websense CEO Gene Hodges was recently quoted worrying about a double-dip recession and European economic instability as part of the reason behind his company’s dampened performance. Cisco global channel chief Keith Goodwin recently told me that financial analysts are worried more about macroeconomic conditions than discrete technology segments and product potentials.
Distribution, Curran asserts, is the standout. GTDC tracks most of the major IT broadline and value-add distributors ranging from Ingram Micro and Tech Data to D&H Distributing. The total volume tracked by GTDC exceeds $100 billion annually. And Curran is gleeful when he reports that hardware sales through distribution in the second quarter grew 20 percent over the same period in 2009. While everyone is talking about cloud computing, Curran reports double-digit increases in wired networking, desktop computers and storage. His conclusion: The tech industry is rebounding and leading the rest of the economy.
That’s one explanation, but it doesn’t jive with the rest of the indicators. More likely at play are factors endemic to GTDC and, generally speaking, distribution. A significant portion of distribution’s growth is coming from “prosumer” electronics, or consumer-grade electronics deployed in business environments. This includes everything from flat-screen TVs to iPads. Many distributors expanded into consumer electronics to expand their business and mitigate the effects of the recession.
GTDC has added several new distributors to its ranks, including SMB powerhouse D&H Distributing. The organization says it normalizes its tracking data to account for membership growth. However, some skeptics say the expanded membership is likely influencing the numbers. But the most likely explanation for why GTDCs numbers are so good is the increased number of vendors pushing their products through a two-tier channel. In the past two years, GTDC reports seeing 200 to 250 vendors going to the channel and market through distribution. This is the real story.
As the economy spiraled, IT vendors – particularly small ones – raced to cut costs and shore up their revenue streams. Many turned to distribution for help. Distribution long ago shook off its core value proposition of “pick, pack and ship.” It still does that basic warehouse and logistics service, but over the last decade has added channel recruitment, training, field support, marketing and certification services. Many vendors have turned over their entire channel programs to distribution to manage. Earlier this year, WAN optimization specialist Riverbed basically outsourced its channel to Avnet’s Advanced Technology subsidiary. The results have been phenomenal, as the distributor has activated more parters, expanded market reach and increased sales volumes. It’s precisely the result Riverbed was seeking.
Curran proudly notes that distribution is the most cost-effective route to market through the channel. Vendors can defray channel management, support and enablement costs by assigning it to a distributor. Does distribution work for everyone? As they say in the automotive world, mileage may vary. Going through distribution doesn’t relieve a vendor entirely of their channel management and marketing responsibilities. In fact, it often means the vendor must expend more effort in relationship management, account cultivation and channel development. Based on the GTDC numbers, is distribution a leading indicator of a broader economic recovery? Not likely. What these numbers do reflect is the valuable role distribution is playing in containing channel costs and aiding vendors in reaching new partners and markets.
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Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships. He’s also the executive director of the Channel Vanguard Council, a thought leadership group and advisory committee to CompTIA on channel issues. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at lmwalsh@the2112group.com.
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