The prospects for the future for computer distributors in Europe were aptly summed up by Merisel Inc chief executive Mike Pickett during his presentation at the EuroChannels 93 conference here recently: To survive the changes in Europe, distributors must get big, get niche, or get OUT. Pickett minced no words about an industry that is in a constant state of flux and often seems, simply, chaotic. The reality of the situation for distributors, however, is simple. The continued shrinking of profit margins on a wide variety of products means distributors must be able to sell ever-increasing volumes cost-efficiently or they must find other, more profitable ways to make money. In the meantime, the same profit-margin pressures are creating great inconsistencies in pricing policy within distribution channels. As Vaughan Thomas from Coopers & Lybrand in the UK noted as he introduced a roundtable discussion on pan-European distribution: I was talking to one of the biggest distributors in Hong Kong the other day and he said his gross margins on hardware are running at about 2%.

Crazy moves

Since Asia is often ahead of us with such trends, I thought you might be interested to see what may lie ahead. Bernard Vergnes, president of Microsoft Europe, cited the Software Publishers Association’s sobering estimate of a 28% decline in average revenue per unit, from $267 in 1991 to $191 in 1992. I expect that to continue to drop. Of course I’d like to see pricing stay where it is, but there have been some crazy moves made lately. For example, you can now buy QuattroPro for 495 French francs not dollars, but francs. With prices like that, the publisher doesn’t make any money, much less the distributor, Vergnes said. Although no data is readily available on the size of the distribution industry in Europe, one can begin to get an idea by looking at the sales of the top three. Ingram Micro, headquartered in Santa Ana, California, reported worldwide 1992 revenues of $3,000m. Merisel, based in El Segundo, California, reported 1992 revenues of $2,200m and says analysts expect it to do between $2,900m to $3,000m in 1993. Europe accounts for 18% of its total revenue, or $396m, Pickett said. Computer 2000 AG, which is based in Munich and operates only in Europe, achieved 1992 revenues of $1,100m and anticipates 1993 sales of $1,600m to $1,700m, said Computer 2000 AG’s co-president Steve DeWindt. The conference sessions made it clear that the biggest distributors are tirelessly streamlining and refining their cost structures in order to stay on top. DeWindt says distributors in the 1990s will handle only delivery, credit and logistics, but they will do it very, very efficiently. All three of the biggest distributors – Ingram Micro, Merisel and Computer 2000 favour a hub and spoke structure for their warehousing and shipping activity. That structure features a few large, centrally located warehouses and a few smaller, satellite facilities.

By Marsha Johnston

We’re all looking to optimise the physical number of shipping facilities. We will be in between 13 and 20 countries by the turn of the century, but we won’t have 13 to 20 warehouses. We think seven will be the right number, says John Winkelhaus, senior vice-president of Ingram Micro Europe. Ingram is test operating its 90,000 square foot warehouse in Ronq, near Lille, in northern France, which will serve all of Europe, supplying other warehouses and resellers. Merisel has just signed a contract to build a 225,000 square foot warehouse in southeast Holland, which should provide next-day service for 75% of its sales, except for southern Europe, Scandinavia and northern England, Pickett said. Ingram also has warehouses in the UK, Italy and Germany, the last of which will be enlarged next year, Winkelhaus said. It will add warehouses in Scandinavia and on the Iberian peninsula, where Winkelhaus expects to be established by 1995. Merisel, too, has warehouses in each of its five markets (UK, France, Germany, Austria and Switzerland) and, Pickett says, We will be creating a hub-and-spoke

structure. Once that structure and its supporting computer system are in place, says Pickett, we can enter a new market every 60 to 90 days by either buying a small distributor or value-added reseller and turning it into a sales, service and support centre. Computer 2000, which today has 20 warehouses including one in Milan, is studying how to cut back on that number, but no decisions have been taken, DeWindt said. Computer 2000 is also implementing a new information system next year, based on SAP AG’s R/3 application, beginning in Germany. We have acquired so many companies, but none of their computer systems are big enough to handle everything, he said. Distributors must also have the means to support the dynamics of individual markets. In Italy, for example, the reseller often specifies which shipper he wants to use, says Ingram’s Winkelhaus. As a result, we support close to 400 different shippers; it’s just the dynamics of the market. The pinch on cash flow in the European distribution market is already proving DeWindt’s contention that the distributor’s ability to provide credit is of growing importance. Thomas Reeves, senior vice-president for Merisel Europe, Brentford, Middlesex, says his company provides more credit in Europe than in the US, which is a problem in our business, with the number of bankruptcies we’re seeing. At a session on price-setting, it became apparent that bankruptcies among European distributors may be aggravated by the pricing chaos in the channels. Linwood Chip Lacy, co-chairman and chief executive of Ingram Micro, said, European distributors seem regularly to take dumber pricing decisions, in that they are only 2% to 3% above their net costs, which are below their operating costs! There just isn’t good price discipline here. In theory, if the dollar moves up, they should remark their inventory, which is admittedly very cumbersome to do, Lacy said. In response, Hussein Khalil, an executive from Sony Peripheral Products in Germany, said the recessionary pressures on small companies, in particular, to maintain their cash flow were causing them to set prices below operating costs. Says Mark Mulford, managing director of Frontline/Computer 2000 in Basingstoke, UK, agreed that crazy deals are being done by everyone. Later on, he added, including Ingram in the UK!

Gotten muddled

What’s happening with distributors and resellers in Europe is that they’ve gotten muddled up on what’s a fair return on box shifting or on value-added, Mulford explained. A lot of the anarchy we see is that people haven’t gotten a handle on that, so until that’s been sorted out, we won’t have good pricing in the channels. So does pressure on margins mean an end to the small distributor? John Breslin, director, Intel Corp, based in the UK, said, I expect that for commodity products we will probably have just a few pan-European guys in a few years, but that doesn’t mean there won’t be room for small distributors who know their market and their local corporate users. In short said Steve Maier, European global accounts manager at Apple Europe, The people who will suffer most in this environment are those who don’t know what they want to do, vendors included.