PC resellers' profit margins seen declining

Profit margins of computer resellers in the region are declining, despite the strong and consistent growth in the local market for computers and upgrades. 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 three per cent on branded computers," says Rohit Bachani, marketing department, Soft Magic Systems LLC, which is 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, an increasing amount of resellers have been moving away from the low profit business of branded computers to the more lucrative market of local assembly, say industry sources.

"We assemble computers and have our own brand that gives us at least a 10 per cent 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, say sources. "I always keep a margin of eight to 10 per cent and this is because of the quality of the products that I sell," said Mazen Al Sa'ad, general manager, Wahab Technical Supplies, a Dubai-based computer reseller.

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 eight to nine 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," said 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, 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 Dh4,000," said Al Sa'ad.

Additional operating expenses come from after sales and customer follow up, leading resellers to try to minimise their interactions within the channel and limit their relationships to a few distributors.

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," said 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," said 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."