This year’s first quarter figures are better than expected. Vendor performances have been especially impressive, with companies like Microsoft and Intel buoyed by high-profile product launches. But as usual, every silver lining has a cloud – the retail sector is already complaining of tight margins, with rumours of these getting tighter still as vendors react to an increasingly competitive market. So what are the facts behind the figures? Are we heading for the best year ever, or was Q1 an empty promise?
According to purchasing director Julie Darrington, Realtime Distribution’s Q1 experiences reflect the overall experience of the channel. “We’ve experienced some strong volume sales in Q1, particularly with our Nvidia and ATI graphics products,” she explains. “But despite this volume growth, it’s still a very tough market for distribution, with margins – and therefore profits – being cut ever tighter.”
VIP purchasing director Duncan McAuley argues that this is a seasonal issue.
“Sales during the first couple of months of the year are typically very strong for VIP, and this year was no exception,” he says. “Our January sales campaign, strong component sales and the launch of Windows Vista and Office 2007 boosted our Q1 sales figures significantly.”
Interactive Ideas’ market development executive Conor O’Dwyer reckons pundits are naturally cautious after Q1. “Intelligent expectations are always conservative, so exceeding them is more about the market continuing to follow the trend. The trend has been falling prices, bringing demand into the market the previously higher price kept out.”
So which are the products that fuelled Q1 growth? Says Darrington: “There are several niche areas of the market that are booming at the moment for Realtime, such as flash media, and a number of high-end gaming products including top-of-the-range PSUs. Flash products are becoming more and more popular with consumers, as their prices continue to fall and their capacities rise. Meanwhile, gamers and enthusiasts are driving the demand for high-end components such as PSUs, with the latest, high-spec graphics cards requiring specialist, high-wattage power supplies.”
“VIP had healthy sales of a broad spread of components in Q1, with graphics products doing particularly well,” says McAuley. “Vista sales and associated upgrade products, including motherboards, certainly helped to boost our figures, despite the rush on Vista not being quite as strong as analysts had predicted.”
So far, so good – but what can the channel do to maintain this momentum? O’Dwyer says we should stay focused: “The channel must continue to upgrade its technical and marketing skills to take advantage of future technological developments. Consumers and businesses demand the benefits of technology, not just the technology itself. Businesses need their technology to be customised to meet their needs. The real value is what the technology achieves.”
McAuley says we should fatten up for the summer. “It’s important that resellers do their utmost to capitalise on the seasonal changes, especially the large growth in sales during January and February, as many will need this to see them through the quieter, summer months.”
Realtime’s Darrington, meanwhile, points to specialisation: “Resellers need to identify the niche markets that are experiencing the biggest growth in sales and capitalise on them as much as possible. It’s such a tough, mature market out there. Failing to react quickly enough to these opportunities and trying to make profits purely at the volume end of the market is proving fatal for many businesses.”
Are margins likely to fall any time soon? Darrington again: “In terms of sales volumes, we’re very optimistic about the rest of 2007. But this optimism is tempered by a continued fall in margins in most areas of the market, making it a tougher sales environment overall. Supermarkets and other big-chain retailers are an ever-growing threat to small indies as they drive down prices at the lower end.”
McAuley anticipates a good, but not record-breaking year. “2007 started well, with strong sales in the first quarter, but this has now started to drop off significantly for the summer, which is always a quiet period for IT sales. Because of this, 2007 is unlikely to be the best year ever, although a strong end-of-year boom could change that.”
Interactive Ideas’ O’Dwyer reckons the quest for short-term volume sales could be detrimental to long-term profits. “We should be looking out for vendors cannibalising their own market for short-term profits. Consumers are very quickly educated. Apple Computer and iTunes is an example – they set the bar at 99 cents for a single song download and an album for $9.99. Consumers’ price expectations quickly followed suit.”
And the future? “I’d expect steady growth in the market, with more and more retailers coming back to the distribution channel after having their fingers burnt by dealing direct with manufacturers,” says Darrington. McAuley adds: “The distribution market is continuing to get tougher. There is still money to be made, but resellers need to really work hard to differentiate themselves and find new ways to make margin to stay profitable. It’s becoming an increasingly competitive marketplace.”