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A fierce competitor

Redington over the past decade has manoeuvred its way into a position of great strength in the otherwise fiercely competitive distribution market. The distributor’s growth has come from perhaps a blend of pragmatism as well as the heart to seek and nurture new markets for growth. Its success in key African markets is an interesting case in point as to illustrate what essential roles distributors of merit really essay. While companies of lesser zeal may settle for moving boxes to established markets with obviously far lesser challenges, Redington perhaps understood the value of expanding beyond the chartered territories early on.  Years later, that remains one of the key tenets that the distributor holds dear.

Raj Shankar, Director of Redington Gulf and a company board member has been steering the operations at a strategic level for quite a few years now.  He is aware that broadline distribution is slowing down in markets where go to market models are well entrenched. Add to it the recessionary impact as well as the falling ASP across product categories, the plot becomes further challenging.  He believes, that the company will continue to look at new market expansions to seek growth while expanding new brands in the volume portfolio only marginally adds to the value proposition.

He says, “We are into IT distribution and non-IT businesses and also do support services. We straddle between Middle East and Africa. In Africa, we address the English speaking parts as well as some parts of N. Africa.  We address Middle East except for countries like Jordan, Lebanon etc.”

He adds, “In broadline distribution, it becomes challenging to continue the same growth rate since we have reached a certain size in the market and with leadership for many of the brands. Largely, the growth in broadline distribution should come from new market expansion. The addition of new brands may not be so crucial but will help us further complete the portfolio and perhaps add some more interest for the channel.”

Redington through its various business units addresses the retail segment, corporate and the SMB segments. Roughly about 28-29 % of the distributor’s revenues come from retail where it addresses the large format retailers, which includes power retailers and hypermarkets.

Shankar adds, “Two thirds of their IT requirements for the brands that we represent are addressed by us. There is an intense scale of engagement. We have a strong retail sales organisation as well as a strong logistics team working in the background.”

So has the company started feeling the heat with the recession?
Shankar sounds reflective and even defiant when he quips, “Is there a slowdown, first of all?” and goes on to elaborate, “In retail, the slowdown has not been very conspicuous. In corporate, there is a slowdown in terms of execution of projects. In Small and Medium Businesses, there was an in-between an aberration but things are picking up again. December was a bit slow, January saw a small recovery, February was more flat while March has seen a stronger recovery. So in total, there has not been a conspicuous dip.”

He adds further, “What is of more concern is that there is serious price erosion happening across all product categories. When you have a multiplied effect of unit times price, there is a tendency for the revenue to be eroded when compared to year on year performance for moving the same number of units. If you are not able to make up for that shortfall in revenues somehow, there is no alternative to cutting costs because the margins on offer do not have the elasticity to expand beyond a certain extent.”

In Nigeria for instance, one of the larger IT markets in Africa where Redinton has a strong presence, the company believes consumer spending is not much affected but the cost of operations for the distributor has been affected because of the volatility of fluctuations in the currency exchange rates.
“We haven’t seen the kind of dip seen in the more developed Middle East market in a place like Nigeria. However, with the Nigerian currency becoming weaker against the dollar, exports have become interesting and imports have become dearer.”

He adds, “We are a net importer to the country and therefore we have challenges such as wherein the landed price becomes more dearer than it was before. Although it impacts cost of business, we don’t see that affecting demand unless there comes a point where we cannot absorb the rise and need to pass it on.”

He also believes that even if margins were to go up, the price erosion and introduction of categories like Netbooks only accentuate the challenges to overcome in broadline distribution and remain profitable.

He adds, “I am of the opinion that margins as a percentage will go up. The issue is when you look at it in absolute terms. Will the absolute margins hold net of price erosion, net of demand erosion is a tough one?”
The netbook has been a great idea and was initially conceived to expand markets. However, has the new low priced category fuelled the dip in profitability?

Shankar says, “For the vendor and the distributor, it has become an extremely tough one. Without sounding too contrarian, I even question if the netbook with its basic functionalities with the exception of Internet browsing should be classified as a Notebook?”
He adds, “Notebooks for instance has seen significant growth of about 77% last year. But the blended ASP of Notebooks and netbooks has seen a huge fall. The challenge for vendors  and distributors is to cover their OPEX. We are not seeing a quantum jump in Notebook sales. It has essentially cannibalised notebook sales.”

The distributor’s willingness to move into new markets comes in handy to lessen the impacts of the recession. Further the company has also executed its plans to cement its perception as perhaps the distributor that has a strong across Middle East as well as Africa in its strongest markets of Nigeria as well as Kenya. The company further hopes to consolidate through in-country initiatives.

Shankar claims, “We are driving in-country businesses. We have got a fairly significant presence in Nigeria. We have offices in Lagos, Abuja and very soon in port harcourt. We have got sales office, logistics centre. We have five stock points and two service centres with the third one coming up. We have 42 people on the ground.”

He adds, “We have a good operation in Kenya out of Nairobi as well. This addresses the whole of East Africa. We have sales office as well as logistics and service centres.  Beside the proximity of East Africa to Jebel Ali in terms of product flow also helps address the market quite comfortably.”
 

Getting cash rich
Redington was in the news in the last quarter of last year, when Investcorp took a significant stake in the company. That fuelled anticipation that the distributor with the extra cash would be pursuing some market ambitions including acquisitions. There are some plans to grow further in the value space but Shankar is unwilling to divulge details for now.

He adds, “It has been less than 3 months since Investcorp took stake in Redington in Nov 08. We have had three meetings since. Partly, this stake will help fuel Redington’s growth and also help  look at inorganic growth through acquisition opportunities. At this point of time, we have zeroed in on any inorganic opportunity.  We are pursuing one or two but nothing has consummated as such. We are hoping that during the fiscal year April-March 2009 -10, we should be able to identify one or two.”

A brief controversy
Redington briefly courted some unflattering attention when it was reported in an article by the Boston Globe about importing some HP products into the large Iranian market, still facing embargoes from the USA. The distributor which has built its reputation on years of steady and stable growth, reacted sharply and refuted that it has flouted any rules of the book.

Raj Shankar who is still peeved about it explains, “We very unwittingly got covered. Redington does not buy even 1 unit of a product of any vendor if we don’t have authorised contract. We function as an authorised distributor for specific territories and sell to approved resellers. In the case of HP, we have abided by their policy guidelines always.”
 

He adds, “The report assumed that since HP is an American company and Redington an Indian company, HP used Redington as a conduit to sell into the embargoed market without realising that certain class of products for which approvals were taken over eleven years ago were exempt from the embargo. These details were missing.  Neither Redington nor HP would have gone ahead if we did not have the relevant documents of approval. Now HP has taken the decision to halt shipments of all products to the embargoed market. The decision has been taken but it will take some time for everything to unwind.”

So there the matter should rest, hopefully. The episode would have taught the company to be more watchful of the public eye as it grows further in size and scale.

Pursuing the value business
The distributor which has over the past couple of years developed its value business unit separately from the volume model is now seeing the merits of its wisdom unravelling. Fair to add that the distributor’s value business unit is likely to get more attention strategically as it is seen as the avenue for more significant scale of growth in view of the slowdown in the volume market.

Shankar comments, “A s a company, we want to strongly take away the stigma of Redington being perceived as a broadline distribution business only. We want to do that because we certainly see opportunities to pursue in value added distribution, which requires different skill sets and different business model.”

He adds, “We have security & software,  storage and networking as silos common to the value business covering Middle East & Africa. We have competencies and skillsets on the ground in all markets that we cover.”

Redington’s focus is clearly on the value added space moving forward. The distributor is likely to add new brands in segments like software. Shankar adds that they are in different stages of discussions with these new vendors and year on year, the company is looking at an ambitious growth rate in excess of 100-150%.  It is also looking at possibilities to further strengthen the value business identity and is certainly not averse to the possibilities of looking at a spin off , although Shankar refrains from commenting as much.

He adds, “If we want to create a separate identity for the Redington VAD, it might be a good idea to spin it off but at the moment, there are no such thoughts and while the value business continues as a separate business unit with a separate team, office and structure, the business is still leveraging the Redington brand name. To a large extent, it has helped us. At a given pint of time, we might look at it. There could also be more attractive options than merely spinning it off as a separate company.

In the meantime, the company will be making new investments such as opening new demo centres which further add to its credibility in the value business model. In a time, when recession is a much discussed concern of most business talk, the distributor wants to defy the odds and consolidate further. And by the looks of its past record, the distributor looks capable of executing its plans to the tee, recession or not.

 
 
 

Redington remains on course for consolidation with strong plans of growth into the value business and new market expansions

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