IT distribution seeks solution
As is the case with many other businesses, the economic crisis has led managers of the largest IT and electronics distribution companies to reconsider their strategies. The biggest companies in the sector outlined to The Diplomat – Bucharest the main problems the market is currently facing and described what they have done to survive the difficult economic times.
The local IT distribution market is barely managing to grow towards the levels posted in the peak years of 2007 and 2008. Per capita consumption has decreased greatly and customers are being more careful about what they buy. They are not going to excess, are very price conscious and buy only what they need. Of course, this change in customer behavior affects the supply chain from retailer to importer,” Dan Stefanescu, Gersim Impex general manager, told The Diplomat – Bucharest.
According to him, the problems that arose in 2011 were not much different from those of previous years, though they have been exacerbated by the crisis in the euro area with its implications for Romanian companies: restricted access to credit and increasing associated costs have caused worse difficulties in the field than in the past.
“But I would not call them problems. This is part of our lives, so we must adapt and recalibrate our business depending on market conditions,” said Stefanescu.
His opinion is shared by other IT distributors in the market. Monica Aluas, general manager at Asbis Romania, said that 2011 was a similar year to 2009 and 2010. She does not expect miracles in 2012. The major problems have been financing the business and the exchange rate evolution.
“Although we did not encounter major problems, 2011 was not a year without challenges. One of the most difficult problems last year, as opposed to previous years, was financing,” added Gabriela Gheorghe Beschea, general manager of ELKOTech Romania.
Her view is that after a slight increase last year, the evolution in 2012 is uncertain with likely moderate market growth of 8-10 percent.
“It depends very much on the economic context. Those who could not adapt and have no financial power to do so will lose the fight. Only the strong companies will survive,” predicted Stefanescu.
Although the recent economic climate has not been a favorable one, most large IT distribution companies were able to cope and searched for new areas for their business.
Prospecting new markets
For example, Asesoft Distribution, the largest IT distribution company in Romania, controlled by businessman Iulian Stanciu, was rebranded as Network One Distribution, so the new name would sound better on foreign markets and end the confusion in the local market with the company Asesoft International.
The distribution company has estimated that it has a local market share of 20 percent and expects turnover of EUR 200 million in 2012.
It plans to begin deliveries in the countries of the former Yugoslavia, and currently exports products to Moldova, Bulgaria and Hungary.
“It all started with the idea of having our own identity. We are the largest distribution company in Romania. We want to expand on regional markets and we want our name to have resonance in the markets where are present,” said Stanciu of the rebranding decision.
He controls the group that includes One Distribution Network (NOD), eMag and Flanco. “In Romania we were often confused with the Asesoft group of Sebastian Ghita. Here people never say Asesoft International or Asesoft Distribution. The first is a systems integrator and Asesoft Distribution is an IT distribution company. There was ambiguity, among customers, suppliers, and even banks, so we needed our own identity,” added Razvan Ziemba, general manager of Network One Distribution.
The company, which distributes several categories of products, from laptops and desktops to appliances and a range of items under its own brands, had a turnover of EUR 145 million in 2010, which rose to EUR 180 million in 2011.
Its target for this year is EUR 200 million, of which EUR 13-14 million will come from foreign markets.
The IT distributor delivers products abroad in Moldova, Bulgaria and Hungary, and the list could soon expand to include Serbia, Croatia, Macedonia and Montenegro.
In countries where it supplies now, orders are shipped within 24 hours. If the new destinations from the former Yugoslavia are added to the portfolio, the time taken will be 48 hours in those new countries.
Aiming for the Adriatic
“In the near future Omnilogic will rely on expansion in the Adriatic area, as it is in advanced talks with one of the major IT manufacturers worldwide. We chose that area because it’s closer culturally and logistically. We work in Moldova, and in Serbia and Croatia we hope to access pre-accession funds. We hope that business in other countries will be profitable. Ultimately, our gross margin is in line with the market. The problem is that the market has dropped dramatically,” Gabriel Marin, founder and general manager of Omnilogic, told The Diplomat – Bucharest.
Last year, Omnilogic had a turnover of EUR 100 million. For 2012, the founder wants to be able to make a very accurate estimate of the market, to know exactly what and where he can expand and to see the segments with growth potential, so he can restructure the company to make it flexible enough for the market.
“Our business dropped about 35 percent last year. I think we decreased less than the market. Over the last two years since this violent compression of the market started, Omnilogic has posted an average of 60 percent of the level of the last five years. The good news is that our financial structure, which performed a little better, allowed us to absorb some of the shock. When other firms have gone bankrupt or became insolvent we have taken market share from them,” said Marin.
The only good thing that he has noticed lately is that outsourcing and cloud computing have begun to increase in recent times.
“People no longer have money to invest. Their approach is: ‘if I don’t have money for IT products, I’ll buy services’. That was the only segment that has grown,” says Marin, adding that the enterprise and Telco segments declined and the public sector, which supported the company in 2010, was absent.
Drive towards innovation
RHS-Tornado Company, which is controlled by businessman Dragos Popescu, another leading distributor in the local market, managed to initiate and implement several projects, some of which were completed in 2011, while others will continue through 2012 and 2013.
“The most common challenge during the business development was the ‘pressure’ and the dynamic of the market, which made us continuously innovate, making us the best provider of business intelligence and services for our partners in Romania,” Dragos Popescu told The Diplomat – Bucharest, adding that the most important partnership in 2011 was signed with Cisco.
The move is part of RHS’s strategy to become the number one distributor in Romania for premium business solutions and to address all market segments with customized solutions, constantly offering partners the opportunity to increase their business organically along with RHS.
In addition, RHS is currently the dealer with the widest range of products and brands, with a rapidly growing portfolio. In the last three months it has partnered with Allied Telesis, Cisco and Zyxel.
Among the best known brands distributed by RHS are Asus, Toshiba, HP, Microsoft, Cisco, IBM, Canon and Samsung.
“In addition, after more than two years of investment in advanced information systems, logistics and process automation, RHS Company launched in November 2011 Like It, a partnership program that integrates an online business solution with an offline one, a concept based solely on a network of partners with national coverage,” said Popescu.
In 2011, RHS-Tornado had a turnover of approximately EUR 85 million and over 150 employees and this year it aims to double turnover by both developing its partner network and the Like It brand.
Chasing brands and new products
“Last year we achieved the budget proposed at the beginning of the year. At the group level, for the first three quarters, revenue growth was 15 percent. Asbis Romania is among the top ten Asbis offices by revenue and we’re pretty well positioned. We accomplished our intended turnover in 2011, and local growth was slightly higher than that of the group,” said Monica Aluas, general manager of Asbis Romania.
According to her, in 2012 the market will grow by 10-12 percent, but the company is aiming for a growth of 20-25 percent which will come mainly from strengthening its product portfolio.
“We are always looking for new brands and products to add to the portfolio. I think the results of recent years have brought Asbis Romania to the attention of many manufacturers,” said Aluas.
She added, “For us it’s a profitable business because we have our own two brands, Canyon and Prestigio, which provide us with presence on the shelves and ensure profit. It is a profitable business if you are close to the head of the production chain.”
Aluas thinks that in Romania, purchasing decisions cannot be delayed much longer, following postponements in 2009, 2010 and 2011. Products depreciate morally, and no business can survive without IT. That is what distributors are relying on when they say that the market will grow this year.
“I think we will reach the 2007 level in 2015, but we must take the European and global context into account. We will increase by small steps every year. We must take into account the macroeconomic and political scene and we should keep in mind that if the purchasing power of individuals or SMEs does not increase sharply, growth will be tempered,” predicted the GM.
Signing more partnerships
“In 2012 we will continue to develop the solutions department along with adding new A-Brands producers to the portfolio and we will focus on strengthening the network of partners. We will also continue to invest in training and certification courses,” said Gabriela Gheorghe Beschea, general manager of IT distribution firm ELKOTech.
Last year, the company signed partnerships with major solutions manufacturers such as Aimetis, Athens, QNAP and LSI, enabling it to offer customers alternative solutions and projects tailored to their needs.
ELKOTech’s newest partner is Fujitsu, and through this agreement the firm distributes notebooks and desktop PCs, graphics stations, servers, storage solutions and IT peripherals.
The company has direct partnerships with major manufacturers such as Acer, Allied Telesis, Axis Communications, D-Link, Fujitsu, Gigabyte, Hitachi, Intel, Kingston, OCZ Technology, Seagate and Western Digital.
“With some of them we have a common history of over 10 years, while others were added over time. Every year we add new brands to the portfolio, but not purely to boost the numbers. Instead we have sought to have a balanced mix of products and to meet market and consumers demands,” said Beschea.
The firm has a diversified portfolio ranging from desktop components to products for consumers and notebooks, plus products and brands that help the company to provide complete solutions in complex projects developed with integrators.
The dedicated consumer products segment margins have decreased greatly. But at the same time, users and the corporate environment have become increasingly aware of the advantages of using technology from notebooks to edge servers.
The IT market is constantly changing, say players, and distribution depends on new user requirements.
“The engine of growth remains the SME segment, which is in need of technology and where players increasingly understand that a technical solution will bring them business benefits. In the consumer products category, we are seeing a massive growth in the ultrabook and tablet PC segments. Last year, at the first ultrabooks launch, we sold out of the first batch immediately. This year we expect that trend to continue,” added Beschea.
ELKOTech Romania currently has 38 employees and sells products through a network of partners that includes over 1,000 companies nationwide, a network of resellers, local computer manufacturers, system integrators, retailers and e-tailers.
“The crisis did not take us by surprise because we took into account the economic signals from the very beginning and we organized in time,” added the ELKOTech chief.
She says that the firm established good management strategies, cut costs and continued to invest in people. Importantly, she kept the team intact, especially people who are in key positions in the company.
“We don’t anticipate spectacular moves such as acquisitions and consolidation like in the previous years. It is difficult to estimate market growth, given the current economic climate and in an election year. We thought there would be a moderate increase in the market, this time fueled by the internal resources of the economy and not by consumption financed by easy loans, as happened in the past,” said Beschea.
Telecom distribution to go on
“Distribution is not a business like a network of kindergartens or nursing homes for example, where however many children or elderly residents you have, you get money accordingly, and you don’t have the chance to explode your sales in one go with the same structure. Those businesses have other satisfactions, but I prefer those generated by my business,” Dan Stefanescu, general manager of Gersim Impex, tells The Diplomat – Bucharest, adding that results in the distribution business can be spectacular.
The company Stefanescu manages only deals with the IT market. His business sells mobile phones, tablets, accessories and memory sticks.
Distribution makes up 85 percent, and covers GSM terminals, with only tablets and memory sticks from traditional IT.
If things don’t get worse internationally this year, and Romania sees some economic stability, Stefanescu estimates business somewhere around EUR 70-100 million, depending on the distribution agreements he signs. Last year Gersim Impex had revenues of EUR 58 million.
“The impressive aspect of our performance is the small number of employees with whom we have achieved these financial results: only 12. We have outsourced a lot of services: accounting, logistics and legal,” outlined Stefanescu.
The company was able to cope with the economic crisis by a sufficient cash flow, maximum focus, low costs, dedicated salespeople, low prices and quality product, he says. Gersim Impex is the official dealer for Samsung, LG and Alcatel. Through an unofficial channel it imports all other brands – Nokia, Apple, Motorola and Sony Ericsson – buying products from authorized dealers in other countries and distributing them in Romania.
The indisputable leaders in the GSM segment in Romania are Samsung and Nokia (which together have an 80 percent market share), while Apple figures only in the high end sector.
“Last year, our partnership with Samsung almost tripled, from EUR 20 million in 2010 to EUR 58 million in 2011,” added Stefanescu.
In 2012, he hopes to secure official distribution rights for Nokia and Huawei in Romania, in order not to be forced to buy from other countries and to benefit from manufacturer support in relations with customers.
“In terms of new customers, we don’t have news. Romania customers are disappearing, not appearing. Only the online segment is a breeding ground for new clients, clients that we are growing step by step. This is the future, and anyone who does not understand that will suffer the consequences,” added the Gersim Impex general manager.
Besides being an authorized distributor, Gersim Impex is also an importer. “It is very clear, as long as distributors do not do business in Romania, or keep their prices high, parallel imports will continue. That is what I do today at Nokia: Romanian distributors do not offer me competitive prices, which is why I use distributors in other countries,” said Stefanescu.
Gersim Impex is not present outside Romania, and has only suppliers abroad. Although the firm had intended to expand to other countries in the glory years of the industry, 2006-2008, now it is waiting for the economic crisis to pass.
“If we want to compare apples with apples, we should look at Poland, a country with double our population, but with IT-GSM sales at least five-six times higher. At individual level that means a Pole consumes on average about two-three times more than a Romanian. I do not want to make comparisons with other markets like Germany, France and the United Kingdom, as it would be inappropriate,” said Stefanescu.
The company’s objectives for the next three years are not about profit, but about market share.
“As long as we don’t lose money and we accomplish our objectives everything will be okay. By 2015 we will have over 70 percent of the GSM handset market in Romania. The market will stagnate in the next two years – perhaps with moderate increases – and from 2015 it will rise again,” predicted Stefanescu. According to him, the benefits of his business are cash flow generated, interesting work and the constant appearance of adjacent products and services so the company has to stay plugged in.
“All this counts for me when I draw the line and innovation is the key word.”
In the GSM and IT area things change every month. And only companies that keep pace with technological progress will last. “Names like Sagem, Siemens, Motorola and Panasonic are now history. Look what Apple has done with a single product: the iPhone. One (the rest are variations on the same topic),” said Stefanescu.
On the flip side, the disadvantages are inappropriate competitiveness, the reverse charge, meaning VAT is paid only by the retailer (when it is received from the end-user) and the financial instability caused by the crisis in Europe, which can drastically affect long-term projections.
Retailers hope for better times
“We are still cautious about stocks. We have developed the product range and we want to constantly optimize services,” said Violeta Luca, marketing director at Flanco, which managed to post growth last year.
The IT and electronics retail chain announced a 37.5 percent increase in sales in 2011 over 2010, to a turnover of EUR 110 million. Its average market share last year was 11 percent and its operating profit was EUR 3.5 million. According to company representatives, the last quarter of 2011 brought the best results, with the company reporting sales of EUR 48.1 million and an average market share of 13.5 percent for October to December 2011.
In 2011, Flanco opened 14 new stores, following an investment of over EUR 8.5 million (including in stock).
“The stores opened in late 2011 and those that will be launched in 2012 will be based on the concept launched by the retailer in October 2011, in the Unirea Shopping Center store. In these stores customers can see and test any technology before purchasing a product, as the products are in operation continuously,” added Luca.
Also in 2011, Flanco continued to focus on controlling retail activity, with average sales per square meter reaching EUR 3,000, up from EUR 2,500 in 2010.
The company ended 2011 with a sales area of 41,500 sqm and a total of 77 stores, of which 83 percent were in commercial galleries and 17 percent in street locations.
Last year the Flanco team was expanded from 600 employees in January to 870 employees in December. For the first quarter of this year the retailer expects business growth of 40 percent over the same period in 2011, and a turnover of EUR 140 million for the whole of 2012.
“For this year, the retailer also estimated a growth of 20 percent in the commercial area and wants to expand the team by 100 new employees, based on the number of stores opened and sales growth,” said Luca. The retailer has budgeted investments of EUR 3.5 million in the opening of new shops and facilities for 2012, having in mind the opening of five stores under the new concept.
For the entire market, Luca said 2011 saw the largest value in history. The local IT and electronics market reached about EUR 1.1 billion in 2011, a slight increase on 2010.
The best quarter for the retail IT and electronics market was Q4, which had a 35 percent share of total sales. The market posted its highest monthly sales in December, November and July.
It will maintain its growth trend in 2012, and Flanco estimates the market could reach approximately EUR 1.25 billion.
In 2012 per capita spending on IT and electronics products could increase by 5-7 percent. Prices are likely to rise by between 3 to 5 percent, according to Flanco estimates.
“I do not think the introduction of new players will have a great influence on the retail market because the per capita consumption is still very low,” said Luca.
Last year, officials of the largest online retailer, Altex, whose turnover was EUR 200 million in 2011, admitted that the IT and electronics retail market potential was still low, but that 2012 would bring an increase in consumption.
“Not until 2012 is it likely that trust, expectations and the consumer credit market will improve, making possible a return to higher business potential,” said Dan Ostahie, founder and CEO of the retail chain Altex.
He added that “large areas are areas of the future”, and that the optimum space for a shop is 2,000-3,000 sqm.
The Altex chief noted that online is becoming more important as more and more customers are turning to this environment, and the online commerce market has been posting double-digit growth in the years of crisis. Also, the number of internet users is continuously rising, and half of customers get informed online before purchasing electronics or IT products.