By Lou Slawetsky (lou@industryanalysts.com), CEO, Industry Analysts, Inc.

I‘ve been known to address what I  continue to think is one of the more critical issues in the distribution of office technologies – the complexity of that distribution network. Some would say I’m always addressing the issue. I guess, in some form that’s true, since, in my opinion, it’s at the heart of the independent office equipment dealer survival strategies.

Well, here it comes again.  I’m armed now with a new set of data from our most recent edition of our annual Imaging System Dealer Distribution Strategies Report. Unfortunately, I can’t address all of the intertwining and, more often than not, competing channels in this short space. Dealers are faced with competition from distributors, agents, VARs, retail outlets, intra-territorial dealer competition, Internet sales, direct mail and, of course,   vendor owned branches. I’ve often said that, if we tried to design the most convoluted distribution system possible, it would look something like what we have now.

For now, let’s examine the unintended consequences of direct branch distribution. We all know the obvious reasons most vendors have chosen this strategy. We know, because the vendors have told us (over and over again) that:

• Company branches are used to block a competitive attempt to acquire a dealer.
• Company branches help control competition.
• Company branches capture the margins from hardware a supply sales that would otherwise accrue to the dealer.
• Company branches capture all of the service revenue and margins that would otherwise accrue to the dealer.

All well and good, but what of those unintended consequences? Here are just a few.

• Multi-Branding – dealers generally find that they simply cannot compete with their vendor’s pricing for hardware, service and supplies, especially when that pricing is heavily discounted. It’s more than a bit difficult to compete with the same brand and model when there is significant price differential. The answer? Compete with a different brand, making a direct comparison more difficult.Here’s the problem for the vendor. We are not dealing with an elastic market.  If a dealer sells 100 units per month of a single brand and then takes on a second brand, they generally sell the same 100 units (perhaps a few more). So the unit volume to the primary vendor declines dramatically.  Has anyone at the vendor level done the math on the financial gains vs. losses resulting from this scenario? I haven’t heard. Our research shows that the average dealer facing no competition from a vendor branch sells 1.8 brands.  But, those dealers facing competition from their primary vendors sell 2.6 brands! Again, at what cost to the vendor?
• Gross Margins – It comes as no surprise that hardware gross margins are lower for those dealers competing with their primary vendor. How much lower? Dealers not competing earn 31.4% while those facing competition earn only 27.6% – less than the actual cost of doing business! Not exactly a sound strategy for vendors to build a healthy dealer network.
• Turnover – One last shot, and it’s a sleeper. When sales reps compete unsuccessfully with their vendors they get frustrated. When they get frustrated, they quit. When they quit, it takes 9 – 12 months to bring the empty territory to quota performance, not to mention the extra costs of interviewing, training, employment agency fees, etc.How significant is the problem? When dealers compete, the turnover rate for sales reps is 21.7%. When they don’t, turnover is only 13.5%. Vendors thrive when their dealer sales reps are productive.  Increased turnover has a huge negative impact on that productivity.

These are just three of the unintended consequences resulting from vendors opening branches to compete with their dealers. I understand the benefits to the vendor that accrue from this strategy. Do the vendors understand the risks? Do they? Really?

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