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MARGINS: For A Few Bucks More

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DQC Bureau
New Update

Few years ago, in the earlier nineties, IT resellers seemed to be at their peak period. A market that was growing exponentially, technology was being demystified and a fat margin of 50-60 percent on every IT product was the talk of the town. This lured many businessmen to get into reselling of IT products. Today when margins have come down to a meager five percent gross, the businessmen are still happy. But, what attributes to the declining margins are multinational companies dumping goods in the Indian market, the taxation structure, evasion of octroi, fluctuation in the international market, etc.

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Even the gray market has become a reason for all those good businessmen to crib. Gray market operators manage to evade octroi and taxes and sell goods at a lower price than the official prices. This has forced the legitimate businessmen to bring down their margin to remain in the business.

Survival of the fittest 

"Despite the low margins, the large turnover volumes are luring people in this business," says Vinod Bhimjyani of Rappel Technologies adding, "if this continues, small players will end-up making losses, and one day will have to close shop." Is this an indication to a shakeout in the near future?

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May be! Hitesh Modi of JD Electronics says, "By October next year a shakeout is imminent. Margins will come to less than one percent bringing down the gross profit and then huge losses and ultimately many will be thrown out of the market." 

However, Rajiv Jain, GM-Accounts, Priya Ltd, says declining margins are prevalent in every industry. But this doesn't mean it will lead to a shakeout. He says, when a new technology arrives, its remains a technology for a limited period and then it becomes a commodity till the next technology arrives. Which means you are doing business with a new set of technology. "Today more and more people can afford PCs. The business volumes continue to grow and I don't think there will be any problem getting your returns," adds

Rajiv.

Vinod of Rappel feels every company should change their modus operandi in the wake of declining margins in order to avert probable bad days. He says resellers should go in for more value addition to their products in order to make a reasonable profit. Service-based speedy disposal of goods is one way of doing it. 

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For example: if you have a stock to deliver in eight days, better ready a stock which can be delivered in two days. Bundling is another way of adding value to keep the customer coming back to you. "Warranty and after-sales services are some things which customer wouldn't mind paying more for," says

Vinod.

Selling cost-to-cost 

In a decade's time, margins have come down from 60 percent to five percent! What next? A zero percent margin? Yes! Many distributors are making money even selling cost-to-cost or even at a discount. By the end of the year there is money. Most vendors have begun to provide various schemes, wherein distributors or dealers are given incentives on the turnover they generate selling their products. 

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The so-called 'turnover incentive' varies from products-to-product and vendor-to-vendor. The incentive is announced on the condition that a predetermined quantity of the product is sold within a period. Usually, such incentive varies from two to 2.5 percent. 

Many big vendors like LG, Samsung and others are known for their turnover-based schemes. "There are only few selected distributors, who get the privilege of such schemes," says Rajiv. These schemes are not necessarily in monetary terms; sometimes it is in the form of holiday trips, cars, and so on. The period also varies from weekly to monthly to yearly sales volumes.

At the rate of two percent incentive on its turnover, the distributors sell goods on a cost-to-cost basis without even adding the profit margin. Sometimes they even sell them at a discount. Which means, they are happy with the one percent they get at the end of the deal. So, what happens to the small dealers? Are they being deprived of the benefits?

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According to Vinod, small resellers should get together and form a cartel or a syndicate to work on certain products and fix a uniform price for everyone. This will, to a large extent, help small timers to remain in the business.

But, Rajiv says, even the small resellers should be happy about the big distributors getting such incentives as they can buy from these distributors who are selling at the same cost or even at a discount of up to one percent. 

From hardware to software

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Over a period of time, most importers have become distributors for various products looking at large volumes in hardware. Some components like keyboards, cabinets, mice, multimedia kits, comparatively carry higher margin at around eight to nine percent. In LAN products the margins are need based. Essentials like motherboards, hard disks, CPU, CDROM drive, etc, have low margins of two to three percent.

Thin margins have led some dealers to sell software. Besides, software gives a very hefty margin presently. But the problem here is the high rate of piracy. But the ones who have entered the software market feel piracy is not a big problem. They are in the hope that in the next two years people will begin to realize the importance of buying legal software. 

Says Rajiv of Priya, "Awareness is already growing among customers. And in two years time there will be enough people who would want to buy legal software. This will also bring down prices considerably."

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Among the developed or customized and retail software, the margins are decent in retail software. The golden catch is in selling developed software. According to market sources, Indian software developers are doing pretty well.

Consultancy is another segment, which some resellers are eyeing in order to offset the losses they are incurring in the hardware business.

Bottom line

While big-time hardware people continue to make money either with decent margins or just with turnover incentives, it is the small timers who will have a tough time continuing in the business successfully. In Vinod's words, if proper steps are not taken to change the style of doing business, for small business there are only three options: expand, merge or cease.

Nelson Johny in Mumbai

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