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THIS WEEK: TWICE asks its panel of distributors to tackle the issue of how the industry can respond to declining margins on PC goods. Participating in the discussion are Kris Rogers, senior VP and general manager of U.S. Distribution at Merisel; Terry Bazzone, VP and general manager, Strategic Business Development at Tech Data; Dave Nalley, VP, Ingram Micro; and Mark Greenwald, marketing director for D&H Distributing.

TWICE: Margins on computer hardware products are among the lowest in any industry, which has made it tough for both manufacturers and retailers to remain profitable. What can manufacturers do to improve margins on these types of products?

Nalley: I believe both the manufacturer and the reseller need to work together in an attempt to hold profit margins and maintain the value proposition for the products in the channel.

Traditionally, manufacturers have used a variety of methods in an attempt to maintain margin. Some have been more successful than others, including limited distribution, a MAP strategy, additional feature sets or bundling, unique SKUs by channel (i.e. warehouse clubs versus Internet versus retailer), and better end-of-life management of products (prohibiting excess inventory in the channel).

Greenwald: The margin problem is very complex because there are so many influences that affect pricing. Depending on how products are sold into the channel, it can create margin chaos and erosion. Gray-market goods, end-of-quarter pressures, over-distribution, end-of-cycle product, shelf space buying, etc., all contribute to the margin pressures experienced by retailers as well as by distributors and manufacturers.

Addressing these concerns can help alleviate some of the problems. It is a gutsy move to make the decision to correct an ongoing margin situation. As long as manufacturers and distributors are willing to continue to provide the dollar incentives to their customers, the cycle will continue.

Bazzone: While margins on hardware are lower, every hardware unit sold creates the opportunity for higher-margin sales of peripherals, software and services. With solution merchandising and cross selling, retailers can improve their margin ratios on an overall basis.

Rogers: To make hardware more profitable, manufacturers should start by limiting distribution of products so there is not a plethora of resellers who sell only on price.

Certainly, for products that the manufacturer believes require some level of value from the reseller channel, only resellers who are providing true value should qualify to resell. Manufacturers should also not allow resellers to advertise unprofitable prices because it discourages the “right resellers” from pushing the product.

Finally, vendors should find ways to allow top resellers to make a profit on commodity hardware, through service opportunities, add-on sales and new launches.

TWICE: Can retailers effectively convince consumers to step up to better products with higher margins or induce add-on sales to improve their profitability?

Rogers: Retailers can effectively convince consumers to step up to better products with higher margins or induce add-on sales to improve their profitability. In order to do so, retailers should create “stores within a store” and staff them with knowledgeable salespeople.

In addition, they should use technology to “sell” products through kiosks, demo days and demo units, as well as merchandise add-on items and have them in stock.

Bazzone: Absolutely. Adding value through service and support continues to be one of the best opportunities for retailers to compete at a profitable level. Many customers shopping for higher-ticket items are looking for the best value, not necessarily the lowest price.

Retailers can attract customers to better products and higher margins in several ways:

  • Financially motivate well-trained sales associates to sell accessories. Many vendors work with in-store demo companies or contact vendors individually for training resources. Many retailers are finding that partnering with distributors provides the negotiating power of a high-volume company.
    In some cases the retailer may have to pay for outsourced reseller service. However, if they go through their distributor, they will get better pricing due to volume. Most importantly, a trained sales force that understands their products will naturally increase sales.
  • A simple solution is to create cross-merchandising with signage. A variety of in-store promotions with strategically placed signs listing peripherals and software to meet a number of customer needs will assist in developing high-margin up-sell opportunities.
  • Merchandising initiatives such as packaging complete systems targeted toward a specific customer – home, Internet, home office or small business – allow customers to see how everything works together. It also gives retailers the option to merchandise high-margin products with basic systems and provides seamless up-sale opportunities.
  • Partner with distributors to offer build-to-order systems. Distribution partners can configure systems in a very short time period, and in some cases, work directly out of the manufacturer’s facilities. Systems can be shipped directly to the customer’s door with the retailer’s logo.
  • Offer a wide selection of financing options. End-user leasing programs sourced through distributors can give retailers flexible, affordable options for their corporate customers.
  • Use Internet commerce to enhance value by adding thousands of SKUs without adding to store inventory. Web sites with custom-configuration tools give customers the option of “building” their own systems.

Retailers looking to capitalize on the fast growing market for application software support services can rely on distributors.

Other support initiatives – such as including fee-based, in-home installation and coupons for free beginner classes – can deliver value to customers and profits to retailers.

Nalley: I certainly believe that the goal of retailers today is to promote and sell the more profitable product lines available to them. Their ability to do that is based on proper merchandising, advertising and informing customers of the availability of these products.

TWICE: Are Internet sales strictly driven by price, and have they made it more difficult for traditional retailers to sell goods profitably?

Bazzone: Convenience and price are the primary drivers of Internet sales. While the sales volume in most categories, except books, is not currently large enough to dramatically impact retail, indications are that it will be in the near future.

Traditional retailers can offer customers the best of both worlds by using a web site as an extension of the store environment. By hosting a web site that combines the convenience of online shopping with the added value of a brick-and-mortar storefront, retailers can maintain market share and continue to create a service-oriented customer relationship.

Rogers: Today, the answer is yes. However, e-tailers do not provide any customer support, they take days or weeks to deliver inventory, and you can not touch or feel the product.

There is no value to the consumer here, so retailers need to continue to support products where there is a value opportunity – where knowledge is important, where demos are important, where product comparisons are important, etc. As e-tailers evolve they are likely to sell more on service and less on price because buyers will come to demand it.

Nalley: I do not believe that Internet sales are strictly driven by price, and I certainly do believe there are a variety of Internet e-commerce strategies in the marketplace that would have pricing strategies that would be unique to their model.

I want to stress the importance of understanding the difference between a pricing model that is driven by an extremely discounted price versus a customer-acquisition strategy that may use lower prices as a component or variable.

Greenwald: The Internet is another piece in the puzzle, adding another competitive pricing pressure that now supports additional margin pressures and creating the perception in the end user’s mind that the retailer’s normal margin profitability may not be fair to the customer, even though it may very well be.

Retailers will have to change their sales tactics if they want to convince customers that there is value added for the price. Salespeople who are better trained and service will be the keys to inducing add-on sales for better profitability.

The shopping experience is changing, and the end user is demanding that the retailer provide substantial reasons for the customer to step up and pay higher prices. It can be done, but it will take time for the cycle at retail to change.