Europe’s IT Distribution Channels Face Another Difficult Year, Says IDC
PARIS – SEPTEMBER 26, 2002 – IDC's annual overview of IT distribution in Western Europe warns that 2002 will mark another difficult year for IT distribution channels. The decline in hardware spending is being exacerbated by weak business demand and the prospect of a major upheaval following the HP/Compaq fusion. In 2001, IDC found that the indirect distribution channels experienced negative growth as the structural decline in hardware spending coincided with fears of a global recession. Not only did the PC market register negative growth but the long-term prospects for hardware infrastructure in general appeared particularly bleak. Given the reseller channel's inability to rapidly diversify its business model, IDC expects direct sales to increase from 54.1% of total IT spending in 2001 to 55.4% by 2005.
According to IDC's latest channels report Overview of IT Distribution Channels in Western Europe 2001-2006 Beyond the Box, the indirect channels handled almost 46% of the $282.5 billion spending on computer hardware, software, and services in Western Europe in 2001. "While the long-term business prospects indicate renewed market growth, the gravity of the present economic context means indirect channels are facing an unprecedented challenge", says Brain Pearce, Senior Analyst for IDC's European Distribution Channels program. "The next several months are likely to be lean ones and we predict that they will not only weaken the volume products channels but also harm specialized players in the midrange server and storage markets".
IT spending in Western Europe is expected to grow by 6.2% in 2002. Stronger growth from 2003 onwards is expected to yield a CAGR of 9.1% for the forecast period 2001-2006 and the IT market recovery should have a positive impact on the distribution channels. IDC is forecasting a CAGR of 8.4% for the indirect channels between 2001 and 2006. Although the demand for infrastructure products will revive, the bulk of this channel growth will be attributable to value-added activities based on software solutions and services. IT vendors and their channel partners will have to take account of this when drafting future business plans.
IDC forecasts that hardware's share of IT spending will fall from 35% in 2001 to 27% in 2006. The PC share will decrease from 15% to less than 10% during this period. Faced with a shrinking hardware market, the volume products channel seems bound for a major shake out, with even some of the major IT providers being forced to scale down or abandon their reseller activities in order to cut losses.
Several players in the volume channels remain incapable of shifting towards higher-margin technical products or a more service-oriented role. Broadline distributors are a case in point. IDC estimates that distributor channel activity stagnated in 2001 at around $57.5 billion and that this channel will continue to experience weak growth of only 2.5% in 2002. Despite the prospects of a stronger recovery in 2003, IDC expects a CAGR of only 4.9% during the forecast period. This implies that, failing a radical change in demand conditions and vendor strategy, the distributor channel's share of total IT spending will steadily decline from around 20.4% in 2001 to 16.8% by 2006.
Resellers are looking to solution sales and services provision to counterbalance the current market saturation and economic malaise. However, very few of Europe's corporate account resellers derive more than 15% of their turnover from services and the majority are financially incapable of investing in the transition to a new value-adding business model. These are the companies that are likely to find themselves left out in the cold when HP/Compaq get around to rationalising their reseller networks. Brian Pearce continues, "The systems integrators and VARs are likely to be the big winners in the years ahead, provided they can agree on a modus vivendi with the professional services activities of the top IT vendors. They already have a head start in terms of customer relations and technical skills. The main challenge for them is to continue to adapt quickly to changing customer needs in the face of fluctuating vendor policy".
The study Overview of IT Distribution Channels in Western Europe, 2001-2006 Beyond the Box (IDC #D01J, July 2002) provides a quantitative overview of IT distribution in Western Europe as a whole and for each of the 16 countries within the region. It analyzes four types of vendor direct channel (outbound sales force, mail order and tele-sales, vendor outlets, and vendor internet) and six types of indirect channel (systems integrators, VARs, corporate account/major resellers, PC and office equipment dealers, mass merchandisers and retail, third-party mail order and Internet). This study is available to purchase from your local IDC office or from http://www.idc.com.
IDC is the foremost global market intelligence and advisory firm helping clients gain insight into technology and ebusiness trends to develop sound business strategies. Using a combination of rigorous primary research, in-depth analysis, and client interaction, IDC forecasts worldwide markets and trends to deliver dependable service and client advice. More than 700 analysts in 43 countries provide global research with local content. IDC's customers comprise the world's leading IT suppliers, IT organizations, ebusiness companies, and the financial community. Additional information can be found at www.idc.com.
IDC is a division of IDG, the world's leading IT media, research and exposition company.