Why Distributors Are the Future of Distribution

In a recent article by industry analyst at Forrester, Jay McBain posed the question: Are distributors the future of distribution? For the team here at Vation Ventures, the answer is a resounding yes. Distributors are not going anywhere. They have a unique opportunity to continue to grow and evolve to meet customers’ demands now and well into the future.

At Vation Ventures, our goal is to provide innovation a path to success. Our work consists of orchestrating ecosystems while coordinating a wide range of variables and relationships to create positive outcomes for our community. We create conduits from the money invested by venture capital companies and private equity firms to the true IT innovators, the original equipment manufacturers (OEMs), and emerging technology companies. 

This holistic overview of the technology ecosystem gives us a unique viewpoint due to our combination of experience, expertise, and consistent and impactful interaction with VC firms to emerging technology vendors providing a detailed understanding of the go-to-market requirements of all types of technologies.

Distributors are positioned at the confluence of vendors on the one side and partners on the other; they are in an ideal position to orchestrate the many moving parts and relationships involved in getting technology to market to the satisfaction of the end customer. Further, distributors have demonstrated time and time again that they can and will adapt to market changes, and this time is no different.

It's no secret that the technology industry is experiencing a tremendous increase in the rate of change across the board. Any successful company, including distributors, will have to learn to adapt to these changes on an ongoing basis. Failure to adapt is a primary reason why companies in any industry disappear. 

After talking with our network of upstream and downstream stakeholders to better authenticate our vision of the future of distribution with a wide variety of viewpoints, we have a better sense of where distribution has come from and where it's likely to go in the future.

So, why are distributors the future of distribution? We believe there are several reasons:

1. Distributors have a history of adapting to fluctuations in technology and markets.
2. The market is betting on distribution to meet the challenge.
3. Many of distribution's core capabilities and value propositions are relevant in the age of digital transformation.
4. The barriers to entry are immense when building a successful, global distribution organization.

We'll break down each of these a little further while also addressing some of the critical challenges and headwinds facing distributors.

Let's Start With A Brief History of the Evolution of Distribution

As an industry, distribution has a long and storied history of adapting to change. Distribution has been a go-to-market partner for technology for over 80 years, beginning in 1935 with used radios and radio parts. We see three key inflection points and eras of distribution: Component and Systems Distribution, Solutions Distribution, and Digital Distribution. Throughout this history, there is a core competency of agility to meeting market needs.

We worked with the Global Technology Distribution Council (GTDC)on the Tech Distribution 2025 report and suggest you give it a read as it breaks down the backgrounds of distribution and where the industry is going in even more detail.

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Here is a quick breakdown of the three eras of distribution:

1930-1990:  Component and Systems Distribution

The first era of distribution solved the upstream need for inventory and logistics management at scale. This extended era witnessed many types of technologies utilizing the emerging go-to-market model of distribution. 

1990-2018:  The Solutions Era

The second era of distribution built upon the first phase's operational excellence by creating cross-vendor solutions distribution. The era augmented the first era's volume ability by building a value-based business model with technical excellence.

2018 – 2025:  Digital Distribution

The next era of distribution focuses on the digital realm. As the world digitizes everything, the technology necessary to support the end user’s transformation will include investments in emerging technologies of Artificial Intelligence/Machine Learning, Cloud/XaaS, IoT, and Security/Analytics for everything. 

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Follow The Money

While there are several differences in strategy and goals between VCs and private equity firms, neither is interested in catching falling knives and wasting money. Instead, they focus on finding upside in their investments. For these investors, they're looking for the prospect of significant value expansion.

Recently, there has been a lot of market activity surrounding distributors—namely, the acquisition of both Tech Data and Ingram Micro by private equity firms, followed by the blockbuster merger of Tech Data and Synnex. When it comes to investing, VCs looking for startups have particular goals compared to the private equity firms that primarily invest in mature, highly developed companies. While VCs are primarily interested in getting in on the ground floor and helping to propel these businesses to great heights, companies investing in more well-established distributors aim to improve profitability by streamlining operations and reducing costs. Given the different stages in the company lifecycle, the multiples will be different when comparing a hot IPO-potential startup with a 100x growth potential versus that highly mature company with legs for continuous and steady expansion. 

This search for upside in the world of distribution is exemplified in Apollo's recent Tech Data acquisition.

"Tech Data is a global, market-leading company with an excellent management team and significant opportunities for expansion," said Matt Nord, Co-Lead Partner of Private Equity at Apollo. "As a result of this acquisition and the resources we can bring to bear, Rich and the Tech Data team will have the strategic and financial flexibility to invest in new technology, expand services and pursue transactions that we believe will drive long-term value creation."

Apollo Private Equity Partner Robert Kalsow-Ramos added, "Tech Data benefits from exceptional global capabilities, a strong financial position, and a values-driven corporate culture, all within an industry that continues to experience strong secular growth."

When considering Ingram Micro's acquisition last year by Platinum Equity for $7.2B, there's clearly an interest and belief in distributors' growth potential.

"Ingram Micro is an industry leader, one of the largest companies in the world, and will be a cornerstone investment in our portfolio," said Platinum Equity Chairman and CEO Tom Gores. "We have the resources and the experience to help the company pursue an aggressive agenda of growth and transformation."

Again, these companies are not throwing around billions of dollars investing in or purchasing companies they believe lack growth potential. Clearly, there is a hunger to take the incredible infrastructure built by distributors and empower them with the additional resources to pursue that aggressive growth agenda.

The Grand Canyon Was Built Over Centuries

As the market changes and distributors reform their value to meet the new needs of emerging technology vendors and the distributor’s downstream partner community, let's not undervalue the immense capabilities, connections, and processes put in place by distributors over the last century. 

The key pillars of value that remain relevant moving forward include:

• Sales acceleration – Through partner recruitment and enablement, cloud marketplaces, and solution ecosystem development, distributors help new vendors and legacy vendors extend their market coverage, enable flexible consumption models, and optimize their marketing investment.
  
• Financial leverage – Among other things, distributors provide partner credit facilities and flexible financing programs, and a variable cost model that accelerates vendor sales, lowers SG&A and improves cash flow.
  
• Operating at scale – In a connected world where technology is pervasive and markets are interdependent, distributors help vendors build global scale. They have worked across geographic boundaries for decades and play a critical role in ensuring compliance with tax laws, dealing with import/export regulations, and enabling local currency transactions and conversions. Additionally, as the technology and IT architectures transform, services will remain key to ensuring a good business outcome and customer experience. Services like integration, deployment, support, and even lifecycle services and asset disposition will be critical in the Digital Distribution Era.

A recent GTDC survey revealed new services like virtual warehouse cloud solutions ranked highest in importance among other distribution core competencies that continue to evolve. According to survey respondents, many long-standing distributor core competencies will remain critical, including integration, logistics, inventory management, and asset lifecycle services, for example. 

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As many ISVs who have tried to go direct have found, they simply cannot navigate the complexity at the scale that a distributor can without a significant increase in SG&A and a significant decrease in sales and marketing focus.

One area where distributors have been investing in for years that will pay dividends in the "digital era" is cloud-based "XaaS marketplaces." Global, regional, and specialist distributors are fully integrating into the digital world through their continued investments in building cloud marketplaces, creating billing infrastructures, and establishing API integrations with thousands of ISVs. At the same time, they continue to provide traditional distribution services, such as currency management, local and international compliance, etc. This combination of new and old competencies allows distributors to help Series A and B startups build global scale more effectively.

Global distributors heavily invest in their digital marketplaces, including Ingram Micro's CloudBlue, Tech Data's StreamOne, Synnex's Stellr, ArrowSphere, etc. We spoke with Arrow about the maturity of their marketplace. 

"ArrowSphere removes complexity in the IT buying process by connecting leading technologies across the globe with thousands of channel partners and millions of end-users through an extensive cloud catalog and consumption management capabilities," said Mark Taylor, president of Arrow's enterprise computing solutions.

That said, there is an immense amount of room for distributors to evolve their digital marketplaces to ensure they effectively compete with some of the newer marketplace distribution offerings like AppDirect and Mirakl. However, existing distributors still have an edge. It is much simpler to create a modern marketplace on top of existing global infrastructure than building that infrastructure needed behind a modern marketplace.

When you look at the barriers to entry and the costs and time associated with building a global distribution company, there are serious headwinds that upcoming companies entering the marketplace will encounter. Many of the behind-the-scenes value-added benefits that are at the core of distribution are the reasons why distributors will continue to have future growth opportunities. When you think about the economies of scale, geographical barriers, vertical and horizontal integrations, customer switching costs, legal barriers, and capital costs needed to compete in the distribution world, there are many barriers. While this should never be a reason for established companies to become complacent, it does provide existing distributors a critical advantage.

It's Not All Sunshine and Roses For Distributors

As we fast forward to the future and the Digital Distribution Era, there are challenges for sure. As McBain pointed out in his article, the technology universe continues to decentralize, and ecosystems and communities will be front and center in getting technology to market. This will require distributors to sharpen and accelerate their value as a solutions aggregator, enabling and orchestrating a range of products and services that generate a successful business outcome for a customer.

Distributors Need to Focus On Building an Ecosystem

Distributors need to be more aggressive in orchestrating the various relationships, capabilities, and enablement activities to get solutions to market. They need to be the "connector in chief," strengthening the linkages between emerging technology companies upstream and evolving MSP, VAR, and SI partner types downstream. Large OEMs with longstanding relationships with distributors should also aggressively leverage and expand their full line cards with the right products and services that their customers are looking for as the technology space continues to change.

That's why we believe so much in platforms and ecosystems like our Vation Innovation Platform, which can help to provide the space necessary for connection, exploration, and cooperation within the ecosystem. There needs to be a greater communication level across all the players in the space; otherwise, things just move too slow.

Distributors Need to Embrace the Notion of Becoming a Platform for Distribution

For distributors, the keyword is orchestration. Upstream innovators need distributors to compile and distribute products downstream. Downstream partners rely on distributors to aggregate products and services from upstream vendors to effectively provide the business solutions required by modern companies. There is a much greater room for distributors to embrace and adopt the notion of becoming platforms themselves in how they interact with the upstream and downstream and tackle business problems rather than just technology problems. We'd give the upstream orchestration for distributors a B+ and the downstream execution a C-. Clearly, there's room for improvement on both fronts.

Michelle Graff, Global Channel Chief at HashiCorp, says she sees distribution moving from a transactional engine to a solution enabler.

"HashiCorp sees distribution evolving from offering transactional vendor-based efficiencies towards an orchestration layer or platform that supports customers in a post cloud era to consume on-demand multi-cloud and multi-ISV solutions, driving business outcomes rather than technology outcomes."

Distributors Need to Accelerate Downstream Deployment

Time is indeed money, and wasted time means wasted cash. It's far too easy for individual vendors to remain siloed within a distribution company, limiting their ability to work cooperatively to provide necessary options downstream. Instead, every business unit should have partners within the organization to build upon each other when adopting new technology. This leads to a more significant value for customers as distributors as a platform can reach across those once-siloed pieces and bring together innovative solutions and products that continue to fit their customers' needs best.

Conclusion

While there are always challenges associated with technology inflection points, distribution has consistently demonstrated the ability to assess the market need and reconfigure its capabilities to meet both upstream vendors' and downstream partners' needs. Distribution has been continually evolving since those early days on "radio row," and it will continue to evolve as new technology and new business practices continue to change the ways that companies connect with their customers. In short, distributors truly are the future of distribution.