VARs go for gold online

According to market analysts Jupiter Research, the UK online hardware and software market is currently valued at £160m, and projected spending is estimated to reach £640m by 2003. That is a market of which online resellers intend to take full advantage.

WStore is one such company doing business with the traditional channel. It started trading in the UK last September and achieved turnover of $11m (£6.9m) for 1999. WStore is aimed at the business-to-business sector and its policy is to match any VAR price in the UK. If a product is cheaper elsewhere, WStore claims it will offer a refund of double the difference.

Small traditional resellers are taking their customers to WStore's website because the online company sells products at a cheaper rate than the distributors they traditionally buy from.

Chris Jones, analyst at market researcher IDC, said he is seeing more alliances between manufacturers and online resellers, and also web portals and VARs, because a reseller can offer more brand choice over a vendor-only website. "I'm sure it will win them deals, because if service is an issue, the company can say, 'here is a choice of VARs to do the work'," he said.

Tony Price, WStore's managing director, describes this arrangement as transaction management. "Some resellers don't have the time to source product and discuss pricing or available credit with distributors. At WStore, half the margin made on that and every subsequent order goes to the reseller," he said.

But Patrick Hudgell, managing director at Black Box, a VAR and networking and cabling catalogue company, said the message his company was getting from customers was that they needed consistency. "If you have too many people dealing in a sale, it could get confusing. Customers want long-term relationships with the same people."

Steve Bennett, chairman at online reseller Jungle.com, said: "When it comes to online shopping, e-retailers with a global brand will need a localised structure to be successful. In most cases, shoppers want to buy from local markets to reduce delivery charges and times, and to avoid currency and confusion charges. This will become more relevant as search engines offer localised services and smaller, specialised businesses use the internet as their main business model."

Black Box's Hudgell said: "While it is understandable that some companies are not yet ready to make the transition to fully-fledged online procurement, use of the internet as the prime source of technical support is an alarming trend."

Cutting costs
Virtual companies are light and nimble and therefore able to operate with little substance. Murray Hennessey, chief executive at Buy.com, would not comment specifically on how the online reseller can maintain its low prices, but he offered four general reasons why it could. With no overhead costs like those of high street shops, and managed on exceedingly thin margins, Buy.com's global, consolidated buying power helped keep prices cheap. Outsourcing a number of its functions also kept costs down.

For some VARs, these reasons are convincing enough for them to get into bed with online companies such as WStore.

IDC's Jones said: "Some online resellers such as Jungle.com have done well. It is one of the top four brands, while WStore has sites in half a dozen countries. But the brand building must not stop now. UK companies need to match this marketing offensive, otherwise the newer companies could take away their market share."

Mail order companies such as Dabs Direct and Action have been busy developing their own sites based on the premise that if people will buy from a catalogue, they will buy over the internet. So far that has proved to be true.

While companies such as Dixons, PC World and Tempo are increasingly taking their online brands and products to the ever-growing SME market, they are also targeting consumers.

Resellers in the bidding
Online auctioneers are also likely to make a move in this market and they should not be dismissed. Auction house eBay recently launched a business-to-business site - eBay Business Exchange - offering 60,000 products. And companies such as Letsbuyit.com, which offers consumers the chance to buy as a community, could also be adapted for SMEs.

While Buy.com fine-tuned its business model in the US and prepared to cross the Atlantic, its UK counterparts such as Jungle.com and WStore are establishing their presence. Buy.com's Hennessey said there is "room for more than one business" to do well online and off, but IDC's Jones is less optimistic about the market's ability to ultimately hold many players. In the US, the market needed to consolidate because it could not accommodate more than a handful of companies, he said.

Those that failed to survive did not have enough traffic to create a brand, such as CompUSA's Cozone.com venture, which closed last month. Jones predicted the UK market will face a shake-up, leaving behind those with ubiquitous brands. Buy.com and WStore intend to continue their marketing efforts and not abandon advertising after the initial drive.

It is inevitable that not all players will survive the challenges ahead, but as the consolidation snowball grows, VARs can take comfort in the knowledge that the new breed of online resellers may float like a butterfly, but they'll need the traditional channel to sting like a bee.