The channel has watched with mounting interest as events at CHS Electronics have unfolded over recent weeks. The calling in of a £17 million loan by Deutsche Financial Services to CHS was, in effect, the final straw.
What followed was a domino effect of spectacular proportions, as each subsidiary under the CHS umbrella in the UK toppled one by one. The CHS Electronics ledger was sold to Northamber, Computacenter stepped in for Metrologie, and there has been a UK MBO at Karma UK.
This episode could provide a significant boost in the fortunes of CHS's competitors. One large player leaving the market will almost certainly provide opportunities to increase business levels elsewhere, and considering the company's drawn-out demise, this has been apparent for months.
In the end, it came down to the fact that CHS just did not add enough value. In January, Jan Lawford, former commercial director at CHS, prophetically said: "Unless you're very specialised, you're going to have serious problems."
Sharing the spoils
Ingram Micro, Ideal Hardware, Computer 2000 and Datrontech are all lining up to claim their share of the spoils. Franchises, resellers with orders to fulfill and skilled sales and technical staff are all up for grabs.
In the short term, the failure of CHS presents an opportunity for distributors to secure a brighter future. They can increase margins across the board on the basis that it would assist in ensuring the future of distribution and, therefore, the support and infrastructure of the channel. With intense competition and wafer-thin margins, the failure of one of the UK's largest distributors would seem to justify the timing of such a move.
Unfortunately, this is unlikely to happen. The competitive pressures of distribution would mean such a move could, at best, only be short lived - if one could ever be agreed. Additionally, it must be remembered that during CHS's last few months, it was trading on a very restricted basis. The slack in the channel had already been pounced on by the competition by the time CHS fell into receivership.
The domino effect
As a result, one key issue presents itself. With any large failure there are knock-on effects: there will probably be further smaller failures as a direct result of CHS's demise. When a player with 4000 customers and sales of £140 million in the first half of 1999 is removed from the equation, finance available via credit to the chalen will certainly be put under a great strain.
Credit is the financial lifeblood of the channel, and having access to interest and cost-free finance is the most effective exponent in fuelling growth. Following a succession of failures in the channel in 1999, the views on credit and risk from vendors and credit insurers are going to be vital to the future of many.
Of CHS's customers, the ones that stand to lose the most are the mid-sized resellers who, no doubt, already have substantial facilities elsewhere in distribution and little headroom to spare during the last quarter of the year. Many of these are not geared towards significant cash purchases, certainly not to the point of replacing a significant line at short notice.
As a result, some may find their ability to compete will be hampered unless this issue is addressed. If this is ignored, we can expect further polarisation of the channel and some sound, well-respected businesses looking at what could be a bleak future.
Reducing the risk
Paradoxically, viewing this issue from a credit insurance point of view, the best way to reduce the risk of business failure may be to increase capacity and exposure, thereby allowing companies to trade at their optimum levels. A bit risky certainly, but the alternatives are limited.
The willingness to fill the void is there, and product supply levels can be maintained. But if credit facilities are not managed and controlled carefully, the result may cause irreparable damage to the entire channel.
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