The IT distribution market in Russia is still not very well developed and has significant potential for further growth. The market is currently highly fragmented; the vast majority of players are small distribution companies, operating on very a limited area of their local markets. There are only a few large players on the market, they are either specialist distribution companies, like Merlion, or distribution subsidiaries or departments of large IT companies, like National Computer Corporation (NCC) or the IBS Group.

In an interview with ICT Update Russia, Mr Konstantin Sidorov, President of RRC Group, an IT distributor operating in Russia and Central and Eastern Europe, speaks about the specifics of the Russian IT distribution market and shares his views about the differences in conducting business across the region. In his opinion, the market has already started to consolidate, the bigger companies are either buying up or pushing out the smaller players.

The IT distribution market in Russia is dominated by domestic players. Short on knowledge of the Russian market, foreign distribution giants have been so far reluctant to enter Russia. However, the market is now evolving strongly. According to Mr Sidorov, large foreign companies which to date have shied away from Russia are expected to make their move in the near future.

 

Marzena Opalinska, ICT Update Russia: RRC Group has over 14 years experience in the Russian IT distribution market. How would you compare the current situation in the market with that of three or five years ago?

Konstantin Sidorov: The market has become highly developed. So far A-vendors have dominated but recently a lot of middle and relatively small manufacturers have appeared, successfully taking over the market from the leaders and developing their own niches. They have also grown much more dynamically than the leaders. What is more, over this period end-users have become much more demanding about quality, services, and warranties, for example. Another thing is that because of strong competition, the margin in the channel has decreased two-fold in the last three years.

 

K. S.: Specific to the Russian market is that there are practically no foreign distribution companies, no leading world or European players, like Ingram or Tech Data, are present. The market is much more fragmented than in other European countries: 4-5 large distributors with a turnover of more than $300m, 8-10 medium players with $100-300m turnover and a lot of small distribution companies. But a consolidation process is just around the corner. Another thing worth mentioning is that because retail companies have been growing rapidly, manufacturers are increasingly preferring to negotiate directly with them.

 

K. S.: Certainly. And more than that, the process has already started. Large distribution companies have been growing rapidly and swallowing up or pushing out from the market small players. These smaller and medium-sized companies have attempted to cater to specific niches where they can better resist the expansion of either large local competition or global players. Until now foreign companies have been looking closely at the Russian market, but haven’t taken any concrete action. In the coming three years I expect a couple of announcements relating to large purchases of local players by foreign companies.

That is why I expect the structure of the Russian IT market to look like the structure of the European IT market in many respects in 3-5 years.

 

K. S.: I would not want to divide our markets into ones with greater or lesser prospects or dynamics. We operate in 12 countries of the CIS and Europe and plan to further increase our geographic presence. At the beginning of this year we opened sales representatives in Romania and Bulgaria. I would say that each of these countries has its own traditions, habits and historical IT “heroes”.

Correspondingly, a dimension of our business in the context of companies and dynamic of our business differs from one country to another. We believe we should not use the same model and develop the same product range in all the countries; that is why last year we finished restructuring the group into three different companies. We separated three units: RRC Enterprise Networking (RRC EN) – a value added distributor of triple play, security and servers products, DiFo – a niche distributor of commodity products, and RRC Edu – a training and e-learning company. Each of the companies defines both strategic directions of development and a product portfolio in the particular countries of our operations. For example, in Slovenia RRC EN has very strong positions and DiFo is not present at all.

Regarding the share in revenue, RRC EN and DiFo are approximately equal and RRC Edu makes about 5% of the total revenues. This sales structure has not changed for a couple of years.

 

K. S.: This is a complicated question because each country has it own characteristics. East European countries of the EU have come to look more and more like the markets of “Old Europe”. There, market is the most “civilized” and the process of consolidation is either finished or drawing to a close. Also, global companies play a big role. At the same time the margin in those markets has declined to the average-European value or even lower because many companies believed they would be able to find “eldorado” in those markets.

Russia is a special country. The size of the market makes it comparable with those of the biggest European countries. As I have said there are no foreign players and the processes of consolidation have only started. Many operations are characterised by a lack of transparency, especially with regard to customs procedures. I would add high competition and a margin level that does not correspond to the risk of conducting business.

Ukraine is catching up with the Russian, though its market is smaller. Other CIS countries are less developed and are in the formation and structuring phase. Because of a shortage of competition between professional players, profitability in these countries is very high in comparison with other markets. Small countries of Eastern Europe which are not part of the EU cannot be grouped together because they are very different from each other.

 

K. S.: The Russian market is extremely dynamic. The situation with profitability can differ from quarter to quarter. For example, in 2005 the “visibility” segment (TFT monitors, TV, plasma) was the most highly developed for DiFo but at the beginning of 2006 we took the decision to close it because of the lack of prospects and profitability. That is why I would speak, not about profitability but about the sales volume dynamics in particular segments. For today the most promising and highly developed aspects of RRC are security, wireless and storage. For DiFo it is PDAs, GPS-navigators and GPS-soft.

 

K. S.: First of all our value rests in the level of technical expertise we can give to our partners. Our main and key partners are small and medium integrators, small telecom providers. These companies sometimes do not have enough skills, especially in the niches of our specialisation. And we can offer them our technical expertise, proposals for optimal equipment configuration and education support together with RRC Edu. I should also mention special credit terms and alternative financing schemes for project financing, greater flexibility than other global players, and cooperation based on specific terms comfortable for our dealers and partners. We are much more flexible than global distributors and more stable and professional than local ones. Not in vain do we call ourselves “local globals”.

 

K. S.: Our approach is simple. We work in new segments of the market, where the growth dynamics exceed those of the IT market as a whole. That is why the priority markets for us now are GPS navigation and wireless mobile devices. As for the client base, year by year big retailers and e-tailers are playing a larger role. Especially for them this year we are launching the new e-commerce system, which will allow us to raise the quality and coverage of client service, improve logistics, optimise communications processes within the company and with partners, and increase efficiency.

 

K. S.: Our main goal is to be more and more effective. We also plan to finalise the embedding of the new ERP-system and the connected CRM and e-commerce systems. Another is to increase the number of services offered to our partners and to start operating in new markets. Our plan is to increase revenue of the group by a minimum of 35%.