Since the humble beginnings of the distribution channel in South Africa, one of the first aspirations of any major distributor has been to achieve the “magical” R1-billion revenue mark.

And this year will see COREX Distribution reach that landmark, and look to exceed it in coming years, as CEO Mark Lu embarks on a strategy for the company based on adding more value to its core distribution business.

“In 2019, we’re looking to break the R1-billion revenue barrier,” Lu reveals. “But size nowadays doesn’t really matter; what counts is profit. When we started COREX in 2003, we realised we couldn’t be the size of some of our competitors like Pinnacle and Mustek – the gap was too big to catch up. So from day one our strategy was to be a value distributor.

“But to hit R1-billion revenue making good profit is still a great achievement,” he adds. “We have a very strong, sound and profitable company.”

Lu says that much of the success of COREX can be attributed to a single vendor, or sole distribution, strategy – something which has become the norm again in recent times among both vendors and distributors.

“But even with R1-billion revenue, we are still a smaller player compared to a Pinnacle, for example, that is doing R10-billion,” he says. “It is for that very reason that we have concentrated on being a specialist distributor, today specialising in components, network connectivity and cloud services.

“This is part of my strategy going forward,” he says.

Components have always been at the heart of COREX’s business and Lu says it will continue to thrive in this sector as other distributors fall by the wayside.

“In components distribution we are probably in the number one or number two position in South Africa,” he explains. “Many of the more traditional components distributors are dropping out of the market, they don’t want to be involved anymore, but for anyone to claim that they are ‘the only components distributor left in the country’ is naïve. A couple of kids with enough financial backing could enter the components market tomorrow – the barriers to entry are extremely low – and they could sign up 10 to 20 component vendors very easily.

“Smaller components distributors are like mushrooms and we should never delude ourselves that we can be the only one in the market.”

Competition from all and sundry is one of the reasons that COREX has adopted a very simple strategy when it comes to components. It selects only Tier One brands, and ensures that it maintains at least a 25% market share with these brands.

“We have always been associated with Tier One brands and have always felt we needed to hold significant market share to justify our relationships with them,” Lu says. “So our strategy is to achieve at least 25% market share with any particular brand – and if we can’t do that, then we’ll cut the brand from our offerings. We, as well as our Tier One vendors, want significant dominance in the market.”

But this dominance can also sometimes lead to confusion. In recent years, COREX has become renowned among gamers buying components to build their specialist gaming rigs. And while Lu appreciates the praise and support from the gaming sector, he says COREX’s product offerings have much wider scope.

“Components have been our legacy business since 2003,” Lu continues. “But a lot of people in the market started to view COREX as a company focused solely on gaming. That was never our intention or our value proposition, despite the success we’ve had in gaming.

“The perception was wrong and I think we have rectified it,” he adds. “We still believe that good, strong market share brings profit and makes the business sustainable, because that is the nature of the components business. You have to have a massive reseller base and you can’t restrict yourself to one market like gaming.

“Even if some people say we’re moving into a recessionary period in IT, the very nature of components can sustain a company,” Lu says. “When an economy is down, people look to extend the life of their machines for as long as possible and that is where components come to the fore. It is a very resilient market. Like the PC will never die, components will never die either.

“I was once quoted as saying that I could make a living out of components,” he quips. “And I think I still hold that trophy.”

A veteran of more than two decades in distribution, Lu feels that many current distributors are making fundamental mistakes as they look to cut costs to combat flailing local economic conditions. This is one of the reasons, he adds, that many are discarding the components business in favour of Tier One products from major multinationals.

“It’s the nature of the beast,” he says. “To make the same margin on the sale of 3 000 PCs, you arguably have to sell 300 000 processors, for example.

“But when you try to be everything to everyone it is a textbook mistake, because you can’t be. How many players have we seen make this mistake? And when the economy turns bad, the first thing they say is: Let’s cut costs. So they cut their delivery fleet or, even worse, outsource it; or they cut the number of technicians they have. How can you call yourself a distribution company when you have no delivery fleet, no technical staff?

“If you want to be a value-add distributor you have to own the whole value chain,” he says. “When you start giving pieces of it away, that value chain you have built up over years, it has to affect your business. In distribution, the customer comes first. When you cut your technical service and your delivery fleet then you compromise customer service – it’s going to drop terribly.

“And the customer is the only reason we survive,” he says. “They are the ones who pay our salaries.”

Lu says that the phenomenal growth of some distributors also leads to errors – and a classic Catch 22.

“When you become a multi-billion rand company, comparisons are made and expectations are raised, so you have to chase growth for the sake of growth,” he explains. “So revenue goes up, but gross profit is down – you start slipping to single-digit GP. Again, it’s a textbook mistake a lot of companies make: they grow, but they don’t grow with profit. And the less profit you make, the more you cut costs – and the more you are cut off from your customer with no fleet and no technicians. How can you then call yourself a value-added distributor?

“In my opinion, how some distributors have responded to the current economic downturn is wrong,” he says. “You can’t add value if you don’t have a value chain.”

So what of COREX’s value chain? Lu says the company is, in fact rapidly expanding its value chain as it embarks on the next phase of its evolution. Apart from plans to double the number of vehicles in its delivery fleet over the next 12 months, the company is making aggressive strides into new, emerging market sectors which will see a huge increase it its technical staff.

“We’re expanding our fleet left and right, and we’re expanding our technical capacity left and right,” Lu explains.

“Since 2012, COREX has successfully incubated two business divisions to become independent companies – Partnertech Africa and Cloud 9 Holdings. With components, this is a new chapter for COREX as we move into more specialised areas.

“To be a specialist network distributor, you need to have the capabilities to help ISPs to configure the network backbone and infrastructure – you need substantial technical expertise to service this client base,” he says. “The client base is completely different from the components side of the business; so is the technical expertise.”

Having identified wireless ISPs (WISPs) as a huge potential market, Lu says that over the past few years COREX has built up a reputation as a network specialist in this field.

“There are between 500 and 600 WISPs in rural areas and townships in South Africa today, so it is a business that is almost guaranteed success,” Lu says. “Even in markets like the US there is huge potential for wireless networking. COREX is fast becoming a distributor of choice in this area and we’re doing really well because, once again, we’ve identified and secured the Tier One brands in this market. And, once again, we are adding more to our value chain as we build up our resources in this sector.

“Our holistic approach in offering server, storage, networking, wireless, surveillance and infrastructure products has helped us gain massive support from our channel partners which, couple with our investment in our technical capabilities, has enabled us to cement our leadership in the connectivity market,” he says. “I am really quite proud that COREX is now also recognised in the channel as a network specialist company.”

The third leg of COREX’s new strategy revolves around Cloud 9 and cloud computing, an area that almost all distributors have become involved in and which many struggle to monetise.

Lu says it is a long-term investment.

“No-one is really making money from the cloud – it’s a long-term investment,” he says. “All software is becoming cloud-based and I think we are all still very clueless. No-one seems to know how to monetise the cloud; it is another domain we have to humbly learn and prepare ourselves for.

“Our approach to the cloud services business has been both prudent and pragmatic,” Lu says. “We noticed a lot of our distribution peers were making huge investments in cloud, but were not seeing any meaningful financial return. So from day one, we decided that whatever we do in this arena it has to be relevant to our core business – we don’t like to play in any area beyond our capabilities.

“We spotted a very important trend in hardware services – Managed Service Providers – so we aggressively signed up a number of exclusive distribution rights on cloud-based services tools for MSPs, cybersecurity, backup software and even hardware repairs,” Lu continues. “We have also leverage our reseller network to get the maximum number of devices connected to our services.

“This is a new challenge with new domain knowledge and it will take time to grow,” he adds. “But I am quietly confident, boosted by the overwhelming support of our reseller base so far, that it is going to be another successful venture for the company.”

So is diversification, which many established distributors are now investigating and implementing, the key to future success?

“I don’t really like the word ‘diversification’,” Lu says. “Instead, I believe in transformation and the effort you have to put in to learn and grow your knowledge within a new domain. Adding new products and services to your existing business portfolio can be defined as expansion, but is far from real diversification – unless you are building or acquiring a new team with different skills and knowledge to execute your new business ventures.”

And further new business ventures could well be on the cards, although Lu would not be drawn on the question.

“A lot of people ask me about the vacant land in front of our current offices,” he hints. “Let’s just say there could be a few more acquisitions on the cards in the future, so we might have to construct an additional building.”

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