Security systems in the channel: What will tomorrow’s distribution model resemble?

May 14, 2013
Traditional delivery model has evolved from box shifting to a more sophisticated value-add service

The traditional distribution model for physical security products across the globe was often
referred to as "box shifting," it offered products off the shelf but with few value-add services. This is model is now rapidly morphing into a sophisticated system delivering value add services that clients now demand.

There are 5 main reasons why the change in the structure of the physical security industry is causing the distribution model to change, according to a recent report on the security market.

1. Manufacturers, have over time, extended the range of their products, which now have a rich layer of features and capabilities. The supply chain must be able to understand and identify where their clients can benefit from them.

2. A strong brand and channel infrastructure is now providing reach and efficiencies. Marketing across the globe can now be achieved by small companies through the Internet at lower cost and this has increased the number of suppliers and solutions.

3. The pace of innovation is speeding up. Edge based storage and advances in analytics are creating more and more applications for IP video.

4. Open standards are starting to take a hold. This will open up competition even further and will reduce the barrier to smaller companies. Real competition will then kill off weaker companies and consolidation will come about through open market forces.

5. Increasing demand for full integration across all aspects of physical security solutions and now the business enterprise.

The channels of distribution in the physical security industry are changing to take into account these factors, particularly in the video surveillance sector, where IP network products have taken a major leap forward in the last three years requiring new skills for designing and installing systems. In the vast majority of cases the manufacturers don’t want to be directly involved in providing these services to the end user, therefore, they require the distribution chain to take on these responsibilities.

This scenario has required new and existing suppliers to brand themselves under the broad classification of distributors, but broken down into resellers, system integrators and solution providers. Normally they buy directly from the manufacturer, while some have a strong partner relationship to one or a few brands.

The term distributor is still used by larger companies from the traditional supply chain and new players from the information communication technology (ICT) sector business. But these companies now offer to supply all the components necessary to deliver a solution to installers. Many of these companies will also operate straight online sales. Finally, a few manufactures normally having specialist products selling to a few verticals have opted to sell direct to the end user and install themselves.

Although one size obviously doesn’t fit all, for those manufacturers that want to realize large-scale global penetration, they need to operate through all the distributor channels and not confuse the market by selling direct.

Within the last five years there have been major changes across the developed markets of the world regarding how products reach the end user. Findings from recent Memoori research shows that the value of product passing through the distributor channel has fallen off drastically from over 50 percent in 2006 to around 30 percent in 2011.

The reality is that distributors have lost market share as direct sales to resellers, system Integrators and solution providers have increased approximately 50 percent since 2011. Installing system integrators have also been joined by specialists from the IT sector, partnering with the manufacturers of IP Network products to offer packaged solutions.

While these trends appear to be most prevalent in the developed markets of Europe and North America, similar trends are now being seen in Asia, in both the video and now the access control markets. Getting IP network products to market is going to be a challenge for distributors and one they will have to meet because it will eventually take 100 percent of the business.This evolution is not so startling when taken over a six-year period, but the consequences of it is now being felt with the recent exposure of a weakened distributor chain and the demise of European distribution giant Norbain.

Distributors that have become more IP savvy as evidenced by such progressive global distributors the AES Group and Digitalcom in Thailand and Tri-Ed in the U.S. These companies have been able to maintain their share by taking on more system integrator duties - especially with regard to system and network design work. Some distributors, however, have taken up the challenge and have opted to beef up their eCommerce operations, which may well work provided they can achieve scale on this low margin business.

There is a place for the distributor but not in the traditional role, at least not for long. Knowledge is paramount, especially in a market increasingly connected through integrated building and security environments. Bringing together packages that meet these needs and the IT services that they require is now necessary across the distribution network.

Alliance and partnership is playing a major role in winning market share in the security business as manufacturers extend the range and depth of these relationships with other motivated manufacturers and system integrators. More formal arrangements of data sharing within the distribution chain has resulted in many new solutions for the end users that go well beyond improving security. In the last 12 months, we have identified more alliance arrangements between manufacturer’s distributors and system integrators who are working together to provide a solution for a particular vertical market, while sharing the development and promotion costs.

Some 2012 IFSEC exhibitors showed a number of case studies demonstrating how business intelligence can be gained through IP video surveillance systems and their technology partners. Axis and Panasonic had displays showing how, in particular vertical markets, they had used video streams to provide business intelligence. In both case the concept was instigated by the camera manufacturer as a means to increase sales.

These particular video vendors also worked with other suppliers of surveillance products and access control systems to produce a seamless solution that fitted the needs of the end user. In addition, they have worked with system installers and distributors not only to orchestrate the marketing sales strategies, but to also identify new applications where they can add value for the end user. The trends show that alliances have progressed from simple technology partnerships among vendor to aligning the needs of the user among all the involved solution providers. The results benefit the end user allowing him to realize real benefits over and above improving the security performance.

So if you want to compete with the top camera manufacturers, you not only need to match their performance, but also drive innovation by providing solutions that deliver more value add and a quicker return on the investment for the buyer. The distribution network has a vital role in making this happen.

The shape of the security market is changing. Security systems specified for new projects are increasingly delivered as fully integrated systems, whereas in the past they were supplied as separate and discreet systems. This has changed the balance within the routes to market with more business going through resellers, system integrators and solution providers.

We believe that as the physical security manufacturing business further consolidates the distribution network will be forced to follow suit. We predict that over the next five years we shall see fewer but larger distributors playing an enhanced role. The market share of the resellers, system integrators and solution providers will increase as systems become more sophisticated and integrate with the business enterprise. Good products sell well but they sell better when distributed through the right channel.

About the author: Jim McHale founded Memoori in 2008, a consultancy company based in London that provides market research, business intelligence and financial deal tracking services to clients across several industries. Prior to Memoori, Jim worked as a Business Analyst for i&i Proplan researching international building controls markets. He has several years experience researching and analysing b2b industrial markets, providing assistance to client’s strategic marketing and acquisition decisions.

About the Author

Jim McHale | Managing Director, Memoori

Jim McHale is managing director of Stockholm-based market research firm Memoori.