Distributor rides IT boom in Eastern Europe

Elko Group, one of Eastern Europe’s biggest wholesalers of computer hardware and peripherals, is riding a wave of demand for its products spurred by rapid economic growth in its nine-country region.

The company boosted sales by 41% in 2005 to reach $610 million and expects to break the $1 billion mark by 2008. At the same time, Elko Group is shifting its product mix towards higher-margin finished goods, such as laptops with built-in wireless, and away from components like processors and disk drives, where it sees slower growth.

Founded by four Latvian entrepreneurs in 1992, the company began moving into foreign markets during the 1990s. Elko Group is now the holding company for nine affiliates, in Croatia, Estonia, Latvia, Lithuania, Romania, Russia, Slovakia, Slovenia and the Ukraine.

The company distributes products including chips from Intel, hard drives from Seagate Technology and Western Digital and laptop computers from Acer. and Fujitsu-Siemens Computers GmbH. In 2005, two Swedish investment funds, Amber Trust and East Capital, took a 25.5% share of the company.

IDG News Service sat down with Jens Hartmann, Elko Group’s CEO, to discuss the rapid growth, the opportunities in the region and what it takes to run a wholesale business that crosses several borders.

IDGNS: You’ve had some very fast sales growth and will rank as the largest company by sales in Latvia in 2005. What was behind the fast growth?

Jens Hartmann (J.H.): First of all, the markets in Eastern Europe are growing a lot faster than in Western Europe so vendors are paying more attention to them. This kind of growth is not possible in Germany or the U.K., so the vendors are looking to Eastern Europe and supporting their partners there much more. Secondly, we’ve transformed our product portfolio in the last two years, more toward mobile computers and notebooks and a little bit away from components. The market for notebooks took off like a rocket last year. Thirdly, we have invested a great deal in recent years in our own IT, in warehouses, in people and management.

IDGNS: Margins are slim in IT distribution and competition is intense. One could argue that you’re simply moving products around rather than adding to their value. When someone orders 2,000 notebooks in Croatia, how do you make a profit in this business?

J.H.: I would be happy if it was 2,000 notebooks at once, but it’s more like 2,000 times one notebook to a reseller. This is our strength, that we can deliver the one computer to the outlet but still have real buying power with the vendor. We combine the demand from Croatia and from elsewhere.

IDGNS: How does your supply chain work?

J.H.: Depending on the vendor, we are ordering six to 12 weeks ahead. This is our backlog, as we call it. Then we get weekly deliveries to our warehouse in Amsterdam and deliver to the various countries, also on a weekly basis. We load the product mix each country needs, be it notebooks, disk drives or digital cameras. … The system runs on a J.D. Edwards solution that is now part of Oracle. We use it for our planning. The country affiliates get what they need on a just-in-time basis.

IDGNS: How do you make the sales forecasts?

J.H.: We have experience, we work with the vendors and the sales offices, but the most important part it is (the staff) sitting around us here in the (Riga) offices. They combine the local needs of the countries and the vendors’ needs and make a sales plan. This is the main value we bring to any vendor — namely, that the “brain” is here in Riga. It is one interface for nine countries, which saves the vendors a lot of effort. So we offer one order, one invoice, one point of payment. We report to them on a weekly basis and they know what stock they have in each country.

So the physical logistics are in Amsterdam, but the brains, the management of the logistics, takes place here in Riga through our electronic network. Just in time delivery is very important in this business because most customers are building a system and they cannot afford to have elements (servers, drives) lying around until they are ready to be assembled, or maybe they are a reseller building PCs out of components. In each country we run a buffer of around three weeks’ supply of the most critical parts so that we are protected against interruptions in supply. This does affect our margins, but the cost of flying things in from, say, China, can be even greater. It is the best model.

IDGNS: How much do you get involved in the service side?

J.H: That depends on the vendor. There are some who are very interested in a particular market, say, Latvia, so they will prepare the whole product offering in the local language and appoint a service center. So then all we do is deliver the product. Others are entering the market with our help; we do the local translations, even the software adaptions, changing keyboards to local standards. We have even been running help hotlines in some markets.

On components, on hard disk drives and CPUs, we handle all the returns. The dealers bring what is broken to us and we handle it all. We also do all the collection and invoicing and pay just one invoice to the vendor, and that’s all done here in Riga as well. There are around 90 people involved.

IDGNS: Elko Group is unique for Latvia. It’s registered here, but does most of its business elsewhere

J.H.: It might be unique to Latvia, but not in our industry. The computer industry worldwide is organized so that most of the products are produced by vendors, who then use wholesale companies to bring the products to dealers and wholesalers, sometimes to retail shops. Among worldwide leaders, there’s Ingram Micro, in America, Asia and Western Europe. Number two is Tech Data in the same markets. In Eastern Europe there are very few, and we are the leader there.

We fulfill a number of duties in the vendors’ value chain, including the logistics of bringing goods into the countries, marketing, translating brochures into local languages, collecting money for the goods, and other things the vendors don’t want to do themselves.

IDGNS: Do you see these fast growth trends continuing in Eastern Europe?

J.H.: The two major growth areas will continue to be everything that is mobile and everything the Americans call “the digital home.” We won’t sell mobile phones because we don’t have the connections to the operators that phone shops have. My prediction is that many mobile phones will be replaced by mobile wireless devices connecting to the Internet and enabling calls through Skype or similar systems. When I travel I use my notebook and Skype more than my mobile, I have been in the United States talking to Latvia with Skype from my notebook. So I think there will be a lot of disruption in industries that now appear to be sitting on gold.

IDGNS: So you have to look at trends beyond the six- or 12-week order horizon?

J.H.: Certainly. We are talking about two or three years. I see our company as a big sailing ship where hundreds of people have to work the sails. But you also have to position the whole ship right for when the wind comes.

IDGNS: Will you start moving into home entertainment products?

J.H.: We are already doing so with some television sets. What we see is the old world of the video and audio systems coming together with the world of PCs and computers. You see this with the iPod and the like. The question is, who will get the digital entertainment wholesale business – the guy who delivered the stereo systems to the dealers, or the guy who delivers PCs. We’ll see who, then, is better.

We will be forced by the vendors and the digital world to go against the traditional distributors of home entertainment products. And vice-versa. The PC dealer and the radio shop will either compete or they will merge. Also, the end-user market or consumer market is far more demanding and costly.