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GST rise to hit margin-squeezed channel

GST rise to hit margin-squeezed channel

Distributors and retailers say they may have to absorb some of the increase in the cost of products and services after GST here rises from 12.5 percent to 15 percent next month.

However, some question how this will be done amid tightening margins.

Soft Solutions business development manager Paul Leslie says absorbing costs after the rise could become a negotiation between vendors, distributors and resellers.

“It will come down to who has the margin to play with,” says Leslie. “The distributor might have to go back to the vendor to do some fine tuning on the price. A lot will also come back to who is setting the price - if the vendor is setting it and working backwards, they’ll work on absorbing the increase. If it is the distributor they will absorb it or maybe work with their resellers.”

Packet Technologies director Frank Ollie doesn’t anticipate major issues over the GST price, but sees two areas of concern. One is whether distributors have paid for stock at 12.5 percent GST prior to the rise, and then make an additional 2.5 percent after the October increase. The other is whether a channel company has carried out services for customers in September, but then invoices for these in October.

JB HiFi CEO Terry Smart anticipates his company will absorb some costs that result from the GST rise but will still have to pass the remainder to consumers.

“New Zealand is such a competitive market that it’s important we retain retail prices where possible. What you will see is certain key price points will remain, such as $99.99. In general, consumers won’t see a dramatic rise [in computer prices] as we can absorb some of the cost.”

Smart adds that the landscape will change for retailers and the importance of having well-known brands such as Dell is crucial. “Consumers are aggressively shopping around and this may increase as a result of the coming [GST] rise.”

Leslie agrees with Smart that certain price points may need to be retained. He says a 2.5 percent price increase on more expensive retail products may not have a significant impact on a consumer’s purchase decision, but lower-priced items that have been deliberately priced below $30 or $40 could be affected, says Leslie. Nuance and Corel are the company’s two major retail-focused brands.

He says margins have decreased significantly since GST was first introduced. “I don’t think distributors can absorb increases because they are already squeezed on their margins anyway. But 2.5 percent isn’t so significant that vendors and resellers will feel they need to apologise for increases.

“There is a price point process that goes on, for example with a mouse that costs $29.95, a 2.5 percent rise takes it to more than $30. That doesn’t look good to consumers, so who makes that call? It will come down to [a decision] brand by brand.”

Simms managing director Paul Johnston says it doesn’t deal with retailers for its agency Dell, but he doesn’t believe distributors will be able to absorb the 2.5 percent increase, because their margins are already so thin. Because of this, he says resellers or retailers could wear the cost.

Chillisoft, the local distributor for security software ESET, will be passing the cost increase to resellers and has drafted a letter to inform them about the price changes. Managing director Geoff Cossey says if his company absorbed the extra costs, its service levels would be affected.

“Our product pricing is based around cost plus a margin to provide the level of service we do to customers. We are reluctant to pass the rise on, but we have to.”

The distributor is arranging its accounting software to handle the rise and working on how it will manage product returns.

Dick Smith ANZ spokesperson Luke Schepen says it is inevitable that buyers will pick up some of the costs associated with the GST rise.

“We will review our pricing to ensure we give the best possible value in the marketplace, but as the cost of goods rise it is inevitable that some of these costs will flow to the consumer.”

Express Data general manager of sales and marketing Paul Plester says the distributor is “not in the habit of paying other people’s tax”.

“Anyone who can afford to wear a 2.5 percent rise in the price of goods is making a bit too much money. Express Data will be passing on the GST rise with all our products. The companies we deal with are business-to-business customers, so they can claim it back.”

The government has advised businesses registered for GST to update their accounting software and ensure staff are ready for the GST percentage rise on 1 October. These companies should also be ready to issue invoices with the new rate, and have the ability to process incoming tax invoices, and issue credit and debit rates, at both the old rate and the new rate.


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