Distributors Face Heated Competition In Fast-Changing Sector

By John Makulowich

Observers of the IT distributor scene may have felt mild irony a few weeks ago after seeing the share price of Ingram Micro drop sharply on fourth quarter earnings estimates, while those of some direct marketing and Internet auction initial public offerings were soaring.

No one is likely to see a trend or even a pattern in that collection of events, not even after hearing about the show of confidence in the distributor by Ingram Micro's Chairman Jerre Stead, who just announced he would buy a million shares of common stock.

But it could be a harbinger of what the ilk of Ingram Micro Inc. (IM) of Santa Ana, Calif., Tech Data Corp. (TECD) of Clearwater, Fla., Merisel Inc. (MSEL) of El Segundo, Calif., and MicroAge Inc. (MICA) of Tempe, Ariz., will see in the coming year as competition heats up for market share between manufacturers and distributors.

If you seek other signs about the health of the distributor sector, you could look at the 52-week stock price range. In a year that saw wild gyrations in the IT sector, none of the four did very well. Ingram Micro opened at 29 and closed at around 35 9/16, Tech Data started at 39 and ended at 39 5/ 8, Merisel began at just over 4 and ended lower at 2 7/16 and MicroAge ended virtually the same at 15.

For Steve Ashley, first vice president of Robert W. Baird & Co., Milwaukee, the outlook for distributors amounts to a year of confluence, as bindings between distributors and vendors tighten in the face of more direct competition from manufacturers and more seepage outside the channel of solution providers and systems integrators.

On the positive side, new relationships between vendors and distributors will emerge, forced partly by the spectacular success of companies like Dell Computer Corp., Round Rock, Texas.

"While net net, the developments in the sector will be positive for leaders like Ingram Micro and Tech Data, we will probably see more competition from manufacturers in an arena like printers," Ashley said. "We are in the midst of change in the relationship between vendors and distributors."

Among the reasons for that change is the business success of direct marketer Dell, which, according to Ashley,Êforced distributors and vendors to review their relationship by creating consternation in the channel.

What it reopened was the so-called white box opportunity.

"The white box opportunity [generic hardware] has always been out there," Ashley noted, "But Ingram Micro and Tech Data have not been willing to play the game. As brand name suppliers like Compaq change relationships, we will see other models change."
According to Ashley, Ingram Micro and Tech Data will not only enter the white box market ? a new opportunity for each of them ? but also provide electronic commerce opportunities to resellers to order online and over the Internet.

Yet, he sees an even bigger opportunity.

"What the bigger opportunity amounts to is re-engineering the supply chain," Ashley said. "If the distributors could extend a Web page presence to the customer level that ended as a direct link to Tech Data, for example, the end customers could believe they were talking to the value-added reseller (VAR). Then, they could place orders that would be drop shipped on behalf of the VAR by Tech Data."

Looking closely at the distributor business, Ashley said the resellers are distributing hardware and relative amounts of value.

The hardware is the wrapper. At the opposite end of the spectrum, the government customer gets the boxes.

How much is the VAR touching the box? It is that end that the likes of Dell and Gateway Inc., North Sioux City, S.D., are attacking. If VARs are simply passing boxes along, then Dell will continue to exploit that market.

By extending a Web page from Ingram Micro, for instance, to end customers, the distributor could reduce expenses even more in the supply channel, where the reseller provides value-added service.

Further, the move toward outsourcing plays into the hands of the VARs and away from the direct sellers.

Talking with Ingram Micro's Shelly Talbott, vice president and general manager of the government and education division, and Pam Smith, senior director of strategic marketing in that division, you hear echoes of Ashley's forecast.

One of Ingram Micro's major initiatives is its so-called Partnership America program, an effort designed to bring vendors into closer contact with the largest wholesale distributor of microcomputer products.

Ingram Micro, with 12,000 employees, now offers more than 145,000 products ? including desktop and notebook PCs, servers, storage devices, CD-ROM drives, monitors, printers and software ? to 100,000 resellers in 120 countries.

The Partnership America program is geared to helping Ingram Micro's resellers procure government contracts by offering support services such as proposal support and long-term, firm-fixed pricing.

More than 225 manufacturers joined the Ingram Micro program, and most provide additional discounts for government resellers.

"We started the Partnership America program, one of five major, corporate, strategic initiatives, in fiscal 1998 to meet the needs of the government and education marketplace," said Talbott.

"We offered our customers bid and proposal services, product discounts and participation in industry events. We saw it as a high growth opportunity, since the government is the largest buyer of technology in the world," Talbott said. "We will relaunch Partnership America in 1999 with new elements after surveying vendors, users and resellers about what was missing in the marketplace and how best to fill the void."
According to Smith, one of the key points learned from the survey of end users was the need to ensure the customer has the best experience when buying technology.

That amounts to more than just giving the customer what it wants; it also means making sure that the technology meets the customer's needs and is the best available to the customer.

Another initiative for Ingram Micro is to offer resellers an electronic curriculum. This includes training employees about the marketplace through e-mail communications, electronic push marketing and chat rooms for those resellers who do not compete with one another.

Ingram Micro's efforts are tied to what it sees as trends in the market, specifically that systems integrators are looking for new and better ways to be more competitive and meet the users demands in the government world of simplified procurement.

"We feel we need to reduce the infrastructure costs that our customers have absorbed in bidding for such contracts as [indefinite quantity, indefinite delivery]. With simplified purchasing, that infrastructure is burdensome. You can't be as competitive from a pricing standpoint or as nimble," Smith said.

"But you can reduce costs by becoming more lean. Our approach is to let our customers do the program management, where they have expertise, and let us do the back-room work, like billing and drop shipping. This will be one of the single biggest shifts this year," Smith said.

On the same playing surface as Ingram Micro is Tech Data, the No. 2 distributor of computer products. Supplying over 75,000 different products, including PCs, software, hardware and supplies, the 5,075-person company distributes items from more than 900 manufacturers to more than 100,000 resellers in 30 countries.

Terry Bazzone, Tech Data's vice president and general manager of strategic business development, and Matt McManus, marketing manager for government programs, feel distribution is an exciting place to be, one that gives the distributor the opportunity to play a more significant role in all market segments and channels.

"We will continue to focus our energies on the government channel, which for us includes federal, state and local and education, Bazzone said. "We have an organization in the [Washington, D.C., area] dedicated to government resellers, to support customers and their federal opportunities. We are planning to launch an education facility this spring inside the Beltway that will support our vendor certification programs."

Beyond the Beltway, Bazzone pointed to the national perspective her company takes on supporting government business in fulfilling and servicing federal contracts. The headquarters in Clearwater includes a government bid desk whose sole role is to stay on top of vendor programs and support Beltway and non-Beltway resellers in their federal, state and local contract efforts.

A Tech Data Web site is dedicated to resellers and contains information on changes in the marketplace and contract opportunities.

"We offer leasing and credit programs and partnering opportunities, as well as help on putting together a complete proposal," McManus said. "These kinds of programs are more exciting and more profitable to the reseller. Partnering with the right distributor can give the reseller a much bigger presence in the government space."

One trend Bazzone noted is likely to alter the industry's landscape is the continuing transformation of the government marketplace, which makes it look more and more like the commercial sector.

"Because of procurement reform, we are starting to see the government look more like the commercial sector. One example is the outsourcing of the IT division," Bazzone said.

"Procurement reform has also allowed the government IT process to change. More resellers are allowed to play, and there is competition from other areas. Now a variety of people who can get to procure through the use of credit cards," she said.