Distributors Face Heated Competition In Fast-Changing Sector
Distributors Face Heated Competition In Fast-Changing Sector<@VM>White Box Market<@VM>Electronic Curriculum<@VM>The Comeback Trail<@VM>Things To Come
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.
One company trying to find its way on the comeback trail is Merisel, once the largest wholesale distributor of computer hardware and software in North America.
Merisel is now ranked No. 4. It offers more than 25,000 products to 35,000 resellers from more than 500 hardware manufacturers and software publishers, including Microsoft, Hewlett-Packard, Sun Microsystems and Compaq.
Like the others, Merisel provides value-added services to its customers, including financing, marketing, product training and technical support.
Just hired away from Ingram Micro last August, Curt Cornell is director of Merisel's government and education division, a new title in a new department of the 2,300-person company. He is in the midst of developing and putting in place an overall market segmentation strategy.
"Our goal is to actively participate in the government market," Cornell said. "We have already put specific tactics in place. For example, we brought in some of the industry's leading experts to serve as the base infrastructure in this initiative. This type of expertise is new to the distribution channel conceptually."
Among the underpinnings for this effort is a refurbished Web site for customers, containing information such as price reduction notifications, how-to guides on government procurement and data specific to the four markets Merisel will serve: federal, state, local and education.
"While the majority of companies inside the Beltway know the federal market well, when you get 200 miles away, you find a lot of misunderstanding and confusion about federal guidelines and contracts," Cornell said. "With the expertise and how-to guides, we intend to help our resellers master that market and open up opportunities in e-commerce and Defense Department initiatives."
Among the factors that influenced the creation of the new division were recognition that some vertical markets showed significant growth, that state and local budgets were growing much more rapidly than federal.
Furthermore, customers that were serving the state and local markets were asking for much more support.
"We will establish teaming relationships with our customers. For example, we will assist in full proposal development and provide all the certifications needed for the solicitation. Moreover, we will continue our support after the win," said Cornell.
A start in that direction is a series of seminars planned for Merisel customers across the country. Cornell intends to bring in industry experts to talk about government procurement reform, new opportunities for business and growth and how the federal government is becoming more creative and more cooperative.
MicroAge, the fourth major company in the group, also is gearing up to compete more aggressively in the federal arena.
The 4,400-person computer systems distributor and systems integrator recently separated its distribution group into a subsidiary called Pinacor, which distributes 20,000 microcomputer systems, networking and telecommunications equipment and software products from 500 suppliers through its network in 34 countries.
According to Kelly Ross, director of government services, Pinacor had distribution revenue of $4.1 billion in 1997, with government accounting for $90 million. He expects government revenue to rise to $310 million in 1998 and to reach $1 billion within five years.
"Our government services program had 650 resellers in 1997. We now have 2,100. And our government division has grown from two employees to 26 in just the last 15 months," Ross said.
Like Cornell, Ross is a recent addition to his company, coming to Pinacor last summer when the firm was just building its government services program. He was brought to Pinacor partly to develop its General Services Administration schedule program.
In a sign of things to come, about three years ago Alan Weinberger, an entrepreneur, created a Web site called TechnologyNet to cater to the needs of manufacturers, distributors, resellers and end users. He now is launching a major public relations campaign to publicize it. He claims to profile 15,000 worldwide computer resellers from about 90 countries.
One of his major selling points ? and the source of revenue ? is the company's electronic commerce solution, a paperless and seamless application that allows buying access between resellers and their choice of distributors. The solution also is available to resellers for their end users.
The site promotes general computer industry knowledge and information. Users can access a dealer locator to find a local dealer or reseller, a 38,000-product catalog and an electronic product library.
Additionally, site users can participate in message boards and learn general technology facts to deepen their understanding of computing and the industry.
Weinberger, the founder and CEO of TechnologyNet Inc., Bethesda, Md., in a recent letter to Web visitors noted that about 80 percent of the $750 billion worldwide purchases of PC computer and related products and services are sold by computer dealers to computer users and not directly by manufacturers.
In a strong pitch for distributors and the channel, he added: "Computer users buy mostly from their local, independent computer dealers ? resellers and value-added resellers ? because they seek unbiased advice and prompt assistance. The digital revolution requires a complex-solution for the customer, mostly a combination of vendors and services."
However, he also noted that while "dealers, wholesalers and leading manufacturers worldwide all support the concept of TechnologyNet" because it is in their interest, a major study in 1996 by the American Society of Quality Control and the University of Michigan found that all industries in the United States had a 1.1 percent reduction in customer satisfaction. But the computer industry had a decline of almost 4 percent.
Enter TechnologyNet as the place where customers can turn for information on product installation, service and continuing support.
"TechnologyNet will help supporting manufacturers more closely connect to end-user customers, and at the same time, tell the customer where they can buy products and find expert service and support ? their local computer dealer," Weinberger said. "Thus, we will help reverse that negative and increase customer satisfaction."