Distributor Consolidation Leaves Narrower, But Healthier, Choices for VARs

By Lisa TerryAnd then there were two.A year ago, four major distributors ruled the government market. But with Pinacor and Merisel fading from prominence, Ingram Micro Inc. and Tech Data Corp. have taken center stage as the dominant players in stocking and delivering technology products to government resellers.Consolidation among distributors "has been in the works for a number of years, but changes in the distribution industry provided the catalyst for the final act," said Bob Anastasi, senior managing director for investment firm Raymond James and Associates, St. Petersburg, Fla.A host of factors drove the consolidation, he said. Manufacturers narrowed their lists of distributor partners, industry growth slowed, and information technology manufacturers eliminated financial rebates to distributors. Those rebates had enabled distributors to cut prices in an attempt to win more sales to their customers, which resell the equipment to government and commercial clients. The resulting price wars among the top distribution competitors produced slimmer margins that brought financial difficulties for less-well-funded players.Problems such as these led Pinacor of Tempe, Ariz., and its parent, MicroAge Inc., to file for bankruptcy protection and narrow Pinacor's focus to computer telephony integration. Merisel Inc. of El Segundo, Calif., has suffered financial woes that have shrunk its general distribution business and with it, its government program.Along with giants Ingram Micro of Santa Ana, Calif., and Tech Data of Clearwater, Fla., myriad specialists also continue to serve the government market. These include networking distributor Comstor Inc., Chantilly, Va., and peripheral and new technology focused D&H Distributing Co. Inc., Harrisburg, Pa., which spent 2000 building its nascent government offering. Regional and industrial distributors also enjoy market share among value-added resellers, or VARs, which resell technology products to government agencies. Unlike some other vertical markets, government cannot support dedicated distributors because most IT buying takes place during the "buying season" that lasts just six months, from March until the end of the government fiscal year Sept. 30. But each year that pattern gets more diluted as government IT buyers have more purchasing options open to them. As many as 25,000 federal IT buyers now can use procurement cards, for example, to make purchases whenever needed up to certain financial limits, said Terry Bazzone, vice president and general manager of strategic business development at Tech Data. Ingram Micro and Tech Data have seen their fortunes rise in recent months. Ingram's third quarter 2000 net income was $38.9 million, up 46 percent from the same quarter in 1999. At the same time, sales increased 13 percent. Ingram, which reported sales exceeding $30 billion for the last four quarters, expects continued but more gradual income improvements in the fourth quarter and sales increases in the low double digits.Tech Data third quarter profits were 43 percent above last year on a sales increase of 20 percent. The company beat analysts' estimates by 7 cents a share. With 2000 sales of $17 billion, Tech Data expects profits of $173 million to $176 million in fiscal year 2001.Now that the top tier of distributors has consolidated and the remaining players' profitability is returning, "I think it's just a matter of time before we see [their] prices rise," said Dendy Young, chairman and chief executive officer of government reseller GTSI Corp., Chantilly, Va. The consolidation "obviously creates some additional opportunity for us," said Pam Bryson, vice president, business development for Ingram Micro, because resellers must now choose from just two dominant players with strong government programs or go with regional distributors.XXXSPLITXXX-Ingram, whose government growth is on par with its overall corporate growth, has spent 2000 bolstering its government offering. In early summer, the $28 billion distributor began a low-profile test of PartnershipAmerica, a Web-based program that enables resellers, VARs and system integrators to compete for government business with an e-commerce program comparable to those of large direct-sales organizations.This "soft launch," which amounted to 20 reseller sites, was followed with the announcement of PartnershipAmerica 2.0 at the trade show Comdex in November 2000. Enhancements included improved catalog tools and customization, line-item General Services Administration contract pricing, per-contract taxation and shipping options, specialized order limits, mobile Internet access and the ability to upload end-user IDs. PartnershipAmerica also helps VARs qualify for more exclusive vendor benefits."We've seen vendors and suppliers move toward authorization programs for products," such as Iomega, said Bryson. "Instead of giving discounts to just anyone, they give them to those with the [right] qualifications. PartnershipAmerica helps accomplish this."VARs not in the pilot anxiously awaited the official launch so they could gain benefits, such as the ability to compete with Internet buying sites while reducing transaction costs for lower-margin products, she said.Tech Data's government sales have grown 20 percent over the previous year, with 40 percent growth in the federal space. The distributor assisted resellers with 148 percent more bids than last year, Bazzone said.The year also brought an increase in the use of configuration services by VARs, she said, a level of service "somewhere between off-the-shelf and white box," the complete assembly of nonbranded computer products. More VARs are choosing to outsource these tasks rather than build the additional infrastructure required to support large rollouts, Bazzone said. The distributor has continued to increase configuration service levels over the course of the year.Government business continues to attract more VARs, Bazzone said. "Each year we're serving more resellers who are serving the government area. With the purchasing vehicles the government is using, it's allowing more resellers in the space than before," she said. The E-rate program for computerization of schools has been a particular draw.Over the past year, privately held D&H Distributing "has really gotten our program up and running, setting up inside and outside sales, a bid desk, building a solid stable of vendor partners, and we have a fair amount of resellers doing business with us already," said Gary Brothers, the company's president.The distributor, which focuses on peripherals and new technology products, said it will compete with the big players with highly personable and accessible service and its ability to react quickly. The government division, led by sales manager Anne Brennan, accounts for a "single digit" percentage of the company's business. But in 2001, "we'll probably become more visible than we've been and more aggressive in drawing business," Brothers said. The most recent sales estimate for the company by Hoover's Online was $600 million in 1998.Merisel continues to limp along with a greatly diminished general IT distribution business, after cutting 700 jobs, closing four warehouses, restructuring and selling off its Sun distribution arm in 2000. In late October, Merisel purchased certain assets of bankrupt Value America Inc. in order to launch a separate arm of the company offering e-services, distribution and logistics to manufacturers and VARs.The model builds on Merisel's and Value America's core competencies without the risks of taking product ownership, said Charles Freedman, vice president and treasurer of Merisel. Those risks include product obsolescence and price wars, he said. Merisel reported a third quarter loss of $43.7 million, with sales down 64 percent over the previous year's third quarter.XXXSPLITXXX-E-commerce, networking, security and emerging technologies will grow more important in 2001 to government customers and the distributors and VARs that serve them, distributors said. As a result, they're beefing up their offerings and seeking to align themselves with the manufacturers and suppliers that can ensure a solid assortment."We want to understand where the government sector is going. We want the latest technology in our line card and to offer technical support for those kinds of projects, such as [technology items] not identified in bids," said Tech Data's Bazzone. "The Internet is not going away with regard to being part of the government infrastructure at any level, so we're looking at storage usage."Tech Data plans to focus more intensively on higher-end products, including servers and network systems in 2001 and setting up separate units within the company devoted to networking systems. Network devices offer higher margins than PCs, particularly when sold via the Internet.Data security is also getting distributors' attention.The Clinton administration set aside almost $1.5 billion to deal with government security in 1999, up 40 percent from 1998, and that was expected to top $1.8 billion in 2000, said Vicky Fortuno, director of value products for Comstor, a networking distributor and division of Westcon Group. Comstor said it is the only distributor to hold a direct GSA agent contract. "We provide this vehicle to authorized agents so they can represent goods and services to government," said Gregg Hott, director of government programs for the distributor, which carries products from Cisco Systems and 11 other vendors. About 300 reseller customers of the distributor are authorized to participate in the program. Government efforts to set security standards, combined with a paucity of security specialists capable of implementing them, will drive interest in outsourcing all or parts of security projects. Comstor addresses these needs by offering both network security products and professional services personnel who can supplement VAR staffing, said Hott. Another product area growing in interest among government customers is mobile computing, particularly among military and law enforcement agencies, said Tech Data's Bazzone.Streaming media and caching also are attracting interest for applications such as distance learning, said Michael Mullins, vice president of sales and marketing at Comstor.At the same time, said Comstor's Hott, government customers are demanding a return on technology investments in much shorter time frames, now mirroring the expectations of commercial customers.XXXSPLITXXX-Electronic commerce emerged as a key capability for distributors in 2000, a trend that will continue to grow in 2001, distributors said."A lot of VAR customers have told us about contracts they're working on that require they have some kind of e-commerce tool," said Ingram's Bryson. "We're expanding our opportunity to do more with configuration and licensing online," Bazzone said. Tech Data plans to add multilevel pricing to its online offering as well.Tech Data reported $5 billion in e-commerce sales in 2000, while Ingram racked up $7.5 billion in e-commerce sales.VARs also can expect the debut of application service provider programs by distributors in 2001, in which distributors link ASP organizations with VARs that can sell their remote, hosted applications and services to a broader audience. A VAR can become a sales agent for ASP services, or launch or supplement its own ASP offerings by acquiring infrastructure and application partners from distributors. Tech Data recently announced an ASP e-procurement offering. Ingram Micro debuted an ASP program in late November 2000, which will be available to a limited group of Sun, Cisco and Citrix-authorized technology solution providers in the first half of 2001. "Just reselling ASP is not enough," said Ingram's Bryson. "Training and marketing tools are critical to success, and we intend to provide specific training on these."The distributor will be shaping its government-specific ASP offering and adding additional ASP partners in 2001. ASPs need distributors for the same reason manufacturers do: to add much-needed marketing and sales support, particularly because "there is a lot less demand from customers than from ASPs driving the demand," Bryson noted.XXXSPLITXXX-The new year also likely will bring a rise in the construction of private exchanges competing for distributors' customers and suppliers, said David Cahn, research director for AMR Research in Boston.Independent exchanges, such as Global Electronics Exchange by NECX.com of Peabody, Mass., and New York-based PartMiner's Free Trade Zone, provide value-added services to spot market buys. To compete, distributors such as Avnet and Ingram Micro are setting up distribution-based exchanges that shorten demand capture cycle times for the supply chain, he said.Collapsing the technology supply chain "gets reduction in costs for everybody. It's a win-win for everyone," Cahn said.While companies such as Dell Computer Corp. and Gateway Inc. have been cited as a threat to the technology distribution channel, few see any real trend away from the channel among most suppliers and manufacturers. Direct sales omit the distributor and sometimes the reseller layer and are often considered as a strategy to supplement or replace sales through the distribution channel, especially to large customers."There have always been companies on both sides of that ledger," said D&H's Roberts. "There are companies that went away from distribution and are coming back, and vice versa.""Manufacturers are trying to get closer to agencies to establish their value for products, but they understand distributors are an important play in delivery," said Tech Data's Bazzone.At the same time, "we find a greater variety of manufacturers and technology in the federal space," said Comstor's Hott.Even for their direct sales programs, a number of manufacturers are turning to distributors such as Ingram Micro to handle the stocking and distribution of their products on their behalf. The vendor maintains ownership of the product until transfer to the client.Despite the wealth of value-added services that top distributors offer to VARs, there are areas where they could do better, said GTSI's Young. "A fundamental issue for the whole industry is the problem of inconsistencies and poor quality in product descriptions," he said.RosettaNet, the industry effort to create a common product language and identifiers, will help, but Young said he would like to see better coordination among manufacturers, suppliers, distributors and VARs to produce better information.Government customers "are thirsty for knowledge," Young said, and need quality product data. Similarly, the supply chain needs to work together more tightly on joint marketing of new products, he said.While 2000 ended with half the number of major distributor options for government VARs, that doesn't mean those remaining can rest easy, according to industry officials. They must continue to acquire the technologies that will enable VAR customers to meet government customer needs. They must price competitively while preserving profit margins. And they also must meet the challenge of new dot-coms and direct-sales vendors, while maintaining and improving the quality of core services. "Now that the consolidation is finished, we've got two very strong companies in Ingram Micro and Tech Data," says Raymond James' Anastasi. That strength will be key to surviving in the increasingly diverse world of IT distribution.XXXSPLITXXX-Information technology distributors are companies that buy IT hardware and software from manufacturers and developers, stock them, then sell and distribute them to resellers, value-added resellers and systems integrators.Business models include volume distributor and value distributor. These provide product-related services as well as product.Manufacturers need distributors in order to cost effectively reach smaller accounts they could not support through direct sales and to handle the complexities of inventory management and delivery. Some manufacturers sell exclusively through distributors, some sell directly to the end user or reseller, and others use both strategies.XXXSPLITXXX-The terms reseller, value-added reseller and systems integrator differ according to who is doing the defining.Generally speaking, resellers focus on moving products to the end customer without a lot of additional services.Value-added resellers also sell hardware but derive most of their margins from software and services such as support, maintenance, training and consulting. Systems integrators do not emphasize the acquisition and resale of product as their sources of revenue, but assist customers in designing, integrating and managing information systems. Hardware and software vendors also may be systems integrators by selling services surrounding their products. Resellers, value-added resellers and systems integrators may acquire the products they resell through IT distributors, direct from manufacturers or through catalog or Internet firms.