The personal computer (PC) industry has been through at least 3 major
periods in ?best practices? business models for computer, accessory
and software distribution.
We started with distributors selling to individually owned franchise
stores in the 1980s. Those stores, including ComputerLand franchises,
often had gross margins of 40% or more. However, during the 1980s
there was increased consolidation at both the distribution and retail
By 1990, the major distributors were Ingram Micro D, Tech Data and
Softsel (now part of Merisel). Distributor margins had settled into
the 12-15% range. ComputerLand had self-destructed in one of the more
bizarre cases of corporate history, but a number of major chains had
emerged to create the computer superstore. CompUSA was the 400-pound
gorilla in that market for years AND was a public company, but it was
acquired in the late 1990s by Grupo Carso, SA. Grupo Carso is a
public company but it?s results are amalgamated with Mexican retail
operations and Good Guys, a consumer electronics chain. Until the
mid-1990s typical retail chains ran gross margins of 25-32% --
actually less than consumer electronics chains.
NOTE: be very careful in this channel when talking about MARKUP vs.
gross margin. As an example, distributors will tell you that they
need a markup of 18% -- which gives them a gross margin of about 15%.
Retailers will use a MARKUP of 33% to produce a gross margin just
ADVENT OF THE INTERNET
Direct marketing companies had been increasing market share in the PC
industry since 1988 but the advent of the Internet dramatically
changed two-step distribution by doing two things:
1. squeezing profit margins at both distributor and retail levels
2. requiring new classes of specialized resellers capable of doing
network installations and other sophisticated systems integration
Dell?s marketing model, considered ?best practices? in computer
industry marketing, is a fine example:
2004 Revenues: $49.2 billion
2004 Gross margin: $9.0 billion (18.9%)
2004 Net profit: $3.0 billion (6.1%)
In other words, Dell is making money (and growing) with gross margins
7% lower than what used to be the low-end of the range for retail
superstores. That?s why you see the reduction in CompUSA, Micro
Centre and other sites ? and why chains like Magnolia Hi-Fi just threw
in the towel on PC sales.
Current distributor margins can be seen in the published reports from
Tech Data and Ingram Micro D, the two giants of the U.S. business.
(Unfortunately, Merisel has been plagued by financial difficulties in
various businesses, so it?s not useful in this analysis).
For the past 5 years Tech Data?s margins have been consistent, running
5.7 ? 6.0 percent, though margins only approached the higher number
Gross margins, reported in the Q1 2005 earnings release for Ingram
Micro D are similar, at 5.38% and down slightly from 5.44% in the year
earlier period. Ingram Micro D?s margins have been running 5.4% ?
5..5% for the past several years, as the 2005 Form 10-K (second link)
Ingram Micro D
?Ingram Micro Reports First Quarter 2005 Results,? (April 28, 2005)
2005 Form 10-K (Mar. 9, 2005)
Now there are several comments regarding distributors that are worthy
of inclusion here:
1. they will expect both full return privileges and inventory
protection (in the event of a price reduction).
2. even the major mass merchants like Best Buy, source via
distributors for a variety of logistical and program management
reasons. In other words, don?t consider Best Buy out of your league ?
though you will almost certainly have to make a trip to Minneapolis
(well, several trips!) to set up any promotional program
3. as a newcomer to the channel, the distributor will expect you to
provide upfront market development dollars (often called MDF or market
development funds) to make your product visible to resellers. The
more you know about the programs ? and the target classes of retailers
? the more effective you?ll be.
4. try early in the program to get integrated into any electronic
reporting (EDI) or other schemes to get information on who?s buying
and their stocking levels. This REALLY applies to retail stores ?
where you may see sales slow in one area only because the store has
nothing on the shelves. But it?s one of the most-overlooked aspects
of distribution ? particularly because companies send in their best
salesman and it?s not their job to be a product manager.
5. your first stop at the distributor is probably the product manager
for accessories. These are busy guys with lots of vendors asking for
their time: be well-organized for your first meeting and very
competitively-focused in whatever you have to say. They?ll be
profoundly underwhelmed if you walk in for a meeting and ask, ?What
does it take to do business with you?? A strategy of ?walk softly and
have a big MDF check in your pocket to use when you?ve got what you
want? would be appropriate.
Without CompUSA as a stand-alone anymore, we?re forced to look at the
consumer electronics retailers ? who also sell computers. This
includes Best Buy and Circuit City ? and one of the few computer
retailers still expanding, Fry?s Electronics.
Best Buy?s gross margins have actually expanded over the pas 4 years,
from 19.8% to 25% in the last 2 years. You can expect computers and
memory to be lower in margins, inasmuch as they?re considered closer
to ?commodities? but computer accessories like yours will rank higher:
?2004 Annual Report?
By contrast, Circuit City?s margins have been in the 29.6% - 32.4%
range over the past 3 years:
?Financial Reports ?
You may find it interesting to see how much profit pressure CompUSA?s
retail business was under in the late 1990?s from it?s last SEC
filings. Gross margins had dropped to 12.7% in 1999, but was only
scantly better in 1998 at 14.1% and 14.3% in 1997. I suspect margins
are still very thin for computer products, inasmuch as Dell is getting
no smaller and Costco and Sam?s Club (with 11% gross margin business
models) are both selling desktop & portable systems:
?CompUSA 1999 Form 10-K?
Some pointers in dealing with the major retailers:
1. Promotional programs drive sales, particular things like end-cap
sales. The stores make as much on the promotions ? but the impact is
dramatic on your sales, increasing them by 50% on a bad promotion and
up to 300%.
2. It?s up to you to make sure that product is in-stock and properly
displayed, not the store personnel. The larger vendors like Microsoft
or Intel have store detailing experts ? but there are detailing firms
that you can hire to provide stocking reports and distribute
3. Stores hate spiffs for sales people ? they distract them from
their job and interfere with the store?s compensation schemes.
ALTERNATE DISTRIBUTION MODELS
There are specialty companies dealing in several markets, the largest
being General Services Administration (GSA) sales and the second being
the college-university market.
GSA schedule sales are used not just by Federal employees but by state
?Report: More Computers Bought Through GSA Schedule,? (Van Camp,
August 26, 2003) http://www.technologymarketing.com/mc/news/article_display.jsp?vnu_content_id=1962806
The second channel with specialty distribution is the
college-university market. At a good-sized campus, like Purdue
University there might be a larger market for computer products every
year than at a major corporation like Boeing. Though it has ?only?
36,000 students, each year an incoming freshman class provides a
market for 7,500 or 8,000 PCs.
Very often those sales are via either the university bookstore or the
campus computing center. And specialty distributors like Douglas
Stewart Distributing, a Madison, WI company, serve this area:
Douglas Stewart Distributing
Google search strategy:
?Ingram Micro D? investor relations
?Best Buy? investor relations
SEC Edgar database
. . . and more than a small dose of business background.