More often than not VARs will tell you that price is not their primary consideration when sourcing product from distributors. But that hasn't stopped IT distributors in recent months from pricing aggressively.
Competitive pricing, especially among the big-three distributors, grew so intense late last year that channel observers wondered if an all-out price war was under way.
It appears, however, that a war has been avoided and the pressure, while still high, has eased off a bit.
"We were close to looking over the edge of the cliff, but all of us stayed rational," said Keith Bradley, president of distributor Ingram Micro North America of Santa Ana, Calif. "We didn't like the view, so we took a couple of steps back."
So what brought the three top distributors—Ingram Micro, Clearwater, Fla.-based Tech Data Corp. and Synnex Corp. of Fremont, Calif.—to the ledge?
Distributors periodically drop prices to beat competitors and to protect their market share.
Usually affected are high-velocity, high-volume, systems-related products, but occasionally there is pricing pressure on peripherals as well.
Read more here about Ingram Micro's strategies.
In the fourth quarter of 2004, competition got particularly stiff as a result of moves to protect market share.
While Synnex traditionally has been known to be the most-price aggressive, competitors got aggressive, too, according to channel observers and published reports.
In addition, distributors, and by extension their VAR customers, constantly have to fend off direct-selling systems vendor Dell Inc. of Round Rock, Texas, and online retailers such as CDW Corp., whose prices often undercut those of distributors on high-volume products.
Pricing is a constant balancing act with cyclical pressures driven by macro- and microeconomic factors, the end result of which is downward pressure, said John Paget, president of Synnex North America and chief operating officer.
"The industry tends to be very competitive. It has always been very competitive," he said.
Despite the need to remain competitive, distributors are well aware of the potential downfalls of an unchecked downward spiral in prices. Market-share grabs, if aggressive enough, can lead to price wars that weaken some or all players involved.
"If one of our competitors attempts to win share based on lower pricing, the result will likely be an ugly price war that nobody wins, including our VARs," said Steve Raymund, Tech Data chairman and CEO. "Obviously, VARs benefit in the long term when served by a healthy distributor community."
To read more about Tech Data's strategy, click here.
VARs say they don't mind the lower prices, but they have other considerations that are just as important, or even more so, when buying from distributors.
"The reasons we buy from any of the distributors at all are based on factors other than price," said Darren McBride, president of Reno, Nev.-based VAR Sierra Computers Ltd.
Price falls behind fast, error-free shipping, quick delivery times and the ability to return bad, unopened or wrongly shipped products, McBride said.
"If we shopped only on price, we probably would do much less volume through Ingram. It is not hard for knowledgeable shoppers to find Web deals, rebates, etc., that beat the pricing of the distributors," McBride said.
"Synnex tends to be the most price-aggressive at this point, followed by Ingram, then Tech Data."
Sierra sources more products from Ingram Micro than other distributors because of a warehouse proximity that allows one-day shipping, he said.
For many VARs, the credit lines they secure from distributors also beat price, said Rad R. Sundar, co-founder and CEO of VARStreet Inc., which provides VARs with electronic storefronts and back-office connections to distributors.
"Distributors need not give the lowest price to get the business," he said.
Distributor credit lines and financing options such as net 30-day terms help many VARs stay in business.
VARs typically hold credit lines with multiple distributors, so they have an interest in seeing all distributors with whom they do business stay healthy.
Bradley said it's in the interest of all players concerned to keep distributors healthy and the overall channel profitable.
He sounded optimistic this week that the three major distributors appear to have reached a level of comfort with their respective positions in the market, enough to avoid a price war.
And while pricing remains competitive, it has returned to pre-December levels, when it intensified the most, he said.
Tech Data Tech Data Chairman and CEO Steve Raymund said prices remain very competitive, but "my sense is that the distributor market hasn't entered some ruinous price spiral."
"As for us," he added, "we remain committed to offering our customers very competitive pricing based on our low-cost operations, but backed up by top-quality service."
Paget said Synnex is always vigilant of its position in the market. The company makes "willful and conscious" decisions to manage its position and achieve its return expectations, he said.
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