Slowing PC Growth Could Push Distributors to Price War

By Pedro Pereira  |  Posted 2005-04-01 Email Print this article Print
 
 
 
 
 
 
 

WEBINAR: Event Date: Tues, December 5, 2017 at 1:00 p.m. ET/10:00 a.m. PT

How Real-World Numbers Make the Case for SSDs in the Data Center REGISTER >

With PC demand softening, distributors will be hard put to resist trying aggressive price tactics against competitors.

Major IT distributors say they avoided a damaging price war earlier in the year, and would like to keep the peace. But declining demand and continuing low prices for PCs could make it difficult for them to keep that resolution.

Market research firm IDC (International Data Corp.) has predicted softer PC growth in the U.S. market for 2005. After two years of 11 percent growth, IDC said, growth in the U.S. market is expected to slow to 7.6 percent this year. Short-term growth will dip into the low single digits before starting to recover, the Framingham, Mass.-based research firm predicted.

And that, says a long-time channel analyst, will create a strong temptation for distributors to lower prices to move more product.

"If the growth rate is slowing, it will be tough for anybody to behave themselves," said Benny Lorenzo, general partner with Aspira Capital LLC in Fort Lee, N.J.

Roger Kay, vice president of client computing at IDC, attributed the softer PC demand to a lack of job growth, rising budget and trade deficits, high oil prices, a "treasury-draining foreign war," interest-rate hikes, a lackluster stock market and record-low household savings rates.

U.S. Department of Labor figures in a report released on Friday support at least part of that argument, indicating that employment in February showed the economy created 110,000 jobs during the month. That brought unemployment down two-tenths of a point, but was half the growth most analysts expected.

With so many risk factors at play, Lorenzo said, pricing pressure at the distribution level is unavoidable. He said that he is, however, giving distributors the benefit of the doubt when they say they want to avoid a damaging price war.

"The signals we have seen appear to show distributors may do what they say they're going to do," he said. "You never really know."

But it will be tough, Lorenzo said. Two of the biggest three distributors, Tech Data Corp. of Clearwater, Fla., and Fremont, Calif.-based Synnex Corp., have been under first-quarter earnings pressure.

Click here to read about Tech Data's POS offerings.

Synnex reported first-quarter results that fell below analyst expectations and provided second-quarter guidance also below analyst estimates.

For the quarter ending Feb. 28, Synnex reported earnings of $8.6 million, or 27 cents per share, which was 11 percent lower than the $9.7 million, or 33 cents, of the year-ago period. The results included a $1.4 million charge, or 5 cents per share, related to the restructuring of Synnex Canada. The Thomson Financial analyst consensus forecast was for earnings of 32 cents per share.

Revenue for the period totaled $1.35 billion, an increase of 10 percent from $1.22 billion a year earlier. Synnex has provided second-quarter guidance of revenue between $1.3 and $1.35 billion and net income of $9.4 million to $10 million, or 30 to 32 cents per share. Analysts had forecasted earnings of 35 cents per share and $1.47 billion in revenue.

"Our second-quarter guidance reflects continuation of a very competitive North American distribution marketplace and an overall more challenging IT demand environment versus last year," said Synnex President and CEO Robert Huang.

Tech Data, which had a stellar fourth quarter in 2004, has provided first-quarter guidance that it expects earnings of 57 to 62 cents per share on sales of $4.95 to $5.10 billion, below the consensus forecasts of 67 cents and $5.11 billion, respectively.

Distributors in the fourth quarter engaged in very aggressive pricing, at times coming close to an all-out price war, in what channel insiders say were moves to protect market share. Specifically, say insiders, Tech Data was fighting back against Synnex, which has traditionally been very aggressive on pricing.

Products usually affected by price aggressiveness are high-velocity, high-volume, systems-related products, but occasionally there is pricing pressure on peripherals as well.

Even though the pressure has eased off, distributors don't want to lose market share. In fact, when Synnex reported its first-quarter earnings, Huang said it wants to continue boosting market share.

If Synnex succeeds in gaining market share at the cost of its two main rivals, Tech Data and Santa Ana, Calif.-based Ingram Micro Inc., a rerun of the aggressive pricing that characterized the fourth quarter is possible.

Keith Bradley, president of distributor Ingram Micro North America, told The Channel Insider last month that he believes 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.

Vendors aim channel programs at SMB buyers. Click here to read more.

Likewise, Tech Data Chairman and CEO Steve Raymund said prices remain very competitive, but a price war is not in the offing. Yet, he conceded that the risk is there, "if one of our competitors attempts to win share based on lower pricing."

Ingram Micro appears to have avoided some of the earnings pressure its competitors have experienced. The distributor has provided first-quarter guidance in line with Wall Street estimates, saying it expects quarterly sales of $7 to $7.2 billion and earnings of 28 to 30 cents per share. The analyst-forecast consensus is sales of $7.1 billion and earnings of 29 cents per share.

Bradley said Ingram Micro has recurring conversations with vendors about pricing, urging them to discourage all distributors from dropping prices too low. Ultimately, he said, none of the players involved, be it vendors, distributors or VARs, benefit from overly aggressive pricing.

"It's in the industry's best interest to have all the distributors healthy and a channel that's profitable," he said.

 
 
 
 
 
 
 
 
 
























 
 
 
 
 
 

Submit a Comment

Loading Comments...
























 
 
 
 
 
 
 
 
 
Thanks for your registration, follow us on our social networks to keep up-to-date