CDW's Micro Warehouse Acquisition Deepens Channel Competition

CDW's $22 million acquisition of Micro Warehouse's North American assets creates a $5 billion powerhouse that poses a greater competitive threat to solution providers, distributors and vendors than ever before, channel sources said.

"This is bad for Tech Data and Ingram Micro because CDW is a better distributor; they can do it at a lower cost and they're able to ship single orders to thousands of different, smaller customers," said Martin Wolf, president of Martin Wolf Securities, which brokers the sale of channel companies. "This is a brilliant move, and CDW will be rewarded handsomely for it."

CDW CEO John Edwardson, however, said he expects CDW will end up buying more products through Ingram Micro and Tech Data as a result of the acquisition. "This will not change the ratio of what we buy through distributors," Edwardson said.

Distributors could not be immediately reached for comment. CDW currently buys about 47 percent of its product through those distributors, down from about 50 percent two years ago.

CDW's increased volume and market share continues to give the company stronger pricing leverage with the major vendors, oftentimes better than what distributors and solution providers can sell for, Wolf and others said. That, coupled with CDW's strong end-user marketing and advertising capabilities, has made the company, along with Dell, one of the channel's most ubiquitous competitors, solution providers said.

"They got the cheapest price," said Bernie Franczak, manager at HPM Networks, a solution provider in San Jose, Calif. "What CDW has done is effectively driven down margins in the marketplace. If I give a customer a quote, they immediately compare that with CDW."

Solution providers said they are further frustrated by CDW's prices because the company's volume buying power allows it to purchase products from distributors and often resell it at the same or lower price than what most solution providers buy it for from the same distributor.

"Distributors are cutting their own throats on profitability because they could be selling at a more profitable price to CDW," said Tommy Wald, CEO of Riata Technologies, a solution provider in Austin, Texas. "CDW is taking business left and right. Tech Data and Ingram Micro are putting themselves and their partners at a disadvantage."

The acquisition of certain Micro Warehouse assets--including a U.S. customer base with sales of more than $900 million, Canadian operations worth about $40 million and existing inventory valued at about $14 million--will deepen that disadvantage, solution providers said.

"CDW has always been a competitor, and they're a more formidable competitor now," said Leonard DiCostanzo, vice president of business development at Emtec, a New York-based solution provider. "CDW continuously sells below my cost and has certainly eroded a lot of my product sales. They're even more formidable because Micro Warehouse was always lurking out there, too."

CDW and Micro Warehouse share about 25 percent of the same customer base, giving CDW thousands of new customers, Edwardson said. The acquisition also gives CDW a stronger base in the government and education markets, he said, adding that CDW will now be the largest Apple reseller in North America.

"That's going to bring a ton of pressure on Apple," said Mike Healey, president of Ten Corp., a solution provider in Needham, Mass., that focuses on the government and education markets.

Despite CDW's competitive threat, many solution providers hope the company increases its lead and services programs through the channel. Healey, who provides integration services for CDW, said solution providers will have to get used to CDW as a price leader and win their own business through value-added services.

"Everybody has to find a happy medium," he said. "We have to concentrate on what drives our businesses. For CDW, it's selling and delivering product; ours is services. If we can partner so that both our engines drive each other, that's great."