Is CDW using vendor rebates and market development funds (MDF) to sell Hewlett-Packard products below other solution providers' costs?
Several HP solution providers say just that. Though CDW has always been aggressive on HP pricing, VARs claim that toward the end of the first quarter, CDW was bidding HP Proliant servers and Imaging and Printing Group (IPG) products below the cost they could buy those same products from their distributors.
"I've seen CDW sell at zero [his cost from distributors] but never at negative [below his distribution cost]," said one Midwestern solution provider, who asked not to be identified.
Ingram Micro and Tech Data did not return calls seeking comment.
The solution provider said that one of his longtime HP accounts was relocating its corporate offices late in the first quarter and needed to buy new servers. He said that CDW went below cost on the servers to wrestle the deal away from him.
"They had to use [HP] MDF to pad their margins," he speculated.
A CDW spokesman said, "As a matter of corporate policy we do not discuss the proprietary details of our business relationships with individual companies."
In a written response to CRN questions, however, Harry J. Harczak Jr., CDW's executive vice president, said, "CDW does not pass market development funds on in our pricing to customers. This is clearly evident if you look at our reported gross margins and our net advertising expense. Net advertising expense was $118.3 million in 2006 and $29.2 million in the first quarter of 2007."
But in CDW's March 1 10-K filing with the Securities and Exchange Commission, the Vernon Hills, Ill., company said, "We are able to offer our customers competitive prices due to our low cost structure, efficient distribution methods, ability to purchase products both directly from manufacturers as well as through distributors, and economies of scale in purchasing products. Our size, financial strength, and ability to successfully serve our customers allow us to negotiate advantageous purchasing terms and earn vendor incentives. ... In 2006, sales of products manufactured by Hewlett-Packard represented approximately 26 percent of our total sales and, therefore, we are dependent on the economic condition and product competitiveness of, and our business relationship with, this manufacturer in particular."
Solution providers have long charged that CDW, because of its HP volumes, receives substantially more HP MDF and rebate money than other solution providers and uses that money to aggressively price HP products while still making a profit. CDW sold $1.76 billion in HP products for its fiscal 2006, according to the 10-K filing.
VARs say aggressive pricing is one thing, but CDW's HP pricing below their costs damages their relationships with customers and ultimately impacts HP's profits.
One East Coast solution provider, who requested anonymity, said that in the first quarter, CDW came into one his largest accounts and bid HP Proliant servers at 13 points, or about $1,000 per server, below what he could buy the same servers from Ingram Micro. "I found out that CDW had an HP Big Deal letter for the account," the solution provider said.
Big Deal authorization allows HP solution providers to sell products at substantially reduced prices to win a deal against competing vendors such as Dell or IBM. But it wasn't intended to shift share from one HP solution provider to another. The solution provider was ultimately able to obtain Big Deal authorization for the account and ward off the CDW incursion. But the upshot of the deal was that HP lost double-digit margins on an account that it was already locked into.
"The only way I can figure out that CDW got a Big Deal letter for the account was that CDW's HP rep didn't do his due diligence on the deal before authorizing it," said the East Coast solution provider.
A West Coast HP solution provider, who asked not to be identified, said he recently lost a large contract for HP desktops and IPG products to what he called a "super aggressive bid" from CDW.
"We can get very aggressive on [HP] pricing, but we couldn't match the CDW bid," he said. "CDW gets additional growth rebates [from HP] that are usually only available to about four or five channel companies in the country. Those growth rebates had to have been factored into the pricing."
Adrian Jones, vice president and general manager for the Americas Solution Partners Organization at HP, declined to comment on CDW's HP pricing.
But in an e-mail response to the pricing issues, Jones said, "While I can't comment specifically on CDW's pricing practices, I think it's important to understand that HP has a varied go-to-market strategy involving direct reseller, distribution and "value add" reseller partners, all of whom play an important part in reaching different market segments. In the market today, pricing will always be a challenge. The key differentiator between the volume resellers and our value-add channel resellers is the advantage of their local presence, expertise and service in owning and managing the customer relationship."