The Superstore Phenomenon

Most people are familiar with the mega chain-store phenomenon: Wal-Mart, Target or Costco rolls into town, for example, offers competitive pricing on a gamut of commodity offerings, and eventually drives out the smaller mom-and-pop specialty stores. Well, watch out government VARs, because the same trend seems to be emerging in your very own federal neighborhood.

For years, certain companies have been synonymous with the label of government technology supplier--CDW Government and GTSI frequently top the list. In fact, according to a survey of 600 federal IT professionals conducted by Fairfax, Va.-based research firm Market Connections, nearly half of the respondents cited CDW-G when asked to name a reseller of IT products, and 26 percent cited GTSI--a dip from last year, but still enough for the company to earn runner-up.

New to the survey, however, was a collection of companies nipping at their heels. CompUSA, Best Buy, Office Depot and Staples earned 19 percent, 11 percent, 8 percent and 6 percent of mentions, respectively. CompUSA is perhaps the least of a surprise, given a somewhat discernable government focus and a fair showing of 7 percent in last year's survey. Staples earned only a 2 percent mention in the 2004 survey, however, and Best Buy earned less than 1 percent.

So, why the change? For one thing, federal IT professionals are consumers just like everyone else. They've watched Best Buy's stock price rise to $68 a share from $47 five years ago, and Staples' to $22 from less than $10 in the same time frame. They've found great deals on PCs, laptops, printers and any other home electronics from these same stores at their local strip malls, so it stands to reason that when they headed to CompUSA to get their HP printers, they'd also pick up memory sticks for the office, says Lisa Dezzutti, president and founder of Market Connections. Who needs long-standing market expertise for that?

In that sense, a lot of these companies are doing little more than accommodating the commodity purchases--ironically good timing, since GTSI and CDW-G recently started to emphasize services rather than just products. That begs the chicken-or-the-egg question: Did the historically government resellers move toward services in response to the consumer players' infringing on their territory, or did the consumer players gain market share by sliding into recently vacated slots as product peddlers? It's hard to say.

For now, it doesn't make that much of a difference. As GTSI and CDW-G can probably attest to, moving beyond products is a long process that both companies have struggled with for years, Dezzutti says, after building unshakable reputations in the commodity marketplace. Consumer players that bite off more than they can chew stand to get bitten themselves. Just look at OfficeMax. In May, the company was ordered to pay the U.S. government $9.8 million to settle allegations that it violated the Trade Agreements Act by selling government agencies office supplies manufactured in noncompliant countries. An experienced government VAR would have known better.

That said, there is one consumer company that, at first glance, seems to be doing it right. Best Buy hired government IT market veteran Bill Shafley to be president of its recently --and quietly--launched Best Buy Gov subsidiary; Shafley is credited with a brief stint at GTSI and helping to get CDW-G off the ground. He now hopes to do the same with Best Buy Gov. The company is rolling out a Web site and GSA schedule this summer, he says, and plans to offer services in addition to consumer electronics.

But for now, Best Buy seems to be the exception. The most harm government VARs big and small will likely see from the invasion of consumer players is a loss of bread-and-butter revenue--that which comes from PCs, printers and peripherals, Dezzutti says. And to earn back those dollars, they need to improve their own value propositions, upping the ante in levels of service and responsiveness to more truly become the government's one-stop shop.