Top Distributors Tackle Profitability Challenge

One thing worth studying more closely, however, is the company's profitability and how it stacks up with those of its peers. Of course, many things factor into a company's profitability, including how it spends its money in the way of salaries, etc., how it administers its investments, and how well it manages the basic buying and selling of goods used in its business.

While some of its rivals have incurred losses in the most recent fiscal year--mostly due to restructuring--Synnex has posted profits in each of the past three fiscal years. One reason is because Synnex's gross margins aren't that out of line with others in its market. Sure, they are as tight as a glove, or worse, a noose. But the numbers suggest that Synnex isn't gaining share with low-ball prices and below-water margins to the extent that some seem to think.

Consider the following: In its SEC filing dated Sept. 9, 2003, the Fremont, Calif.-based company founded by CEO Bob Huang reveals that Synnex's gross margins (sales minus cost of goods sold divided by sales) for the first half of fiscal 2003 totaled 4.6 percent.

At Ingram Micro, the industry's largest wholesale distributor, gross profit margins have totaled roughly 5.4 percent for the past six straight quarters, slightly above its five-year historical average of 5.38 percent. In the quarter ended June 28, 2003, margins crept up to 5.44 percent.

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At Tech Data, meanwhile, gross margins have historically been slightly better, but by no means fundamentally different. They are, however, above levels achieved in fiscal 2003 ended Jan. 31, 2003. For the previous fiscal year, gross margins totaled 5.29 percent. Since then, they have climbed to 5.68 percent, ahead of their five-year historic average of 5.56 percent.

In contrast to the broadline, volume IT products distributors, wholesalers of more expensive midrange computing systems typically sold to a smaller number of partners tend to have significantly higher gross margins--though not necessarily higher profit margins.

Arrow Electronics, for example, boasted gross margins of 17.04 percent in fiscal 2002, while Avnet recorded gross margins of 13.43 percent in its most recent fiscal year ended June 27, 2003. Nonetheless, neither company throws off substantially more profit than Tech Data or Ingram Micro, which had profit margins in the most recent quarter of 0.41 percent and 0.22 percent, respectively. In contrast, Avnet's profit margin is 0.53 percent while Arrow's is 0.33 percent. Despite their different business models, none of these big wholesalers of IT goods and services produces a whole $1 in profit for every $100 in revenue they generate. Not one.

One would think that the aforementioned numbers mean that there's no money to be made from moving IT products from point A to point B. That's not true, of course. Direct-marketing response companies are proving that there is money to be made doing just that. CDW, for example, boasts gross margins of 14.55 percent and profit margins of 4.06 percent.

The disparity between CDW's profitability and those of pure wholesalers is one reason why Tech Data and Ingram Micro have taken such pains to overhaul their businesses. Both companies have closed redundant facilities, trimmed workforces and slashed other costs, while investing in new programs that get them closer with both their VAR customers and their vendor partners. Ingram, for example, has rolled out new practice groups that can help VARs develop business practices around key market segments, including networking, security, storage, wireless and convergent technologies.

"Ingram is more focused on partner needs and internal profit metrics than at any time in its history," says president and COO Michael Grainger.

If and when sales do rebound, however, Tech Data, Ingram Micro and others will have to resist the temptation to try to steer a rally in buying their way with low prices. Because these companies are public, that should immediately show up in their gross margin numbers, which will be available for all to see.

That brings us back to Synnex, which soon will have to report its results each quarter. One hopes by then the company will have better locks on its building to prevent future thefts. Every penny counts, of course, and good locks are expensive. But Synnex's insurance company has not covered $7.8 million of the $9.6 million worth of goods taken. And with margins what they are in distribution, that hurts.

Synnex's Grand Plans
Strategically, Synnex hopes to accomplish the following: