How Low Can CDW Go?

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How does CDW sell products below other solution providers' cost? That's what a growing number of solution providers are asking themselves.

In recent months, many have seen the $6.8 billion channel giant go after some of their longtime accounts with prices below their cost for the same product through distribution. One Midwestern solution provider said CDW has matched his price for Hewlett-Packard ProLiant servers through distribution before, but until recently it had never beat that number.

Yet, late in the first quarter of this year, the solution provider, who asked not to be identified, said one of his longtime HP accounts was relocating its corporate offices and needed to buy new servers. He said CDW went below cost on the servers to wrest the deal away from him. "They had to use [HP] MDF to pad their margins," he speculated.

Aggressive pricing from CDW, Vernon Hills., Ill., is not new and has long been a fact of life for solution providers that count heavily on hardware sales and margins, even as they shift to a more services-oriented solution model. But, solution providers say, below-VAR-cost pricing is a new weapon CDW appears to be using in an attempt to grab business away from them and feed growth.

As a matter of corporate policy CDW does not discuss the details of its business relationships with individual companies, a spokesman said. But in a written response to CRN questions, CDW's executive vice president, Harry Harczak, stated emphatically: "CDW does not pass market development funds on in our pricing to customers."

In an e-mail response to CRN's questions on pricing issues, Adrian Jones, HP's vice president and general manager, Americas Solution Partners Organization, declined to comment on CDW's HP pricing. But he 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."

Jones said that in today's market, 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," he said.

Solution providers have long charged that CDW, because of its volumes, receives substantially more MDF and rebate money than other solution providers and uses that money to aggressively price products while still making a profit.

In its most recent corporate 10-K filing, CDW wrote: "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."

And in its earnings statement for its fiscal 2007 first quarter ended March 31, CDW said its gross profit margin increased to 16.2 percent of sales vs. 16 percent of sales for the year-earlier period due in part "to an increased level of vendor incentives."

Next: Account Incursions

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