How Low Can CDW Go?

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

Account Incursions
Solution providers say aggressive pricing is one thing, but pricing below their costs damages their relationships with customers and ultimately impacts vendors' profits.

One East Coast solution provider, who requested anonymity, said that in the first quarter CDW came into one of 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 for 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 in order 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 his own Big Deal authorization for the account and ward off the CDW incursion. But the upshot of the deal was that HP, Palo Alto, Calif., lost double-digit margins on an account 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 solution provider.

Another solution provider said CDW's HP pricing is so aggressive he's essentially stopped selling HP products. "I have experienced the same thing over and over with CDW [selling below my costs]. We have nearly stopped selling HP hardware," said the solution provider, who asked not to be identified. "We do a lot of configuration work and at the last minute CDW swoops in and steals the deal. CDW is the 900-pound gorilla with suppliers and always gets the sweetheart deals that the rest of us cannot touch due to their volumes."

Other solution providers say they are seeing a similar CDW pricing issue in Oracle products. But the below-VAR-cost pricing is prevalent at Dell as well as CDW. After word surfaced about CDW selling HP wares at below-VAR cost, several Oracle partners said they are seeing similar scenarios with Dell. One said that "Oracle plus Dell equals HP plus CDW."

The issue here is essentially the same. An established Oracle partner is in a deal, gets down to brass tacks negotiations and loses the deal at the last minute when Dell or CDW offers below-VAR-cost pricing.

Oracle, Redwood Shores, Calif., is aware of the issue, which it says tends to ebb and flow. The company tries to protect VARs, said Judson Althoff, Oracle vice president of platform and distribution alliances, "but if at the end of the day if it's a CDW or a Dell deal and Oracle is a line item in a bigger deal, it becomes very hard for us to manage that."

Oracle's approach is that neither Dell nor CDW gets rebate money. "They get the same discount on Oracle that other partners get," Althoff said. CDW and Round Rock, Texas-based Dell also have to buy through distribution, just as other partners do, he said.

And, beginning two years ago, said Althoff, Oracle started to control dispersal of MDFs much more closely. "It used to be a carte blanche. We don't any longer just cut a check for $250,000 in marketing funds at the beginning of a quarter. We now do a line-item check on those marketing programs and we negotiate all that. And we get a lot of pushback on it."

Another Oracle partner said he sees similar conflicts with both Dell and CDW. "I have been directly impacted by both," said Scott Jenkins, CEO of EBS Group, a solution provider in Lenexa, Kan. "Dell actually sold a deal under their cost to get the hardware [sale]. CDW cut their margin with a non-value-add partner and we lost a $2.4 million deal to them in the third quarter."

Jenkins said he thinks both CDW and Dell are able to sell all of Oracle's technology products—middleware and databases—from the low-end Standard Edition One up through the Enterprise Edition.

"That's a problem for value VARs like us," he said. "Customers do a price check and they see they can buy it cheaper at CDW than with us, and if we want to keep the deal, we have to match or beat CDW. Arguably, this is okay at the SE/SE1 level, but not for VARs who invest six, nine, 12 months in an enterprise sale cycle only to see it cannibalized by CDW or Dell."

Cisco Systems solution providers, for their part, say they have seen little change in the competitive landscape since CDW acquired high-flying Cisco VoIP provider Berbee Information Networks for $184 million last October.

"We haven't seen any fallout from that," said Tim Hebert, CEO of Atrion Networking, a Cisco Gold partner in Warwick, R.I. "I'd be more concerned if I was in the Midwest, which is their [Berbee's] home territory. They are very strong and very good at what they do."

He said he hasn't seen CDW undercut him with low-ball pricing that he cannot match. "Does CDW sell at low margins?" asked Hebert. "Absolutely. Do they make it hard for other people to keep their margins high? Absolutely. But I believe Cisco has made the playing field pretty even so I am not competing at a disadvantage from the get-go. It is pretty much an even playing field. They've done a very good job policing it and trying to manage that."

Next: More Channel Stuffing?

More Channel Stuffing?
Other solution providers said manufacturers might be turning to direct marketers such as CDW to dump excess inventory at the end of quarters, a practice formerly reserved for distributors.

Several years ago, distributors stopped taking the excess product and vendors may have looked to their next biggest set of partners, one large Midwestern solution provider, who asked not to be identified, said.

For example, the solution provider said he recently lost a big Lenovo desktop deal because CDW's price to the end user was below his own costs. He believes CDW bought several thousand monitors from an Asian vendor for cut-rate prices at quarter's end. CDW then attached the monitors to the Lenovo desktops and sold the package at a reduced price.

The solution provider said the vendors are hurting themselves by taking less money for deals they could have won with higher prices. Still, he said, it's up to solution providers to adjust their own models accordingly.

"If you're going to be in the hardware game, you've got to play the game the way the big boys play it," he said. "There are times you have to walk away from opportunities because some manufacturers gave people like CDW better deals. It makes the market not equal."

One distribution executive took issue with vendors that allow CDW to buy at singularly low levels, saying the practice of filling one customer's warehouse creates more issues for the vendor than it does to help.

"Manufacturers need to have clear lines of channel practices," said the executive, who asked not to be identified. "The ones that waffle cause some issues."

Some vendors do not sell to direct marketers because they want to keep distribution "more pure," the distribution executive said. "We appreciate that. It helps us know where we stand. Others say they'll have direct relationships with the CDWs, Insights, Zones and fill in with [two-tier] distribution. They're the ones that give us heartburn."

BARBARA DARROW & STEVEN BURKE contributed to this story.