Dell Awards Sourcing Pact To Tech Data

Dell recently awarded the sourcing deal, estimated to be valued at many millions of dollars, to Tech Data following a hotly competitive reverse auction designed to secure the lowest bid from the major distributors, according to sources familiar with the negotiations. The direct computer maker, which purchases products such as peripherals from major broadline distributors including Tech Data, Ingram Micro and others, essentially pit the distributors against one another in an attempt to consolidate its purchasing with distributors and get more competitive product pricing.

According to sources, Tech Data was awarded the deal last week after lengthy talks and a tense bidding war between several major distributors. The deal, which sources say includes products from as many as 200 different vendors, could have far-reaching implications, as one of the channel's fiercest rivals could very well be getting peripherals and a variety of other products from Tech Data for better terms than what smaller Tech Data customers enjoy.

No details on the financial scope of the agreement have been released, and neither company has made any official announcement regarding the deal. When asked about Dell's reverse auction last week, Tech Data chairman and CEO Steve Raymund declined to provide any specifics. "Dell does a lot of business with the distributors," Raymund said. "As for Dell's distribution strategy, I think you'll have to ask them."

A Dell spokesperson declined comment, saying only that the company does not talk about its vendor, supplier or distributor relationships. Dell, however, has made announcements on its alliances with Lexmark and EMC in the past.

This time, neither party is saying anything, but people in the industry are speculating about the possible repercussions of the deal. What could upset resellers is the realization that their arch-enemy Dell could very well be getting consideration on peripherals and a variety of other products for better terms than what Tech Data resellers receive.

Roger Grady, owner of Boulder, Colo.-based Native Systems, an ASCII Group reseller, does business with Dell and Tech Data. Grady said he isn't surprised that distributors are courting Dell's business. "Dell is going to get product from somewhere, whether its distributors or vendors. Look at the deals they've made with Lexmark and EMC," Grady said. "Dell has a heavy hand, and [the channel] just has to do whatever it can to compete."

"We don't view this as a channel-friendly move," added Alan Weinberger, chairman and CEO of the ASCII Group, the industry's largest organization of independent resellers. "It's certainly a seismic shift in Tech Data's business model."

Dell has used distributors such as Tech Data and Ingram Micro in the past to buy peripherals, components and software, which are then sold through the computer maker's DellWare Web site. The alliance between Dell and IT distributors has long ruffled the feathers of many VARs.

"It doesn't make any sense to me that manufacturers and distributors continue to spend millions to get small resellers to buy from them," said one reseller who wished to remain anonymous, "and then turn around and give better deals to the very business that destroys our ability to make a profit."

The sourcing agreement with Tech Data could have even more adverse effects on pricing and margins for the channel. Dell already offers highly competitive pricing for such items as cameras, printers and other peripherals. For example, a search of the DellWare Web site revealed that a Canon PowerShot S410 digital camera lists for $349, which, compared to some other reseller Web sites, beats channel offers for the same item by as much as $100.

Analysts have cited Ingram Micro as Dell's biggest distributor partner for its DellWare site, but Tech Data beat out both its largest competitors as well as Synnex for the latest deal. Ingram Micro declined to comment on how Tech Data's sourcing agreement will affect Ingram Micro's business with Dell; however, sources familiar with the deal say it will cause a significant reduction of Ingram Micro's sales to Dell. Some in the channel thought that Synnex, which has been growing rapidly and taking market share with its low-priced model, stood a good shot at landing the deal before it went to Tech Data. Synnex was unavailable for comment.

The new purchasing agreement could be an enormous plus for Tech Data, which earlier this year won a lengthy bidding process with other distributors to win a highly coveted alliance with EMC.

Despite angering some reseller customers, the new pact should allow the industry's second-largest IT distributor to reap more of Dell's double-digit sales growth. According to Dell's recent SEC filing for the quarter ended July 30, 2004, Dell's peripherals sales grew 35 percent year-over-year during the three and six months prior to July 30. Dell's printing and imaging business, launched in early fiscal 2004, is currently the fastest-growing product line in Dell's history, and is expected to exceed $1 billion in net revenue during fiscal 2005. It's unclear whether Tech Data's sourcing agreement includes printers. Tech Data's peripherals business, meanwhile, is one of the distributor's strongest revenue generators.

Still, with the reverse auction putting enormous pressure on product prices, Tech Data may not get much margin out of the agreement. A source at one of the competing distributors said negotiations drove prices down so far that the deal became almost worthless in terms of profit margins.

The sourcing agreement could signal more channel activity for the company that wrote the book on direct IT sales. Though it has modest channel business, Dell has made some inroads with indirect sales in recent years, launching Solution Provider Direct program for unbranded Dell white boxes in 2002 and then forming a partnership in 2003 with the ASCII Group that provided its members with both branded and unbranded Dell systems at special prices.