Business Virtually Booming
For years, Ingram Micro Inc. has made its fortune not by producing things but by acting as a giant middleman between the manufacturers and sellers of personal computers. To most, the Santa Ana company’s operations are invisible, obscure and downright boring.
But they are far from small.
With $16.6 billion in sales last year and a market cap of nearly $6.5 billion, Ingram not only is the largest PC company in the Southland, it also is bigger than all but two of the state’s technology titans: Hewlett-Packard and Intel Corp.
Now, high tech’s back room big boy wants to be heard. With a smart new e-commerce business plan, Ingram is expanding into manufacturing and redefining the assembly line. It’s also becoming a virtual warehouse for Internet-based resellers.
The shift comes at a time when computer retailing in the U.S. is dominated by direct sellers such as Dell Computer Corp. and Gateway 2000 Inc., as well as large national chains such as CompUSA, none of which need wholesalers standing between them and the manufacturers.
It’s a gutsy move for Ingram, considering that distributors already fight for razor-thin margins. But with the promise of billions in new revenue, Ingram sees its future in Internet commerce.
“This is a fiercely competitive industry,” said Shelby Fleck, senior technology analyst at Morgan Stanley Dean Witter. “To keep their lead over their competitors, Ingram has to move in this direction.”
The build-to-order business has become one of the hottest segments for hardware manufacturers in the last couple of years. The trend was sparked by the success of Dell, which has been able to reach both the consumer and corporate markets.
Because every computer is made to order, Dell makes sure it doesn’t stock parts that are more than 2 weeks old. By keeping its inventories down, Dell and other direct sellers can cut down on administrative and storage costs. Out go the middlemen, in come the customer savings. Traditional manufacturers such as Hewlett-Packard and IBM, in an effort to compete, have followed suit.
Theoretically, this should be bad news for companies like Ingram. Who needs middlemen when manufacturers have direct contact with their customers, either in person or across the Internet?
As it turns out, nearly every player in the PC world needs someone like Ingram to act as the “umbilical cord of communication” between these two groups, said Jerre L. Stead, Ingram’s 55-year-old chief executive.
Someone has to house all of these expensive components. And when retailers and resellers need a part, they want to be able to get it the next day--even if the order is placed as late as 5 p.m.
Size counts when it comes to a distributor’s catalog of inventory. Ingram carries 145,000 products, ranging from PC to telephone parts, from more than 1,400 vendors. Only 25% of the company’s annual revenue comes from the sale of personal computer parts.
“Let’s say you’re in a Fry’s [Electronics store]. In the future, you’ll literally go to a kiosk and configure an entire home center,” Stead said. “That kiosk will be connected live from Fry’s back to us,” where the order will be assembled.
In March, Ingram opened its first build-to-order plant in Memphis, Tenn. The facility, one of 11 set to launch by 1999, is designed to make customized notebooks, desktops and PC servers for Compaq Computer Corp., Hewlett-Packard and IBM, among others.
Ingram’s plan, known as “channel assembly,” is to store partially built machines that still need microprocessors and memory chips. These two components are the most vulnerable to price changes. When an Ingram customer needs a particular machine, it orders the PC and--hopefully--cuts down on the reseller’s operating costs because it’s not storing a lot of prepaid inventory.
PC makers such as Dell and Gateway 2000 Inc. insist such a tactic can’t match the efficiency of their build-to-order technique. Yet that hasn’t stopped distributors from reinventing themselves from shipping experts to manufacturers.
Ingram started cranking computers out of Memphis this spring, as have competitors Tech Data Corp. and InaCom Corp., a Nebraska technology management service firm.
Even smaller players such as MicroAge are moving into this arena. In the back of one of its warehouses, MicroAge employees take customer requests for parts and install these components into the hard drives. The now-customized machines are then shipped to such clients as Citibank and Northwestern Mutual Life.
“Everybody’s obviously latching onto this as a much more efficient way of doing business,” said Tim O’Malley, a spokesman for IBM. “Forty percent of our commercial desktops for the U.S. market are [final] assembled in the channel. . . . As a business model, it’s very much in vogue now and for the immediate future.”
This future, insists Stead, can blossom only with the help of the Internet.
Ingram has long used computer networks to link resellers to its telemarketers, who would take orders and reel off technical information to curious customers.
In 1996, Ingram launched an expansive Web site to reduce this burden on its 1,380-person call centers, where at least half of the calls are just requests for price and availability. The site is designed specifically for resellers such as CompUSA that take Ingram deliveries, then sell the products to the public. By signing on with individual passwords, resellers can check the availability of thousands of products at the prices they have privately negotiated with Ingram.
Clients also can use the site to place orders, configure computer systems and monitor shipments, company officials said. The site now handles 6,400 orders on the Web each month from resellers, and the company’s goal is to double that number by next year.
To help do that, Ingram is developing a trio of software products that will allow its resellers to set up shop on the Net.
The project, code named Prime Access, has three components: the actual design of the Web site; a live connection to Ingram’s catalog of available products; and an e-commerce software program that allows customers to place orders online. Resellers can use the software series, which will be released next year, either piecemeal or as a whole.
Eventually, a computer reseller will be able to launch a site that lets the public browse through Ingram’s warehouses and order what they wish. But the Ingram brand won’t be anywhere on the site.
The move marks the first time that Ingram is creating technology that will be used by the general public, but the company sees itself lurking in the background. The goal is to make these online resellers look and feel bigger--and therefore more respectable--to the consumer.
“The Internet creates a new paradigm for our business,” said Douglas Antone, president of Ingram’s frameworks total integration services. “We’ve been really good at serving ‘real’ companies in the bricks and mortar sense. Now, we want to do the same thing with virtual companies.”
Even before the launch of this software product, the transition is working. Take Ingram’s agreement with Software.Net, the online software store.
When a customer orders a product such as Microsoft Office 97, the request goes directly to Ingram, which then ships the title. Such distribution deals benefit Ingram by increasing its number of online sales without requiring it to spend any money on marketing or advertising.
“It all comes down to trust,” Antone said. “[The vendors] know us and trust us. The unknown piece of the equation is the end user. . . . And they’re just starting to learn who we are.”
Before being spun off as a public company in November 1996, Ingram was part of a family-run corporation that wielded an enormous amount of influence in the retail channel. A significant chunk of the public’s favorite consumer electronics products--from desktop computers and software to CD-ROMs, videos and video games--travels through Ingram warehouses.
Ingram Entertainment Inc. ships one-third of all home videos. Ingram Book Group handles about two-thirds of the books that travel from wholesalers to retail shops.
And then there’s Ingram Micro. The world’s largest distributor of microcomputer products, it has historically served two groups: those that produce computer products, such as IBM and Microsoft, and those that sell these products to the public.
Ingram, formed from the combination of two smaller resellers in the early 1980s, became dominant through its pursuit of efficiency. The company’s previous chief executive, Linwood A. Lacy, is credited with assembling a talented team of managers and investing in a distribution system that competitors envy.
As the company was perched to go public, Lacy unexpectedly resigned in an apparent feud with Martha Ingram, matriarch of the close-knit and powerful Tennessee family that owned Ingram’s former parent company.
His replacement, Stead, made his name as a turnaround star at AT&T.; His teamwork philosophy--Stead’s business card reads “Head Coach”--has won him kudos from both employees and analysts. A sterling silver whistle from Tiffany’s, a gift from business friends, is tossed on the corner of Stead’s desk.
“He’s a classic team-builder, and that’s been great for Ingram Micro,” said Michael Grimes, co-head of West Coast technology at Morgan Stanley Dean Witter in Menlo Park.
Since the company went public, Ingram’s share price has more than doubled, from $18 a share in its initial public offering to $47.44 on Monday. Such growth is surprising, as Wall Street has long shied away from computer distribution stocks because of their low margins.
Ingram’s profits nearly doubled last year to $193.6 million, or $1.23 a share. That represents only 1.1% of its $16.5 billion in annual sales.
Yet in this market, analysts say revenue growth is the key to tracking success.
“They are, by far, the leaders of their industry,” said Morgan Stanley’s Fleck. “When you’re talking about hitting $20 billion in revenue--with about $2 billion of those sales being done via the Web or some other [electronic] link--you’re talking about a huge company.”
Ingram’s 40% annual growth rate has far outpaced the rest of the technology industry, including networking (25%), software (20%) and hardware (15%). The company’s work force has doubled in two years to 12,000, thanks to an aggressive hiring spree and the acquisition of nine distributor companies.
Such consolidation has turned the distributor market into a battle between three giants, Fleck said. Ingram is the leader in the U.S., followed by Tech Data and CHS Electronics Inc., the top distributor in Europe and Latin America.
Indeed, Ingram has taken major steps to expand into Europe. Last month, the company announced plans to build a 550,000-square-foot warehouse and shipping center in the Netherlands. And Ingram also agreed to buy Tech Data’s majority interest in German computer products distributor Macrotron AG for $100 million in cash.
Analysts say that even Ingram, as successful as it is now, should be wary of a lull in production, particularly now that the company is expanding into manufacturing. Like the PC makers, Ingram needs to monitor buying trends in order to be able to quickly cut back its inventory if sales orders start to slow.
To accomplish this, the company has shifted its corporate approach from being “pushed” by vendor needs to being “pulled” by customer buying habits. Stead’s idea is pretty simple: give resellers faster access to what is stored inside Ingram’s warehouses and make it easier for clients to place an order.
As part of this approach, Ingram is embarking on two experiments aimed at cementing its hold on the distribution arena--building the actual machines and creating Web-based storefronts that will connect resellers to its vast catalog.
“It’s become really clear that folks like us had to do more” to keep customers, Stead said. “We’re just getting started.”
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Strength in Numbers
Since 1994, Ingram Micro’s sales have more than doubled and its profits have more than tripled. The impressive growth, fueled by aggressive acquisitions, has made the company No. 1 in the wholesale computer products industry. A look at Ingram Micro:
Headquarters: Santa Ana
Chairman/CEO: Jerre L. Stead
Business: Wholesale computer products distributor
Employees: 12,000 worldwide, including 3,000 in Orange County
Status: Public
Exchange: NYSE
Monday’s stock close: $47.44
Soaring Sales, Profits
Sales (in millions)
1997: $16,582
Net income (in millions)
1997: $193.64
