Compaq expected to cut distributor ranks
By Bloomberg News
Special to CNET News.com
May 7, 1999, 5:10 p.m. PT
HOUSTON--Compaq Computer is expected to cut the number of
distributors that sell its products to about four from as many as 40 to curb
costs and manage inventory, analysts said.
The move, the first big decision by chairman Ben Rosen since he ousted
chief executive Eckhard Pfeiffer last month, could come as early as Monday,
said analyst Kurt King of NationsBanc Montgomery Securities. Compaq's
partners are likely to be Ingram Micro, Tech Data, Merisel, and CompuCom
Systems, said analyst Ashok Kumar of US Bancorp Piper Jaffray.
Compaq wants to winnow the companies that distribute its PCs because it's
too difficult to control inventory, gauge demand, and keep costs down with
dozens of disparate sellers. In exchange for giving a handful of companies
more sales, Compaq likely will seek better terms from its remaining partners.
"They'll have control of what demand and inventory look like and they'll get
cost savings," said Kumar, who rates Compaq "buy."
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Compaq has struggled with slowing sales, lower earnings, and a cost
structure that made it difficult to compete with No. 1 PC direct seller Dell
Computer. Dell builds its machines to a customer's order, helping it hold
down its parts inventory and benefit when costs fall, as they typically do in
the PC industry.
Compaq's problems, exacerbated by a first-quarter profit shortfall and a 40
percent plunge in its stock price this year, led to Pfeiffer's dismissal April 18.
"Compaq has been in discussions with our U.S. channel partners to
maximize our distribution model. We expect these discussions to lead to
refinements in the model," said Compaq spokesman Jim Finlaw. He said the
company expects to make an announcement early next week.
Ingram Micro and Tech Data already
make Compaq's Prosignia products for
small and medium-sized businesses and
build some others at Compaq's
headquarters in Houston. Merisel also
works with Compaq to build some
machines on site.
"Compaq's job of managing distribution
will become a lot simpler," said
Montgomery's King, who rates Compaq
"buy."
Compaq is also likely to reduce the
amount of price protection it gives to
distributors, analysts said.
When a computer is sold through a
distributor, the manufacturer often guarantees that if prices fall before the
machine is sold, it will make up the difference.
That makes it difficult to compete with PC makers like Dell, which carry only
days of inventory and don't have to offer any price protection.
Computer prices can fall as much as 1 percent a week while sitting on
warehouse shelves.
So-called co-location helps because it means distributors take on more of the
assembly tasks, putting the boxes together quickly as the main parts come off
Compaq's manufacturing lines. It also lets them build machines as orders
come in, which means lower inventory.
Other computer-related companies already have made similar moves in
consolidating distributors. Apple Computer cut the number of distributors
from five to two and Seagate Technology, the world's largest disk drive
maker, winnowed its distributors to five from about 12.
Copyright 1999, Bloomberg L.P. All Rights Reserved.
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