If you have a distribution organisation to sell, call CHSs openly to PC Dealer about the difficulties the distributor has had to face integrating companies collected in its buying blitz last year. She also gives her views on channel assembly, software licensing, the euro - oh, and teenage crushes and dream dates. Electronics.
With 15 acquisitions under its belt last year - the largest number of acquisitions it has made in any one year - CHS has not only become known as an acquisition-hungry company, but has also emphasised its position as one of the top three distributors in the world.
But as often happens with rapid expansion, there comes a great deal of pain. Following the takeover of struggling distributor Merisel in 1995, CHS learnt an important lesson - that it should not have attempted to merge the two cultures of the companies into one. The year after the takeover, CHS/Merisel suffered badly in terms of sales with resellers and vendors as it tried to sell both at the high and low end of the market without much success.
Despite buying Merisel, CHS was still known as a networking specialist.
It attempted to change this when, in 1996, it bought distributor, Karma - a components and storage specialist. At the time, observers expressed surprise that Karma had sold to CHS because the distributor was still not viewed as a significant threat. But with the buyout of Karma, CHS was determined not to repeat the errors it had made after buying Merisel.
It kept Karma as a separate company - the name, staff and the culture remained the same.
As Jan Lawford, commercial director of CHS, explains: 'It was no secret that the consolidation of Merisel was a painful process. Which is why we now have a strategy of keeping any acquisitions we make as a separate entity.'
CHS applied this strategy when it made the significant acquisition of struggling French and UK distributor Metrologie, which was completed in June 1998. Metrologie was seen as a high-end, value-added distributor with particular strengths in supplying Digital workstations.
According to Lawford, the acquisition of Metrologie completed the distributor's three-pronged attack whereby CHS provides the volume model focusing on key brands but services the general market; Metrologie is the value-added distribution arm for enterprise systems; and Karma is for components.
'We have done a lot of work developing the three portfolios,' Lawford says. 'Originally, there was a lot of overlap between CHS and Metrologie, but we have increased the distinction today. Metrologie is building its portfolio as a business orientated, high-end platforms and services provider to the Var community.
'There are three brands, but resellers are able to choose which brand and portfolio suits them. Resellers may buy from all three brands. If a reseller wants a whole system, it would go to Metrologie but if it wants MS Office, it would go to CHS,' she adds.
There are no plans to force re-sellers to have one account across the three brands. Lawford points out that it is extremely important for resellers to have three credit accounts with CHS - if one credit account in one particular brand is up to its limit, the reseller is still able to buy from another part of the distribution group.
'We service customers from three areas and want to give them three credit lines. By servicing their businesses, we maximise their business. If their CHS credit account is on hold, they can carry on trading with Karma. No other distributor has this,' she explains.
Not only has CHS forged its three-brand strategy in the UK, but on a global basis the company has expanded its coverage. As part of the 15 acquisitions made in 1998, CHS now has a presence in Asia and the Middle East and not just its traditional areas of Latin America and Europe.
But while each local subsidiary has its own Ts&Cs, there is also a centrally driven vendor strategy. This means CHS can negotiate its vendor strategy on a European level that ensures each subsidiary follows the same strategy and is able to have its own relationship with every level within the vendor.
Another strength that CHS is keen to point out is its central European warehouse in Helmond, Holland. All of CHS' stock is stored centrally there and during the past year, more business has been driven from the warehouse.
As part of expanding its role, more products are being delivered direct to the warehouse, instead of to individual subsidiaries. Because the warehouse is able to fulfil and deliver an order within 24 hours, it means local subsidiaries only need to keep a couple of days' inventory at any one time.
CHS is also spending a lot of time and effort in its warehousing facilities in the UK. It has recently taken an option on a warehouse - a 120,000sq ft facility situated on the M40 near Banbury. All deliveries for CHS and Metrologie will take place from the new warehouse. Metrologie's deliveries will move from April, while CHS' move over next month.
At the moment, CHS has two loading bays in Brentford and although the Banbury warehouse has 18 bays, both the distribution arms will utilise only 50 per cent of the capabilities. While some of the existing staff from Brentford have transferred to Banbury, the distributor has also been involved in a recruitment drive in Banbury to employ local people. During the past few weeks, these people have been driven down to CHS' existing warehouse facilities and trained on CHS' systems.
During 1998, CHS developed a software licensing team which set up an EDI link. Because software licensing is a complicated sale, inorder to make sure that all the forms are correct, the main issue for resellers and distributors is policing it. CHS has secured a pan-European deal with Network Associates, worth $40 million a quarter, of which the UK represents a substantial figure. The distributor has also upgraded its IS systems where the CHS internal systems are based on AS/400s and its communication system on Lotus Notes, across all of its subsidiaries.
But with all these changes and investments, CHS is still largely viewed as the third largest distributor in the UK, as far as revenue goes. But Lawford is quick to point out that in particular areas, CHS has strengthened its hold on the market and can claim the first or second slot in terms of market share.
She claims that it is the number one in storage, in worldwide and local terms. According to CHS' figures, it sells one million units of storage per month worldwide.
But CHS still suffers from a perception problem - it is largely viewed as a place to buy networking and storage products. Lawford agrees with this image but says: 'We also sell peripherals, software and PCs, but it is hard to shake off people's legacies. Our portfolio is more than networking and storage. We need to put more focus on telling the market exactly what we can offer.'
As to the future, Lawford believes CHS will continue with its acquisition policy but that the trend will slow down. 'It has been quite dramatic over the past year. We have no strategic need to acquire, but we have stated our objective that we want to be dominant in every sector.'
She adds: 'You shouldn't rule out any more acquisitions but it's not as likely as before we bought Metrologie.'
This may be true with regards to the UK, but CHS has been linked with the possible purchase of MicroAge's US distribution operation, Pinacor.
MicroAge has stated that it wants to concentrate on its reseller business because of cash restraints and, interestingly, CHS has no US presence.
An announcement on a possible deal is expected during the next few weeks.
But whether the acquisition goes ahead or not, CHS is having to deal with a more immediate problem - e-commerce. More companies are finding that business is being conducted over the Web. However, there appears to be a reluctance by resellers to place orders electronically.
According to research by CHS, resellers do not use distributors' Websites for product information - they go to vendors for that. CHS has set out to design its Website differently from its competitors by providing business data on the site according to each reseller's account. The information includes items such as stock numbers, availability, statement of account and price.
Lawford points out that the internet is more of a useful tool for smaller resellers, rather than the larger ones that tend to use EDI instead. About 25 per cent of CHS' resellers are registered with online accounts. But as Lawford says: 'Today, there is minimal ordering online. Resellers aren't using it for that. UK resellers want to ring and barter on the phone. The industry has created this issue as it wants to get the best price. The greatest interest of ordering over the Net has come from users, not resellers.'
She highlights the fact that there is a lack of standardisation across the industry so that each distributor's Website looks different from its competitor's. Because it takes resellers a long time to place an order electronically, they would be better off placing the order on the phone.
Lawford says: 'However, when standardisation starts to materialise - which key players should adopt - then we will see more resellers doing business over the Net. Resellers are very active in developing EDI relationships with us, as it is an easier way of doing business. The amount of business will increase once standardisation occurs. It will be the main way of doing business,' she predicts.
While CHS' strategy for the internet seems clear, it is playing its cards close to its chest about the other latest buzz word - channel assembly.
Lawford admits the company is in discussions about its stand on the issue.
While Metrologie configures Digital's boxes by adding memory, storage and components, CHS has not yet formalised a European channel assembly strategy.
Lawford predicts that while consolidation will slow down, the gap between the top three distributors and the remainder will get bigger. During 1998, $45 billion worth of sales went through the top three. 'Unless you are very specialised then you are going to have serious problems,' warns Lawford.
The issue of Europe is also going to be a factor affecting the UK distribution market this year. One immediate effect has been the fact that vendors are starting to change their pricing polices to offer euro prices as well.
Lawford points out that the euro could have two effects on the grey market.
While on the one hand, the euro could reduce the pricing differential between countries' currencies, the downside is that countries which do not adopt the common currency may not be able to compete against it. That, therefore, could be more expensive.
Lawford gives the example of Ireland - which has adopted the euro - and has seen an immediate effect on its P&L, with its interest rate dropping from six per cent to three per cent in one fell swoop. So, while the UK banks want to reduce their interest rates to three per cent in line with Europe, this has not yet happened and certainly will not happen until, at the earliest, by the end of the year.
So far, there has been little, if any, interest, from resellers to buy in euros but distributors have to be prepared for it and offer customers the choice to deal in this currency, says Lawford.
The burning dilemma that distributors have been facing in previous years is the reduction in their soft dollar funds. And as Lawford concedes, this is going to get tougher.
'Vendors were offered a lot of rebates two years ago. It had a knock-on effect for distributors as we were forced to increase prices as limited contribution of soft dollars. Resellers had believed that all distributors had huge percentages of soft dollars on each purchase that they could buy at cost but distributors could live on soft dollars. This no longer happens,' says Lawford.
'Vendors want to invest in demand generation. Resellers know who the key players are and what their products are. We need to use the funds to create the demand, there is no need to simply place an ad saying who the distributors are.'
Finally, as far as the recession goes, Lawford maintains that the IT industry will still experience healthy growth. While the recession will have some impact on sales, businesses do not cut back on their IT spend if they want to move their businesses forward.
No doubt CHS will make an acquisition during this year, but the challenge for the distributor is whether it can dump its perception as a networking and storage player and consolidate on its position as a serious competitor to its nearest rivals Computer 2000 and Ingram Micro. And not just through acquisitions.
A YEAR IN THE LIFE OF CHS
April: Acquires struggling French company Metrologie in a deal worth more than $80 million. Issues $200 million bond to raise capital.
May: Takes majority interest in distribution organisations in India, Hong Kong and the Middle East.
June: Agrees to buy German retail giant Vobis, along with manufacturing operations Maxdata and Peacock, for $320 million.
September: Centralises UK sales operations in Brentford, Middlesex.
October: Vobis acquisition collapses. Distributor lands $20 million contract to supply Microsoft software to Computacenter in the UK, Germany and France - ending Computer 2000's four-year hold on the deal. Distributor undergoes financial restructuring to free up $800 million.
November: For the quarter ended 30 September 1998, gross profit increased by 89 per cent to $160.3 million from $84.9 million, from the corresponding quarter in 1997. Net income increased by 103 per cent from $11.4 million to $23.2 million for the same period. Turnover doubled from $1.1 billion to $2.17 billion.
December: Restructures UK board of directors.
January: Opens 120,000sq ft warehouse in Banbury, Oxfordshire.
Commercial director - CHS Electronics
Have you broken any New Year resolutions' yet? If so what?
To stop over committing myself - I run a personal and professional diary that is busier than the CHS sales desk. I can never say no to any social event so always end up taking on too much. Already this year, I have completely screwed this resolution - can anyone remind me how many days there are in a week?
What was your bargain of the January sales?
I don't do sales - definitely not my idea of a pleasant shopping experience, struggling through crowds of people for last season's slow-moving lines!
What was the last CD you bought?
I haven't had to buy a CD for at least six years - living with a music-holic who buys a minimum of five CDs per week more than covers all my requirements.
Who was your first teenage crush?
The games teacher at school - maximum testosterone, great fit body and a very competitive attitude.
Which football team do you support?
Arsenal - growing up in north London, it had to be either Arsenal or Tottenham.
What do you drink when you go to the pub?
Usually too much.
What is your biggest personal achievement to date?
The biggest challenge I have ever faced is juggling two small kids with a full time job.
If anyone knows of a good nanny, please can they give me a call.
If you could be doing any other job, what would it be?
My existing job reduced to a three-day week would be great - with the same salary of course. There's so much I would do with all that extra time - become really good at skiing and golf, get mega-fit, do a business course, play with my kids and more and more and more. Hope my boss is reading this.
Who would be your dream date?
Someone who looks like Sting, has Chris Evans' personality, Bill Gates' money and is committed to an evening never to be forgotton. The opportunities would be endless.
Who do you admire most in the industry and why?
There are lots of people that spring to mind for all the obvious reasons - Michael Dell, Steve Jobs - but I can't truly admire someone I don't personally know.
I do genuinely admire our chief executive, Claudio Osorio - he's so focused, committed and determined in everything he does, either professionally or personally. It is inconceivable that he will do anything other than succeed 100 per cent. He also places a lot of emphasis on personal relationships and family values, which is rare in someone so competitive and ambitious.
Where are you going on holiday this year?
I'm desperately trying to get a booking for Christmas and the millennium, somewhere hot and exotic with good sports facilities, endless beaches and a very well stocked bar. But as usual, I've left it too late - most places are booked already.
With two small rug rats, holidays have changed dramatically in format from total adult, self-centred indulgance - scuba diving, skiing, golf - to family stuff - scouring brochures for kids club facilites in exotic resorts is a real life change. What's Mickey Mouse doing on New Years Eve?
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