Stand and deliver

The experiences of mail-order specialist MicroWarehouse is a shining example of how well the catalogue market can work - and also how wrong it can go.

The idea of buying computer equipment through a mail-order catalogue may not have always sat comfortably with the more discerning IT customer, particularly if that customer's business performance is at stake. But the catalogue market is set to double over the next three years and for those who box clever, it could prove a lucrative route to market.

But because of the nature of mail order, it increases the considerable risks associated with retaining large quantities of inventory. With technological development advancing at exponential rates, the threat of obsolescence is constant and cannot be underestimated.

The experience of international catalogue specialist, MicroWarehouse, which buys three quarters of its products directly from manufacturers, is a case in point.

The company was founded in 1987 by chief executive Peter Godfrey, together with fellow publishers Robert Bartner and Felix Dennis. The venture's early success was born from accurate predictions that the demand for PCs was about to explode.

The Macintosh by Apple was, at the time, the leading light in the microcomputer industry and the Mac Warehouse catalogue, which dealt exclusively in Macintosh products, formed the company's core business. Vendors that were anxious to increase the number of outlets for their products, added to the customer base, supplying MicroWarehouse with details of registered users.

In 1989, with the Wintel alliance in ascendance, the MicroWarehouse catalogue for PC users was launched. International expansion swiftly followed.

The UK operation was established in 1991, and in 1992, the company went public and set up offices in Germany and France. By 1994 it had operations in Australia, Canada, Japan and Mexico and had brought in a clutch of speciality catalogues including Micro Supplies Warehouse, CD-Rom Warehouse and Micro Systems Warehouse.

It was also investing heavily in global telemarketing centres. The following year it acquired the UK Mac reseller Technomatic and three more Mac outlets in Australia and Canada were added to the portfolio.

At the start of 1996, MicroWarehouse appeared unstoppable and a further two acquisitions followed, including that of US network retailer Inmac.

But that year marked a turning point for the business. Rapid expansion and diversification coupled with year-on-year revenue growth - sales were approaching $2 billion in 1996 - was marred by shrinking profits and claims of accounting irregularities.

Also, an investigation by the US Securities and Exchange Commission (SEC) led to the departures of chief financial officer Steve Purcell and chief accounting officer Eric Furman.

The SEC continued its inquiry and requested that MicroWarehouse file revised figures for the previous two years. Shareholders watched helplessly as its value plummeted. The board of directors was accused of recording misleading financial statements and two class action lawsuits were initiated, one of which was finally settled by MicroWarehouse this year. The other suit is still ongoing and litigation costs so far stand at more than $30 million.

Last year, the company closed its UK headquarters in Bracknell and wound down operations in Denmark, Finland and Norway. It also closed its facilities in Australia and Japan. Costs associated with these closures totalled $52 million.

And despite claims by MicroWarehouse that the restructuring would have a limited impact in the UK, nearly all the UK directors have resigned or been forced to leave during the past six months, amid continuing allegations of mismanagement and in-fighting.

So what went wrong? Brian Burke, corporate analyst at Dun & Bradstreet, thinks it is simply a case of poor timing: 'I don't think the company did anything wrong, as such. It just didn't do things as well as its competitors.

The market is definitely growing but it's not infinite and some players are moving forward more rapidly than others by broadening their products to attract a wider customer base.'

He believes this is the key to a catalogue reseller's success. 'Computer consumables, software, hardware and general office supplies are coming together in terms of the supply source. Because MicroWarehouse is still perceived as a Mac reseller, people wanting office supplies will not naturally look there first.'

This explanation gains weight when you look at the success of firms such as Global Direct and Dixons' PC World Direct, which are broadening their portfolios to include everything from hole punchers and filing cabinets, to high-end PCs and multi-user copies of Windows NT. Burke also cites office suppliers such as Staples, Ikon, Orion Media and supermarkets such as Tesco as examples of the rise of the one-stop shop.

But MicroWarehouse was the pioneer of this strategy and is fighting its ground. It offers more than 25,000 products fulfilling every possible small business need. Furthermore, nearly 70 per cent of its customers are SMEs.

A more accurate explanation for the company's breakdown lies in its failure to manage inventory as effectively as it could have. Over a relatively short period, MicroWarehouse built up a massive inventory of obsolete stock. As Mac sales declined and prices fell, it continued to value products at the old prices, inflating the company's assets and share price.

Moreover, as Burke points out, MicroWarehouse failed to rebrand itself in the UK and Europe as it had in the US. In the UK, it is still perceived as primarily a Mac outlet. As a result, it hasn't offset its losses through Wintel sales, as it has in the US.

When the crisis first became apparent, Godfrey recruited Chip Lacey from Ingram Micro, hoping his experience at the world's largest distributor could cure MicroWarehouse's inventory headache. But Lacey held the position of chief executive for little more than 12 months and resigned when Godfrey rejected his idea to introduce a UK-specific catalogue.

This May, rumours began to circulate of further inventory problems. According to sources, this provided MicroWarehouse with a good excuse to force out the UK finance officer and managing director, Terry Shaw. His replacement, Jeff Sheahan, also European president, left last month for Onsale, a rival online auction reseller based in the US.

MicroWarehouse has declined to comment in detail on the state of its UK business. Warren Kaufman, the company's legal representative and sole UK representative, claims the more recent departures are fall-out from the closure of the Bracknell offices last year and not due to internal discontent.

But despite MicroWarehouse's problems, mail-order operations have a number of potential advantages over the traditional two-tier model. And in a renewed effort to pick up a share of the seemingly limitless SME market, all players are working hard to dispel old notions of unreliability.

But stories of damaged goods, late deliveries and unaccountable customer service staff has created an image of the catalogue sector that can't be dismissed easily. It is one thing to find out that the charcoal grey V-neck you ordered turns out to be a cream coloured cardigan when it finally arrives on your doorstep, but discovering that your order of 20 networked PCs are the wrong specification is quite another matter.

However, if you're an IT manager with diverse technical needs and a busy schedule, the attraction of browsing through a catalogue containing thousands of up-to-date and clearly priced products is significant. Simple purchasing options and guaranteed next-day delivery adds to the appeal.

Catalogue resellers such as Action Computer Supplies and US-based Global DirectMail are growing steadily in the UK, with more resources being targeted at SMEs. Keen not be left behind, PC World Direct recently launched its first catalogue aimed directly at the small business sector.

At the same time, the meteoric success of direct vendors such as Dell has not gone unnoticed. Many competing manufacturers now regard mail order as a viable alternative to a fully-fledged direct operation and the inevitable conflict this creates with established sales channels. Last month, IBM announced it was strengthening its mail-order strategy aimed at SME customers.

According to Vince Smith, head of the PC division at IBM, catalogue resellers have an increasingly important role to play in the SME and SoHo markets.

As a result, Big Blue has moved the responsibility for the mail-order market to its small and medium business (SMB) unit and increased the number of account managers allocated to catalogue sales. The vendor plans to recruit three leading catalogue resellers - Action, Portable Computers and MicroWarehouse - to help promote the initiative.

Of course, catalogue mail-order one-stop shops are quite different to specialist Vars and the finely-tuned direct operations which only supply their own brands. Smith claims resellers do not feel threatened by mail order precisely because it does not add value in the same way as a Var.

But this is not strictly the case. Action has just established a services division called Action Services, which allows it to deliver, configure and install up to 300 PCs. Elsewhere, Global outsources its services to CDI, and PC World Direct boasts 'a sophisticated service package at the highest level', according to business manager, Derek Lloyd.

Despite this, many Vars remain ambivalent towards the mail order sector because it still accounts for such a small proportion of total PC sales, little more than three per cent, according to Brian Pearce, senior distribution analyst at IDC.

But he predicts the market will double in size over the next three years.

One look at the annual results of Action, PC world Direct and Global suggests his prediction may be too modest.

At MicroWarehouse, Godfrey admitted some of these mistakes and started to put recovery measures into place. At an investment conference in September, he unveiled plans to deploy a virtual warehouse model for the purpose of reducing inventory costs.

Godfrey stated: 'MicroWarehouse is reacting to the restraints in the channel much like everyone else. We need to reduce our physical presence to accomplish overall reduced costs.'

The second measure is the introduction of online auctions. Last year, at the height of its crisis, MicroWarehouse acquired Online Interactive, a Web-based reseller, which was swiftly relaunched as an internet auction site that can attract bargain hunters 24 hours a day, seven days a week.

Since then, both Global and PC World confirmed that they are looking at the possibility of launching their own auction sites.

But, as Lloyd points out, if inventory management is good and sales forecasts accurate, auctions and the inevitably lower margins they produce, aren't necessary: 'It is not certain that online auctions will work over here, as they have in the US,' he adds.

Lastly, MicroWarehouse is planning to customise access to its Websites, in what appears to be an overdue concession to Lacey's proposal for region-specific customer targeting. 'We are tailoring the nature of our sites based on our customers' needs and performance,' Lloyd says.

He adds: 'The European common currency will also be an important development.' But with MicroWarehouse becoming more reliant on electronic routes to market, the UK and Europe must become far more e-commerce friendly if its domestic revival can be replicated over here.