DAVID DUKES : Profiting as a Middleman : Ingram Micro Is Nation’s Largest Distributor of PCs

To David Dukes, 47, president of computer distributor Ingram Micro Inc. in Santa Ana, the distribution industry hasn’t always received a lot of respect.

Big manufacturers, such as International Business Machines Corp. and Apple Computer Inc., traditionally bypass distributors and sell their products through an authorized network of dealers.

But in the past two years, thanks to a merger and the proliferation of upstart computer manufacturers, including Advanced Logic Research Inc. in Irvine, Ingram Micro has become the largest distributor of personal computers in the nation.

Overall, Ingram Micro controls the distribution of about 25% of the computer hardware and software market, with $1.45 billion in 1990 sales. The company became a sales juggernaut in February, 1989, when Ingram Micro was formed in the merger of Buffalo, N.Y.-based Ingram Computer and Santa Ana-based Micro D distribution companies.

Now the company has designs on an international expansion. Ingram Micro made an initial launch into the Asia-Pacific market in November with its announced purchase of a stake in Imagineering Technology, a distributor in Sydney, Australia, for $11.8 million.

But the transaction fell apart after Ingram Micro got a closer look at Imagineering’s books and decided to withdraw the offer. Then, last month, the company acquired WinPrime Group and its subsidiary, Software Limited, in Great Britain as part of a plan to expand its presence in Europe.

Meanwhile, the company reported its sales increased 34% in the first quarter ended March 31, despite the recession. Dukes attributes the success to good execution of Ingram Micro’s strategy and consumer interest in new products, such as notebook computers and Microsoft Corp.’s Windows 3.0 software interface.

Before joining Ingram Micro in September, 1989, Dukes spent nine years in the trenches of the retail computer industry as a value-added reseller, or a niche-oriented dealer who packages computers with certain software applications and markets them to a specific industry.

Dukes discussed his views on the distribution industry and the future of personal computers with Times staff writer Dean Takahashi.

Q. Ingram Micro will soon begin building a new headquarters in Santa Ana. You probably could have moved anywhere you wanted to. Did Orange County’s concentration of computer firms have anything to do with the decision?

A. Certainly the concentration of high-tech companies in Orange County was a plus for our staying here. But the biggest reason we decided to stay here--and this is an expensive market to do business in--was because of the outstanding employee base we have. If we elected to move to another part of the country or even 20 miles south, we would have had high employee turnover, which would have been a major setback to our company. We decided to stay in the immediate area. We looked in Irvine Spectrum and most every part of the county. We are a low-cost distributor. We often say we’re not pretty, we’re just effective. The Pacific Park/Catellus Development Corp. area we settled upon made us an offer we couldn’t refuse. We wanted to stay within a 5-mile radius.

Q. How does Ingram Micro’s distribution business work?

A. We fill the role of traditional wholesalers, of being the middleman between the manufacturer and, in our case, the dealer or the reseller. Serving as the middleman means we’re a step in getting inventory ultimately to the end user. We currently represent 550 hardware and software vendors and 8,500 inventory items.

Two key points are that we take the inventory risk away from the reseller and share that risk with the manufacturer, and second, we are taking the credit risk away from the manufacturer. In general, that’s the key role for a distributor, but it is a lot different in the computer industry because we are about a lot more than inventory management and credit management.

We are a fulfillment house for several of our major customers such as Businessland, Dell and Sears. We’re transparent in the process. They put their names on a catalogue, and for some large portion of the catalogue, we fulfill the orders for them.

A customer will place an order with Businessland, which will transmit the order to us, we will ship it direct to the customer and bill the customer, transparently. So distribution has a multifaceted role.

Q. What is the company’s recent corporate history?

A. The biggest event that occurred in our recent history, of course, was in February, 1989, with the merger of Micro D, which was a public company, and (privately held) Ingram Computer. We are now a subsidiary of Ingram Industries based in Nashville, Tenn., which is a conglomeration of distribution companies. The way they got into the computer business was that back in the mid-1980s it appeared that the way software might go to the marketplace was through bookstores. And as a large book distributor, they had some obvious vested interests to protect. So they acquired a company in Buffalo called Software Distribution Services, and it became Ingram Computer, specializing in the software side. They also held a fairly large stake in Micro D. In February of 1989, a merger was consummated, and we became Ingram Micro D and then dropped the D because it’s a mouthful. We are now Ingram Micro. We are the largest distributor in the world. We had revenue last year of $1.45 billion, which represented 43% growth. This year our revenue will come in excess of $1.75 billion, and that number does not include any anticipated mergers in the international marketplace.

Q. How has the merger proceeded?

A. The thing this company did right was it made all the hard decisions fast. It said this is what we’re going to be called, this is where we will be located, each of you have a job and this is your position, I’m sorry this group of you doesn’t have a job--got all of the hard decisions fast and all of the emotions behind. Very quickly the merger was behind us, I came in and it was already over.

Q. With whom does Ingram Micro compete?

A. We are the largest. The other major players in distribution are (Torrance-based) Merisel, which was formed by the merger of Softsel and Microamerica last year; Florida-based Tech Data is the third-largest company. Following that there are a host of companies in the $100-million to $300-million range. Outside of the distribution channel, I’d say we compete with manufacturers who sell direct to customers. We encourage those manufacturers to come to distribution.

Q. The computer distribution industry has been described as an oligopoly, which is a big contrast to the computer industry itself. Why did things evolve this way?

A. Simply said, a couple of mergers in the last year created billion-dollar companies. But there are also shifts going on in the marketplace. At the same time we were emerging, the dynamics of the market, such as capital tightening up, more and more manufacturers flooding the market, a shift to the growth of the value-added reseller--all these pointed to the bigger role of distribution. We are the most cost-effective way to go to the marketplace. We represent a very broad base of customers, all told, over 40,000 customers, and 26,000 (of them) domestic.

Q. Would you say the oligopoly structure in distribution helps maintain a lot of manufacturers as opposed to driving them toward consolidation.

A. Yes. Our size and our resources allow us to be a genuine extension of what the manufacturer needs. We can share and relieve costs in marketing, technical support and training programs. That is part of what we’re all about. We have the lowest cost structure in distribution, and we identify areas where we can be more cost-effective than a manufacturer can.

Q. What product developments in the past year have most affected your business?

A. Microsoft Corp.’s Windows (3.0 software interface) was the big one for 1990. It was the largest single launch we ever had. We had opening inventory of 16,000 software packages and we sold 12,000 the first day. We formed a Windows division to serve the manufacturer and reseller in taking their products to the marketplace. We became a focal point in conjunction with Microsoft for the applications software developers in the community. We now receive (15 to 20) Windows products out of 200 to 300 new product offerings a month. On the hardware side, the biggest development was the notebook computer (which weighs less than 8 pounds and fits inside a briefcase.) In this industry, you have about six months’ edge if you have a technological advantage. The notebook has been changing that fast.

Q. Computer stocks are starting to take a beating in the market. Do you think personal computer sales are going to hold up during the recession?

A. I absolutely think they’re going to hold up. But it’s a difficult question to answer because you have to address that in segments of the marketplace. For example, notebook computer sales this year will continue to explode. There is no question they fit in the market. The momentum behind Windows and the graphics arena will continue to see technical evolution and that will help feed the marketplace. There seems to be some slowdown in replacement of existing equipment in some of corporate America. But there is still this great opportunity out there in automating small business in America. In the last few months, we have seen the evolution of the value-added reseller. They became very significant last year because lots of small players developed product-niche expertise in their software applications. We think lots of computers will be sold in small quantities by lots of VARs.

Q. What sort of technological changes do you foresee coming in the computer industry?

A. Huge growth in low-cost but powerful machines based on 386SX chips and up. The notebook computer market will continue to explode. The workstation market will keep growing and continue to come down in price. There will be changes in graphics, improvements in color monitors, driven in part by Windows. Multiple operating systems, such as DOS and Apple’s System 7, will continue. One area that will be exciting is in the mass storage side, with big changes in the way data is stored. Multimedia computing--bringing together all the various elements of presentations from sound to graphics--continues to get a lot of attention but it is poorly defined and shows little cohesive momentum in the marketplace. It might be we’re finally getting close to reducing the amount of paperwork in the office. In the early 1980s, that was talked about a lot. Now, with the continued evolution of technology, the way data will be stored and processed and distributed, the capability is there in document processing to take paper off the desk.

Q. Half the PC dealers in the country are expected to close or be acquired by 1995. Why is that happening?

A. The way the market is segmented today is, it’s broken into owner-operated chains like Businessland, the franchise chains like MicroAge, independent dealers, corporate resellers, value-added resellers that market software for specific applications, and super stores. There is a lot of momentum among the VARs, corporate resellers, the super stores and the independents.

The owner-operated chains are at risk because they developed expensive infrastructures in a market of declining prices and profit margins. Those that cannot redefine value and deliver it to the market are very much at risk.

The franchise chains, meanwhile, changed a great deal. They became what the industry calls “aggregators.” Franchisors got a percentage of sales from affiliated stores that paid for service and training. A chain called TCBC changed that in the late 1980s by allowing stores to buy from it on a cost-plus basis. The traditional chains said it wouldn’t work. Then the company acquired Entre Computer Centers and you had a major chain selling at cost plus and it changed the economic equation.

Q. International business accounts for 11% of your revenue now. Can you tell me about the international expansion strategy?

A. Our international expansion strategy is very important. Our mission statement clearly says that we want to be the preeminent distributor of microcomputer products and services in the world. Our total size makes us the biggest, but historically most of our presence is domestic. We entered Europe in October, 1989, by acquiring a small company called Softeurope. We expanded in France and Brussels and acquired a company called WinPrime in the United Kingdom. We’re looking at additional opportunities there. We just opened in Italy and expect to go into Spain in the fall. We hope to go from 11% of sales to 18% by the end of this year and in the long term we hope to have half our sales coming from the international market.

Q. Will the European market follow the U.S. market by evolving into a collection of giant distributors?

A. Yes. There are circumstances that make the parallel fuzzy. But in general, we expect the momentum here to be followed in Europe. There are not any Pan-European companies that are dominating the marketplace. When the curtains come down at the end of 1992, we expect there to be big opportunities, and you will see two or three companies evolve to dominate the market.

Q. Do you see parallels in the Asian market?

A. You’re aware that we attempted to enter the market last year with Imagineering and it didn’t happen. We absolutely intend to expand there, but our attention is absorbed in the European market right now. We probably won’t expand in Japan because it isn’t as clearly a defined opportunity in Japan compared to other countries. We do not anticipate any announcements in the near future, but you will see us focus on it at some point.

Q. The Big 3 computer makers do not use distributors to market their products. Do you think you will begin selling more of those products, and would that be a sign of respect for the distribution industry?

A. I would redefine the question to include the big five or six. We have been selling some equipment with some of them for some time, such as ASCII terminals for International Business Machines Corp. We have represented some products in the market for IBM. We have not sold CPUs from any major manufacturers. We have worked with Apple Computer Corp. to bring some products to market in the software arena. Only recently did we get to sell Apple-label modems in the last few weeks. I’m often asked if we would like to sell the products, and the answer is, of course we would. We represent a segment of the market they do not participate in, and we think we could give them incremental sales.