Bucking the Odds by Slashing Costs
Sales of PCs are in their deepest funk in more than a decade, but that has barely bothered Tech Data Corp. The computer distributor is making a profit selling PCs, printers, and other tech gear--even as revenues fall and competitors lose money. How? Aggressive cost controls. "We've learned how to calculate the cost of serving every customer, and that has enabled us to make money in bad times," says CEO Steven A. Raymund.
This is no small feat. In the third quarter, ended Oct. 31, Tech Data's (TECD ) earnings are expected to be $30 million on revenues of $4.3 billion, according to Raymond James & Associates Inc. Sure, that's down from profits of $47 million on sales of $5.2 billion a year ago. But it's a lot better than rivals' results. Industry leader Ingram Micro Inc. (IM ) lost $13.3 million in its third quarter (ended Sept. 30), as its sales fell 23%, to $5.8 billion. Tech Data's profitability has spurred a 29.8% rise in its share price in the past six months, pushing the company to the No. 3 spot on BusinessWeek's Info Tech 100. "Tech Data is hitting on all eight cylinders now, even though its market and the economy are down," says Raymond James analyst Robert P. Anastasi.
RISKS GALORE. Will Tech Data run out of gas as the economy continues to sputter? Don't bet on it. A daredevil who has swum with sharks in the Caribbean and run with the bulls in Pamplona, Raymund, 46, is used to living on the edge. That's helping him manage Tech Data's two-pronged strategy of keeping a lid on costs, while increasing high-margin businesses.
Consider his approach to client costs. His customers are corporations, smaller distributors, and retailers. If a client isn't profitable, Raymund isn't afraid to lose the business. The company measures 150 costs, from average order size to freight charges, to calculate the gross expense and margin on every account. "Quite frankly, we were losing our shirt with some clients," says Raymund. In the past two years, scores of customers that didn't measure up were shown the door or persuaded to order more efficiently--for example, making one order of $1 million rather than 10 orders of $100,000 each. Such moves have slashed Tech Data's expenses to 3.5% of sales--well below the 5% level of Ingram and other players, according to Wachovia Securities.
With its core PC business declining, though, cost-cutting won't be enough. So Raymund is expanding sales of higher-margin peripherals such as scanners. And to provide better service, the company is rolling out an online sales program that links clients directly to Tech Data's inventory system. This change has boosted Tech Data's ability to ship orders quickly, "and that means a lot to my customers," says Robert Molinari, president of 1st Run Computer Services Inc., a New York reseller of scanning and storage hardware.
If Raymund can please customers while controlling costs, Tech Data should stay on its feet until the bulls run again.
By Charles Haddad in Atlanta