Computer Mailers Big on Government Sales

Computer catalogers may or may not be in favor of bigger government — but they are seeking bigger government and institutional sales.

According to information technology (IT) reseller Government Technology Services, the U.S. government will spend $48 billion on IT products this year. And by 2003, government spending on IT products will rise to $52 billion. Moreover, that figure does not include IT spending by institutions such as schools.

So it’s little wonder that within the past six months a spate of computer catalogers have established or acquired businesses to capture incremental sales from the federal government and educational institutions.

For instance, PC Mall’s sales to government business increased 33% last year, despite a 12% decline in overall revenue, to $718.1 million. So in April, the Torrance, CA-based cataloger announced the formation of subsidiary PC Mall Gov.

Also in April, $1.9 billion Micro Warehouse formed its own government/education market subsidiary, Micro Warehouse Gov/Ed. Micro Warehouse Gov/Ed, which already is a $400 million business, opened a field sales office in Washington.

“We’ve been talking about forming a gov/ed business for the last two years,” says Laurence Midler, Norwalk, CT-based Micro Warehouse’s executive vice president for corporate affairs. “There’s no question that gov/ed has held up better for us than in the tech downturn,” he says.

PC Connection may have started the trend with its acquisition of ComTeq Federal in 1993. Merrimack, NH-based PC Connection changed the name of the Rockville, MD-based subsidiary to GovConnection in March. According to PC Connection chief financial officer Mark Gavin, the name change is part of a plan to underscore the growth of the company’s government sales and customer base, which in addition to federal agencies includes state and local government agencies and schools and colleges.

So eager is PC Connection to increase its share of the gov/ed market, in March it bought Boca Raton, FL-based MoreDirect, a $129 million e-procurement supplier to businesses and government.

Vernon Hills, IL-based computer cataloger CDW got into the government game in 1998 by forming subsidiary CDWG. Less than four years later, CDWG accounts for 17% of CDW’s $3.96 billion in annual sales. In fact, increases in government sales contributed largely to CDW’s 3% sales growth last year — a year when most other computer catalogers suffered sales declines.

The same — only different

“The government is becoming more like corporate America in the way that it buys IT products,” says David Manthey, a research analyst with Milwaukee-based equity research firm Robert W. Baird. “Once they buy from catalogers, such as CDW and PC Connection, these government entities are bowled over by the service and breadth of product available.”

Nonetheless, marketing to the government differs somewhat from marketing to businesses. For one, the General Services Administration (GSA) regulates the prices for products procured by the government; sellers must document that they are giving the best price on every single item. What’s more, companies must be on the GSA schedule to sell large-ticket items to the government, and getting on that list of approved vendors can cost $5,000-$10,000 a year in paperwork and fees.

The government/education market sector is also getting crowded, Manthey says, and those not yet in it risk missing the opportunity. “Clearly, it’s beneficial to be first.”

Even some of those that got in early are suffering from the increased competition. For the three months ended March 31, PC Connection’s sales to the federal government declined by $34.2 million from the fourth quarter of 2001. Then again, PC Connection attributes the dropoff to unusually high federal sales during that fourth quarter.

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