Micro Warehouse: What Went Wrong?

It’s tough to say what was more surprising: that Micro Warehouse, one of the industry’s largest and oldest computer catalogers, was selling the North American portion of its business to $4.3 billion rival CDW, or that CDW was able to snap up the business, which has annual sales of roughly $940 million, for a mere $22 million.

For its $22 million, Vernon Hills, IL-based CDW gets Micro Warehouse’s customer database along with $14 million in inventory, intellectual property, trademarks, and copyrights. Norwalk, CT-based Micro Warehouse, which filed for Chapter 11 bankruptcy protection on Sept. 10, two days after the sale, retains its overseas business, which accounts for approximately $1 billion in revenue. In its Chapter 11 filing, Micro Warehouse listed consolidated assets of more than $100 million and debts of more than $100 million. Computer products distributor Ingram Micro, Micro Warehouse’s largest unsecured creditor, is owed $17.9 million. CDW won’t acquire the accounts receivables or the liabilities, but it will receive a 5% service fee for collecting existing Micro Warehouse receivables. By not buying the company’s liabilities, says CDW spokesperson Anne Ireland, CDW keeps itself apart from Micro Warehouse’s Chapter 11 filing.

The deal not only enables CDW to become the country’s largest Apple computer products reseller, but it also allows CDW to broaden its customer base considerably. CDW determined that 75% of Micro Warehouse’s revenue is from customers who have not bought from CDW. And although Micro Warehouse’s Canadian subsidiary pulls only $40 million (U.S.) in annual sales, “we view it as a platform for getting us into Canada,” Ireland says.

“We will retain the Mac Warehouse name,” Ireland says. “It has a lot of brand equity in the marketplace.” The company’s Micro Warehouse and Data Comm Warehouse trademarks will be phased out.

Rise and fall

Founded in 1988, Micro Warehouse “started by having smart people on the phones fulfilling orders more cheaply than Comp USA did at retail,” says Marty Wolf, president of Martin Wolf Securities, a San Ramon, CA-based investment bank that follows the computer products and services industry. The company’s greatest growth was during the mid-1990s, when sales soared from $776.4 million in 1994 to $2.1 billion in 1997. At one point during the mid-’90s, the marketer did business through nearly a dozen titles, including Home Computer Warehouse and LAN Warehouse.

But several observers say that Micro Warehouse failed to evolve from a traditional catalog business, with order-takers waiting for calls, to a more proactive direct marketer. During the past five years CDW, Dell, Insight, PC Connection, and other computer marketers have invested in larger outbound telemarketing and field sales divisions to offer information technology professionals more one-on-one direct selling.

For instance, in the seven years that Dino Farfante, president of Insight North America, has been with the Tempe, AZ-based computers marketer, “we’ve gone from 98% direct-to-consumer and 100% catalog to a proactive outbound telemarketing/face-to-face sales model to 99% businesses this year.” And while consumers account for just 2% of CDW’s sales, they made up 15% of Micro Warehouse’s, Ireland says.

The problem in selling computer products and services to consumers, Farfante says, is that “the repeat business isn’t there. The frequency of purchase isn’t as large as it is with business customers.”

When Micro Warehouse was bought by an investor group led by president/CEO Jerome York at the end of 1999, the group hoped to catch up to CDW and Insight by mailing more catalogs. But what was really needed was a larger outbound sales staff.

For Micro Warehouse’s most successful rivals, says Wolf, “the catalog has become kind of like an appetizer, rather than the main meal.”

And the meal that Micro Warehouse was offering was less palatable to tech professionals than the appetizers produced by other marketers. “Most of the companies I follow these days aren’t just sending catalogs that show products and prices,” says David Manthey, research analyst with Milwaukee-based investment bank Robert W. Baird & Co. (Baird maintains a trading market in the securities of CDW, though Manthey doesn’t personally own CDW shares.) “They have a theme that focuses on solutions, such as computer virus protection. They’re more like magalogs to support sales.”

Also unlike many of its rivals, Micro Warehouse shied away from acquiring smaller computer marketers. During the past two years alone, PC Mall bought Pacific Business Systems and Wareforce, PC Connection acquired e-procurement supplier MoreDirect, and Zones bought Corporate PC Source. And of course, there was last year’s merger of Hewlett-Packard and Compaq Computer Corp.

“We’ve expected CDW to make acquisitions over the past two years, so this one wasn’t a surprise,” Insight’s Farfante says. “There’s consolidation going on in this industry because of economies of scale. We’ve acquired three companies over the past 18 months [including reseller Comark last year] and expect CDW to take similar steps.”

Manufacturer/marketer Dell, the two-ton gorilla — or $35.4 billion segment leader — of the computers market has done its part to consolidate the industry as well. Although it hasn’t made major purchases of rivals, Dell has inked exclusive distribution deals with such manufacturers as computer printer vendor Lexmark, which Wolf equates to acquisitions.

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