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Ingram Micro (IM)Stock (Computers Wholesale Industry, Manufacturing Industry)
 The company's focus makes it vulnerable to slowdowns in PC sales: in 2002 when demand for computers dropped, Ingram lost $275 million.[2] The Michigan index, which measures consumer confidence in the U.S., recorded its lowest level since 1980 in July 2008.[3] The domestic spending mood has a significant impact on demand for computer products - which in turn impacts demand for IM's distribution services. Domestic sales contributed $14 billion (40%) of the company's 2007 revenue - exposing it to risk if a major U.S. client like Hewlett-Packard Company (HPQ) (23% of IM's business in 2007) struggles.[4] Ingram Micro is the only major electronics distributor to have significant operations in Asia. The personal computer market in Asia grew by 18% in 2007, compared to 4.5% in the US.[5] Ingram's revenue from Asia grew by 29% in 2007.[6]
[edit] Business Overview  Ingram Micro is the world's largest wholesale distributor of computer hardware, software, networking equipment and peripherals (such as scanners and cameras) in terms of net revenues. In 2007, the company sold to over 170,000 customers in 150 countries, through 114 distribution centers.[9] The company does not manufacture any product, neither does it sell directly to the end-user; rather, it acts as a link between original equipment manufacturers, such as Hewlett-Packard and Microsoft, and resellers, who sell to the end-user. Ingram makes money by selling the products at a mark-up -- in 2007, the company had a gross margin of 5.4%.[10] Ingram has short-term distribution agreements with the manufacturers which generally impose territorial restrictions, provide the company with non-exclusive distribution rights and outline the terms of discount and return rights.[11] The company states that its operating margin, and hence net income, is primarily dependent on the terms of these agreements. While Ingram Micro distributes products from over 1400 manufacturers, including Lexmark, IBM and Intel, sale of Hewlett-Packard products represented 23% of the company's revenue in 2007.[12] The electronic distribution industry is characterized by extreme competition. Distributors, such as Ingram, have no way to differentiate their offerings except through price. This is because they do not hold exclusive rights for any original equipment manufacturer, and the manufacturers themselves compete vigorously with each other. Even though Ingram is unmatched in terms of its reach, they still have to compete with smaller companies in different regions and other channels of distribution, such as direct sales by manufacturers. The risk of disintermediation also leaves Ingram with a poor bargaining position. As a result of these factors, margins in the industry are very thin; in 2007, Ingram had an operating margin of 1.2%.[13] [edit] Business FinancialsIngram Micro had net sales of $35 billion in 2007, up 12% from the year before, and net income of $276 million, up 3.8% from the year before.[14] However, operating margins fell from 1.35% to 1.27% in 2007 since cost of sales also increased by 12%, and higher revenue did not translate into greater operating efficiencies.[15] Ingram has been able to grow its revenue steadily over the past 4 years, with a compounded growth rate of 11.6% annually. Moreover, operating margins have seen significant improvements rising from 0.69% in 2003 to 1.27% in 2007.[16] [edit] Geographical DistributionIn 2007, the company served over 170,000 customers in 150 countries. North America represented their largest market with nearly $14 billion(40%) of revenue in 2007 and Asia accounted for $7.1 billion (20%) of revenue in 2007. [17] The global market for personal computers increased by 16% in the second quarter of 2008, compared to the year before -- the market in Asia grew by 18%, while the U.S. market increased by 4.5%.[18] Ingram believes that its presence in Asia provides it an advantage over its main competitors, namely Tech Data and Synnex, who are focused on the North American and European market.[19] This claim is supported by the fact that Ingram's Asian business grew by 29% in 2007, compared to near stagnant growth in North America.[20] [edit] Trends and Forces[edit] Distribution agreements are short term and provide little competitive advantageIngram has the advantage of having a very extensive distribution network; in 2007, it distributed products from 1400 manufacturers to 170,000 resellers and was the largest wholesale distributor of computer-related products in the world in terms of revenue.[21] However, the company does not hold any exclusive distribution rights for any original equipment manufacturer and most of its agreements are short-term.[22] Thus, distributors need to be extremely efficient in order to deliver the lowest prices to the end-user. While there is no distributor who can compete with Ingram in terms of reach, the company faces competition from many regional players, as well as from the manufacturer's themselves who often sells to customers directly. As a result, Ingram's margins are extremely thin -- in 2007, Ingram had a gross margin of 5.4% and an operating margin of 1.27%.[23] On the positive side, since cost of sales were almost 95% of revenues, any improvement in discount terms will automatically translate into higher net income for the company. [edit] Low margins means demand must be high for net income to growIngram's operating margins improved from 0.7% in 2003 to 1.27% in 2007, Ingram is still vulnerable to changes in total demand for its products.[24] A slowdown in demand for Ingram's products between 2000-2002 resulted in its operating margins to fall from 1.2% in 2000 to 0.2% in 2002.[25] The company barely earned any net income in 2001 and had a loss of $275 million in 2002.[26] The Michigan index, which measures consumer confidence in the U.S., recorded its lowest level since 1980 in July 2008.[27] In 2007, 40% of Ingram's sales were made in the U.S.[28] [edit] Latin America and Asia offers growth opportunities for Ingram MicroThe Latin American personal computer market grew by 23.2% in 2007, while the Asian market grew by 18%.[29] This compares with a 4.5% growth in the U.S. during the same period.[30] While 40% of Ingram's revenue comes from the U.S., Ingram's revenue from Asia jumped by 29% to $7.1 billion in 2007.[31] While the company's Latin American business did not show such promising results in 2007, growing only by 4.6%, the company has stated that the region will be key in driving its revenue growth in the future.[32] In 2007, the company's capital expenditure in Latin America grew by 28%.[33] Additionally, while Ingram faces competition from smaller regional players, its two major competitors, Tech Data and Synnex, does not have any significant operation in either Latin America or Asia. [edit] CompetitionIngram faces direct competition from other wholesale distributors in all of its regions. In addition, it also faces competition from other sales channels, including direct sales by original equipment manufacturers and internet sellers, such as Dell and Buy.com. However, in the wholesale distribution market for electronic products, only Synnex and Tech Data can compete with Ingram in terms of volume and reach -- though neither of them have significant operations in Asia or Latin America, the two fastest growing region for computer-related products. Agreement terms with suppliers and ability to favorably price products are the key factors that drive net income for the players in the industry.
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