Of all the industries you could start a business in, IT products distribution is probably the last I would recommend. Low margins, cutthroat competition, and high supplier bargaining power make this as unattractive an industry as you can find.
However, while I wouldn’t say some companies thrive in this industry, it is clear that a few have found a way to make more money than most.
The most attractive profitable company in this industry is Ingram Micro Inc. (NYSE:IM). Ingram Micro is the largest IT products distributor in the world and is set to exceed $40 billion in sales in 2013. It has a size-able lead over its two biggest competitors, Avnet, Inc. (NYSE:AVT) and Tech Data Corp (NASDAQ:TECD).
Tech Data Corp (NASDAQ:TECD) is the second-largest IT product distributor, having reclaimed the position after briefly giving it up to Avnet, Inc. (NYSE:AVT). But there is no doubt who will remain the biggest in the industry for years to come — Ingram Micro Inc. (NYSE:IM)’s size confers scale advantages that the other two companies cannot directly compete with.
Instead of going head to head with Ingram Micro on all fronts, Tech Data Corp (NASDAQ:TECD) and Avnet, Inc. (NYSE:AVT) have been pursuing small- and medium-sized businesses. Still, the two companies’ strategies are quite different.
Avnet, Inc. (NYSE:AVT) grows primarily through smart acquisitions and seamlessly integrating them into the company — a strategy which has proven quite profitable over the last few years.
Meanwhile, Tech Data Corp (NASDAQ:TECD) is focused on improving margins from within and returning cash flow to shareholders.
A Brutal Business
No matter how different the top three companies’ strategies, the competition remains brutal. A quick look at gross margins is enough to keep any new entrant out of the market.
Avnet has managed a significantly higher gross margin — albeit only 12% — due to a different offering. But it’s safe to say that margins are pretty darn low for everyone in this industry.
This is why Ingram Micro Inc. (NYSE:IM)’s stock price is down in the dumps right now. Tech spending is expected to be lower-than-normal for the foreseeable future and the company has had some major issues coming out of its Australian operations. In addition, investors are skeptical as to whether management can achieve projected synergies with the company’s recent acquisition of BrightPoint.