When the return on capital goes below the cost of capital…it makes sense to ditch the business that’s dragging it down.
Computacenter has done the maths and reached the only sensible conclusion and is pulling out of trade distribution of PCs and printers to focus on servers and storage products. It is never going to be able to reach the level of market share in these categories that will generate sufficient profits to cover the overheads and make a positive return on capital.
Far better to recover the capital and invest in the more specialised categories where there is still some scope to add value to the core functions of instant availability, breaking bulk and providing credit. Even these categories may not sustain the distribution dimension of Computacenter’s business, though they are a more natural fit with its corporate reselling activities.
It may seem rather hackneyed these days, but all distributors have to make the strategic choice between:
- Get big
- Get niche
- Get out
Any other strategy is simply deferring the problem and will soak up more capital and cashflow the longer the decision is deferred.
The key question for Comptacenter is which play is it making in the storage and server categories? And then will the profits generated cover the cost of capital invested in this part of the business?
It was significant that the PC and printer distribution business generated £70m of sales, but no profits (according to CRN). This suggests the decision has been made rather late as even at optimum working capital management ratios, Computacenter will have had around £7m of capital tied up in PC and printer distribution. Not many businesses can afford to have that sort of capital tied up generating no return. Certainly not one that increased its interim dividend only last October.
Computacenter will not be the only player to move out of the distribution business, in part or in whole. There will be further consolidation, especially at the broadline level and even the specialists will find superior margins cannot compensate for the fall in volumes we are likely to see in 2009.
Who will be next?