HP looking for end to price wars

With a price war raging on HP and Compaq branded hardware, the post-merger vendor has warned there is likely to be cuts to the channel structure in both the distribution and premium reseller tiers to bring the pricing battles to an end.

While aggressive pricing strategies are not restricted to just the HP/Compaq range and are also being fought in the components market, the fiercest combat is taking place in the crowded channel of the new HP. It is here that all former HP and Compaq distributors and resellers have been given access to PCs and notebooks.

Tony Bill, general manager of the post-merger HP's personal systems group (PSG), said the current situation is "not healthy" for the vendor or its distribution and reseller partners and a solid review is under way to "map the channel".

As a result of this review, Bill said the most likely outcome is less distributors and less tier-one resellers.

"Certainly it is on the cards," he said of a future channel cull. "I can't say categorically that that will be the case but what we need to do is map the market and if we are over-distributing in a certain market segment then we will need to rationalise that."

Bill said that all the vendor has done since the close of the merger was simply to "put both channels together" and he stated that it will "stay that way" for the next three months.

"We weren't in any position to make decisions about rationalising the channel," Bill said. "We need to look at how the distributors operate in the market, where there is overlap and where we are saturating the market -- hence the price war.

"It is all part of the review process which will be finalised in about three months time. We will then go through a review of each player in the distribution channel as well as our tier-one channel."

Bill said HP is very conscious of the need for its partners to make money out of supplying its product and agreed wholeheartedly that the current price war situation cannot continue.

"All it [the price war] does is erode margins," he said. "It is important for us to have viable partners. We want them to make money because then they will continue to stay in business and that is crucial to the success of HP moving forward.

"Bad debt is something that all vendors are conscious of. If our trading partners are not profitable they are going to have a difficult time paying those debts."

Bill said the channel review would be finalised "within three months" and the new structure would be "executed" on November 1.

It is commonly believed the battle was initiated by Tech Pacific earlier this year as the country's largest distributor tried to wrestle back some of the market share it lost last year.

However, Fiona Dicker, distributor Dicker Data's managing director, claims it was in fact Ingram Micro that started it all last year, as it wanted to take some of the market share that Tech Pacific had dominated for years.

"It has been really tough probably since about July last year when Ingram Micro started the price war," Dicker said. "Tech Pacific have in effect responded since January this year when Kerry Baillie was appointed.

"They have entered the war and fought back with a vengeance to grab back their market share. They had no choice but to respond to Ingram Micro going on the attack."

Like Bill, Dicker said the present situation cannot continue, and believes the big companies must be losing money.

"It is a different mindset we compete against where people [at Ingram Micro and Tech Pacific] just see it as not their business when the sale makes a loss," she said. "They are losing money but it is not coming out of their pocket. They have parent companies overseas that have very deep pockets, sustaining them and allowing them to continue."

As reported in ARN two weeks ago, Ingram Micro's managing director, Steve Rust, also agrees that the current margin levels are unsustainable. Last week he emphasised this point.

"You can't run a broad-based distribution business on one or two points," Rust said. "It is a reality in today's market but it can't continue. Price wars come and price wars go, but over time businesses need to be profitable to survive.

"The broad-based business model does allow for pricing tactics to come into play from time to time, but at the end of the day, the pricing has to provide a profit. At the moment it isn't."