Systemax, Inc.

views updated

Systemax, Inc.

22 Harbor Park Drive
Port Washington, New York 11050
U.S.A.
Telephone: (516) 608-7000
Fax: (516) 608-7111
Web site: http://www.systemax.com

Public Company
Incorporated: 1999
Employees: 3,778
Sales: $1.6 billion (2001)
Stock Exchanges: New York
Ticker Symbol: SYX
NAIC: 334111 Electronic Computer Manufacturing; 454113 Mail Order Houses

Systemax, Inc. is a direct market retailer of custom configured and preconfigured personal computers, computer peripherals, such as data communications and networking equipment, and computer supplies. Systemax manufactures and distributes ISO 9001-certified personal computers under its private-label brands, Systemax, Tiger, and Ultra, offering state-of-the-art specifications and using name brand components. National brands available through Systemax include Hewlett-Packard, IBM, Compaq, Sony, Toshiba, and Macintosh. Systemax uses three direct to consumer methods of marketing: mail-order catalogs, Internet web sites, and account relationship marketing to business users. More than 40,000 products are available from 20 Internet sites and about 40 different mail-order catalogs, with more than 125 million copies distributed annually to North America and Europe. The company also sells office furniture and materials handling products, such as equipment for moving and lifting stock, protective clothing, and storage equipment.

Expansion of Family Business: Late 1970s

Systemax started as a materials handling business in Long Island, serving customers in the New York area. Founded by two brothers in 1949, the company supplied materials handling equipment, such as hand trucks and carts, and industrial supplies, such as cables, metal shelving and bins, and safety equipment. The company issued its first mail-order catalog in 1972 under the name Global Industrial Products.

In the late 1970s Richard Leeds and twins Bruce and Robert Leeds joined their father’s business after completing college. The three had worked in the family business from a young age, on the factory floor and in clerical and sales positions, and understood its inner workings. They joined Global as young adults with the intention of expanding company operations. Robert and Bruce joined the company in 1977, when revenues were at $3 million; Richard joined in 1981. The brothers brought complementary areas of interest and knowledge, Richard with finance, Robert with computer science, and Bruce with acquisitions and expansion. They developed an efficient business model through a process of consensus with the management team and division heads; the model provided a foundation for calculated risks in growing the business.

The first steps in expansion involved obtaining new business outside of the New York area and adding new products. The company began to offer office furniture along with industrial products and, in 1985, the company issued its first catalog offering computer products, distributed under the name Global DirectMail The acquisition of Dartek Corporation in 1986 extended Global’s base of operations. Located in Chicago, Dartek offered computers and computer supplies by mail-order catalog, including Mac computers wholesale. Further geographic expansion occurred through implementation of an outbound telemarketing program to national customers. The national accounts program offered specialized ordering, custom billing, bulk discounts, and special stock requests. In 1990 the company entered the European market through the acquisition of Heathrow Computer Supplies based in London. Distributing 65 million copies of ten different catalogs, Global reached 1990 revenues of $178.6 million and garnered a net income of $2.3 million.

The biggest risk the Leeds took involved the 1992 purchase of Misco, a supplier of computer products in the United States, Canada, and Europe. Global purchased Misco from a much larger company for $16 million when Misco was losing money. In 1991 Misco reported revenues of $113 million, more than double Global’s own revenues, with 26 percent of revenues originating in the United Kingdom, Germany, Italy, and Spain. Global retained existing management but implemented its own model of distribution and marketing to reduce overhead expenses and increase efficiency. The company also redesigned the catalog and expanded the product line with lower-priced goods. Through Misco, Global began to offer brand name computer-related products, including data communications and networking equipment, software, and general supplies.

By 1994 Global published 24 full-line and specialty catalogs, distributing 114 million copies, 27 million in Europe. With a prospect list of more than 35 million potential customers, Global sold computer products to 1.2 million active customers through eight distribution centers in the United States and Canada and six sales and distribution centers in Europe. In 1994 the company recorded revenues of $484.2 million and net income of $17.1 million.

1995 IPO Funding Continued Growth and Development

In June 1995 Global went public, offering 8.3 million shares of stock at $17.50 per share. Global used the funds from the initial public offering (IPO) for company debt and continued expansion and development. Global’s expansion strategy involved increased distribution in Europe, the addition of brand name computer products and custom configured computers, and operational support. By the end of 1995 Global expanded its market presence in the United Kingdom, Germany, France, Italy, and Spain and issued catalogs in Austria, Switzerland, Belgium, Ireland, and Portugal for the first time.

In November Global acquired TigerDirect, Inc., a mail-order retailer of computer hardware, software, and accessories to consumer and corporate users. TigerDirect contributed a prospect list of 3.5 million names and 400,000 active customers to Global’s resources. Global reorganized TigerDirect for profitability by reducing overhead expenses, reorganizing purchasing methods to reduce risk of excess inventory, and eliminating unprofitable catalogs. Global continued the Tiger and Power Up! catalogs as well as the Tiger brand of personal computers.

In early 1996 Global expanded operations in Chicago by consolidating two distribution centers into one larger facility. The 241,000-square-foot distribution center more than doubled existing capacity. Global used the additional space to initiate a personal computer configuring operation, building network-ready personal computers and servers and preconfigured personal computer networks. In addition, the facility accommodated service for the company’s growing business in national brand name computers. New products included IBM desktop and laptop computers as well as servers, and Hewlett-Packard printers, scanners, drives, and networking equipment. Global received authorization to offer Compaq computers via direct mail and to distribute Compaq’s Presario line through retail stores (then in development).

The company reported a 44 percent increase in revenues in 1996, to $911.9 million, garnering a net income of $43.7 million. The increases were attributed to successful business-to-business marketing to mid-sized corporations and growth in TigerDirect’s small office/home office sales market.

In early 1997 Global issued three new catalogs directed to niche computer supply markets. Global Ergo Answers offered economically correct products and office furniture that reduced the strain and injury from working long hours at a computer. The catalog was directed to human resource managers and their concern for employee productivity and well-being. Capitalizing on Global’s position as one of the top five suppliers of wire shelving, Global Wire Products offered wire shelving for the foodservice, healthcare, computer, and industrial markets. The third catalog, Global Traveler, offered portable computer hardware, software, and peripherals to business travelers. US Air Shuttle provided catalogs to its customers in the seat-back pockets of planes along the heavily traveled routes between Boston, New York, and Washington, D.C. Global opened retail Business Centers at Logan International Airport in Boston, LaGuardia Airport in New York City, and National Airport in Washington, D.C.

International expansion at this time involved a joint venture with 06-Software Centre Europe, the largest catalog retailer in The Netherlands to offer brand name personal computer software, supplies, and services. The joint venture, Global Computer Products B.V., acquired the assets and liabilities of 06. Formed in June 1997, the venture allowed Global to expand into a new market at a lower cost than a new start-up.

Late 1990s: Emphasis on Build-to-Order Computers and Internet Marketing Initiatives

As part of the company’s plan to enter the build-to-order segment of the personal computer industry, Global added two new executive positions. The chief information officer and the vice-president of operations oversaw the streamlining of supply chain management, sales, inventory, and warehouse procedures and systems to accommodate build-to-order operations. Global integrated its three-point marketing system for effective organization. The marketing system involved sales through direct market catalogs, online catalogs, and the development of business-to-business account relationships.

Company Perspectives:

We are the leading direct marketer of SYSTEMAX build-to-order PCs, Notebooks and Servers, brand name and private label computer hardware, software & industrial products.

The Company’s multifaceted marketing plan features Internet, relationship marketing and inbound catalog sales. Through these channels Systemax offers over 40,000 products to its two million customers. Systemax PCs are “The Perfect PC” for the educated buyer who wants name brand components, warranty and service without paying for massive amounts of advertising.

Global entered the private-label build-to-order personal computer business with the September 1997 acquisition of Infotel, Inc. Purchased for $40 million in cash and $8.3 million in stock, Infotel would add $235 million to Global’s annual revenues. Founded in 1982, Infotel originated as a dealer of computer printers and eventually added a line of private-label products. In 1991 Infotel began to offer its own line of personal computers. Global purchased Infotel for its popular MidWest Micro catalog of computer products for the small office/home office market. The Infotel Distributing catalog offered the Ultra brand of value-added resellers (personal computers). Global wanted Infotel for its production capacity for build-to-order personal computers; the Fletcher, Ohio-based company’s factory accommodated production for up to $1 billion in computers per year.

Global planned to use Motel’s production capacity to supply units for online sales of Tiger brand build-to-order personal computers through TigerDirect. The web site, launched in late 1997, offered computer-generated price quotes with specialists available to review quotes as well as to review compatibility and functionality of hardware and software requested by the customer. The online store sold Tiger brand systems as well as national brand names, including Toshiba, Sony, Compaq, and Hewlett-Packard.

Global reached two major milestones in 1997 and 1998. The company surpassed $1 billion in revenues in 1997, earning a place on the Fortune 1000 list of largest corporations in the United States in 1998. The company had grown at an average annual compound rate of 27 percent from 1988 to 1997. In 1997 Global distributed 40 color catalogs, many directed to unique market categories, and sold goods via more than six Internet sites. With a sales force of 1,300, Global distributed more than 40,000 in-stock or build-to-order products through 16 sales and distribution centers in the United States, Canada, and Europe. The company reported a same-day shipping record for 90 percent of new orders.

Global continued its successful strategy of international and online sales growth through acquisition. In August 1998 Global acquired Dabus Data Produkter AB of Sweden for $10 million. Dabus offered computers and computer supplies through direct market catalogs or the Internet to 12 European countries. Global hoped that the acquisition would facilitate entry into other Scandinavian markets. In February 1999 Global purchased Simply Computers Limited, a computer retailer based in London, contributing $100 million to annual revenues, with $20 million from Internet sales.

In September 1998 Global had launched an online auction house for personal computers and accessories, Ezbid.com. The site offered 65 to 80 products daily, including new and refurbished desktop computers, accessories, software, data communications products and overstock items, as well as digital cameras, and, later, consumer products such as electronics and small appliances. The bids started as low as one dollar, with bidding taking place over the course of one to four days. An e-mail system notified customers when someone had placed a higher bid on an item, so that the customer could bid again. The following spring Global promoted EZbid through televisions commercials on cable stations such as Bravo and The History Channel.

The Internet became a more important outlet for Global, prompting the company to seek new opportunities online. In early 1999 Global reported that its web sites averaged more than $1.5 million in sales weekly. The company sought high-profile links online, such as on the Yahoo search engine. A partnership agreement with Digital River provided more than 100,000 digital products, electronically downloadable via Global online stores in the United States and the United Kingdom.

Positioning the Systemax Brand for the National Stage: 1999

To reflect the prominence of the company’s integrated marketing system and the development of its Systemax brand of build-to-order personal computers, Global changed its name to Systemax, Inc. in May 1999. The company planned to consolidate all private-label merchandise to the Systemax brand, except for the Ultra brand for value-added resellers. Billed as “The Perfect PC,” Systemax personal computers represented quality, state-of-the-art systems at a lower cost than national name brands. Lower overhead costs allowed the company to price computer products 10 to 15 percent lower, even though Systemax used the same third-party component and warranty vendors, including the recognized brands Intel, Microsoft, AMD, and others. In its business-to-business relationship marketing, Systemax offered personalized sales and configured product specifications according to individual company needs in small and large quantities. Thus Systemax offered a single source for personal computers, computer supplies, office furniture, and industrial equipment. The company planned for growth, with the aim to sell one million personal computers per year and to make Systemax a national name brand. Toward this end the company began construction on a 112,000-square-foot addition to the Fletcher, Ohio facility.

Key Dates:

1972:: The company distributes its first mail-order catalog as Global Industrial Products.
1985:: A computer products catalog is distributed for the first time.
1990:: Global enters the European market through acquisition.
1994:: The acquisition of Misco expands the company’s reach in North America and Europe.
1997:: The build-to-order computer market is accessed through the acquisition of Infotel, Inc.
1998:: Sales exceed $1 billion, earning Global a place on the Fortune 1000 list.
1999:: The company takes a new name, Systemax, and ships its 500 thousandth personal computer in August.
2002:: In-store kiosks allow customers to custom configure personal computers.

The acquisition of the Proteva personal computers business provided Systemax access to consumer electronics store chains and national and regional mass merchandisers, including Sears, Value America, and The Wiz chain of consumer electronics stores. Assets acquired included customer lists, the Proteva brand name and trademarks, and in-store kiosks where customers could configure and purchase build-to-order computers. Systemax viewed the acquisition of Proteva as a consolidation of the “white box” market of off-brand personal computers. The acquisition gave Systemax a production facility capable of producing 200,000 computers per year. The company closed a Wisconsin facility and added 300,000 square feet to the acquired facility.

Systemax increased its marketing activities to promote the Systemax brand. The company initiated its first national campaign with advertisements on cable stations ESPN, SNN, and MSNBC, and in major computer magazines. New distribution outlets included the Home Shopping Network and Value Vision. The company hired 300 new sales people in 1999, expanding its relationship marketing concept, for a total of 1,000 account executives.

Systemax reported sales of $1.75 billion in 1999, a 22 percent increase over 1998. North American sales accounted for 72 percent of revenues, at $1.3 billion, while European sales accounted for 28 percent, at $491 million. The company attributed the growth to increased sales through relationship marketing, up 53 percent and accounting for 41 percent of sales. From its 19 web sites, Systemax reported $83 million in sales, an increase of 197 percent over 1998. The company counted 1.8 million active customers from a prospect database of 48 million potential customers.

Net income declined to $36 million in 1999, from $41.3 million in 1998, prompting Systemax to streamline operations in 2000. The company sold EZbid and reduced its U.S. workforce by 8 percent through attrition and elimination of redundant positions. The company closed ZAC Software, its software direct marketing subsidiary, and implemented a new manufacturing system for increased efficiency on the assembly line. Inventory problems, which came to light in late 2000, prompted Systemax to install a TradeStream logistics technology that provided realtime warehouse and inventory management and reduced the number of employees necessary for these operations.

The Internet continued to play an important role in Systemax’s strategy to become a nationally recognized brand. High standards of service gained TigerDirect the Gold Star Status on BizRate.com, a web site that evaluated online businesses based on consumer opinion. America Online placed TigerDirect on Shop@AOL as a “gold tenant.” In February 2001, Systemax entered into an alliance with Elgin Financial Savings Bank to give Systemax computer users instant access to that company’s real-time online banking products and services through custom computer configuration. Systemax offered Elgin customers a discount on personal computers.

Systemax struggled with a slow economy and slower sales of personal computers. The company reported sales of $1.6 billion in 2001, a decline due to lower sales to business customers, though national advertising stimulated consumer sales. North American sales declined for the second year in a row to $982.6 million, while sales in Europe increased slightly to $564.4 million. Internet sales more than doubled, accounting for $218 million of revenues, with traffic growing rapidly at TigerDirect, the company’s star web site. Systemax recovered from a loss of $40.8 million in 2000, due to liquidation of excess inventory, reporting net income of $700,000 in 2001.

Systemax initiated new strategies to improve efficiency in 2002. These included implementation of a new web-automation technology in Systemax’s European operations to provide faster connection to vendor systems for immediate response to customer inquiries of product availability and pricing. In May Systemax began to test the “Six Sigma Breakthrough Strategies” at the Fletcher facility. Six Sigma provided techniques to spot defects in operational and administrative processes and to change them for improved effectiveness and cost savings. The project included training for managers and executives. In related actions the company sold a facility near its Port Washington headquarters and reduced the staff by 50 jobs.

A new marketing initiative involved the installation of build-to-order kiosks in all 42 units of The Wiz chain of consumer electronics stores in the New York City area. The kiosks featured easy-to-use, point-and-click interface to allow customers to easily custom configure a Systemax Venture desktop computer or Systemax Pursuit laptop computer. The product would then be shipped directly to the customer’s home.

Principal Subsidiaries

Global Computer Supplies, Inc.; Dartek Corporations; Misco America Inc.; TigerDirect, Inc.; Midwest Micro Corporation; Misco Germany, Inc.; Misco Italy Computer Supplies S.P.A.; HCS Global S.A.; Systemax Europe Ltd.