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Systemax Inc.
11
Harbor Park Drive
Port Washington, New York 11050
(516) 608-7000
www.systemax.com
Sales
$1.7
billion
Business Description
Systemax is a direct marketer of brand name and private label products,
including personal desktop computers (“PCs”), notebook computers, computer
related products and industrial products, in North America and Europe. We
assemble our own PCs and sell them under the trademarks Systemax™, Tiger®
and Ultra™. In addition, we market and sell computers manufactured by other
leading companies. We offer our customers a broad selection of products,
prompt order fulfillment and extensive customer service. Computers and
computer related products accounted for 91% of our net sales in 2003.
Products
We offer more than 100,000 brand name and private label products. We
endeavor to expand and keep current the breadth of our product offerings in
order to fulfill the increasingly wide range of product needs of our
customers.
Computer sales include Systemax PCs complemented by offerings of other brand
name PCs and notebook computers. Our computer related products include
supplies such as laser printer toner cartridges and ink jet printer
cartridges; media such as recordable disks and magnetic tape cartridges;
peripherals such as hard disks, CD-ROM and DVD drives, printers and
scanners; memory upgrades; data communication and networking equipment;
ergonomic accessories such as adjustable monitor support arms and anti-glare
screens; and packaged software.
We assemble our Systemax-brand PCs in our 297,000 square foot,
ISO-9000-certified facility in Fletcher, Ohio. We purchase components and
subassemblies from suppliers in the United States as well as overseas.
Certain parts and components for our PCs are obtained from a limited group
of suppliers. Systemax PCs sold in Europe are assembled by third parties. We
also utilize licensed technology and computer software in the assembly of
our PCs. For a discussion of risks associated with these licenses and
suppliers, see Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Factors That May Affect Future Results
and Financial Condition.”
Our industrial products include storage equipment such as metal shelving,
bins and lockers; light material handling equipment such as hand carts and
hand trucks; furniture, small office machines and related supplies; and
consumable industrial products such as first aid items, safety items,
protective clothing and OSHA compliance items.
Sales and Marketing
We market our products to both business customers and individual consumers.
Our business customers include large businesses (customers with more than
1,000 employees), small and mid-sized businesses (customers with 20 to 1,000
employees), educational organizations and government entities. We have
invested consistently and aggressively in developing a proprietary customer
and prospect database. This database includes more than 50 million names. We
consider our business customers to be the various individuals who work
within an organization rather than the business location itself. The
business customer and prospect database includes detailed information,
including company size, number of employees, industry, various demographic
and geographic characteristics and purchasing history.
We have established an integrated three-pronged system of direct marketing
to business customers, consisting of relationship marketers, catalog
mailings and propriety internet web sites, designed to maximize sales. Our
relationship marketers focus their efforts on our business customers by
establishing a personal relationship between such customers and a Systemax
account manager. The goal of the relationship marketing sales force is to
increase the purchasing productivity of current customers and to actively
solicit newly targeted prospects to become customers. With access to the
records we maintain of historical purchasing patterns, our relationship
marketers are prompted with product suggestions to expand customer order
values. In the United States, we also have the ability to provide such
customers with electronic data interchange (“EDI”) ordering and customized
billing services, customer savings reports and stocking of specialty items
specifically requested by these customers. Our relationship marketers’
efforts are supported by frequent catalog mailings and e-mail campaigns
designed to generate inbound telephone sales, and our interactive websites,
which allow customers to purchase products directly over the Internet. We
believe that the integration of these three marketing methods enables us to
more thoroughly penetrate our business and government customer base.
Increased internet exposure can lead to more internet–related sales and can
also generate more inbound telephone sales; just as catalog mailings which
feature our websites can result in greater internet-related sales.
We successfully increased our sales to individual consumers through our
Tiger Direct subsidiary, using a combination of e-commerce initiatives and
catalog mailings. To reach our consumer audience, we use methods such as
website campaigns, banner ads and e-mail campaigns. We are able to monitor
and evaluate the results of our various advertising campaigns to enable us
to execute them in a cost-effective manner. Our catalogs generate calls to
inbound sales representatives. These sales representatives use our
information systems to fulfill orders and explore additional customer
product needs. Sales to consumers are generally fulfilled from our own
stock, requiring us to carry more inventory than we would for our business
customers. We also periodically take advantage of attractive product pricing
by making opportunistic bulk inventory purchases with the objective of
turning them quickly into sales.
We have also successfully increased our sales to individual consumers with
the addition of a number of retail outlet stores. These stores are located
in or near one of our existing sales and distribution centers, thereby
minimizing our operating costs. We presently have four such retail locations
in North America and plan to add several more in 2004.
Catalogs
We currently produce a total of 30 full-line and targeted specialty catalogs
under distinct titles. Our portfolio of catalogs includes such established
brand names as Global Computer Supplies™, TigerDirect.com™, Misco®, HCS
Misco™, Global Industrial, ArrowStar™, Dartek.com™ and 06™. Full-line
computer product catalogs offer products such as PCs, notebooks,
peripherals, computer components, magnetic media, data communication,
networking and power protection equipment, ergonomic accessories, furniture
and software. Full-line industrial product catalogs offer products such as
material handling products and industrial supplies. Specialty catalogs
contain more focused product offerings and are targeted to individuals most
likely to purchase from such catalogs. We mail catalogs to both businesses
and consumers. In the case of business mailings, we mail our catalogs to
many individuals at a single business location, providing us with multiple
points-of-entry. Our in-house staff designs all of our catalogs. In-house
catalog production helps reduce overall catalog expense and shortens catalog
production time. This allows us the flexibility to alter our product
offerings and pricing and to refine our catalog formats more quickly. Our
catalogs are printed by third parties under fixed pricing arrangements. The
commonality of certain core pages of our catalogs also allows for economies
in catalog production.
During 2003, we distributed approximately 97 million catalogs, of which
approximately 62 million catalogs were mailed in North America and
approximately 35 million catalogs were distributed in Europe. This total was
approximately 9% fewer than in the prior year as we were able to leverage
our advertising spending as a result of increased internet sales.
E-commerce
We continually upgrade the capabilities and performance of our internet web
sites. We currently have twenty-two e-commerce sites, including
www.systemaxpc.com, www.globalcomputer.com, www.tigerdirect.com,
www.dartek.com, www.misco.co.uk, www.simply.co.uk, www.hcsmisco.fr,
www.misco.de and www.globalindustrial.com, offering a wide variety of
computer and industrial products and allowing customers around-the-clock,
on-line access to purchase products. Our internet sites feature on-line
catalogs of thousands of products. Many of these sites also permit customers
to purchase “build to order” PCs configured to their own specifications. In
2003 we had over $384 million in internet-related sales, representing 23.2%
of total revenues, an increase of $126 million from 2002.
Suppliers
We purchase the majority of our products and components directly from
manufacturers and large wholesale distributors. For the year ended December
31, 2003, Tech Data Corporation accounted for 14.7% and Ingram Micro Inc.
accounted for 10.4% of our purchases. For the year ended December 31, 2002,
Tech Data Corporation accounted for 14.7% of our purchases. For the year
ended December 31, 2001, Tech Data Corporation accounted for 15.1% and
Hewlett Packard Company accounted for 10.5% of our purchases. The loss of
any of these vendors, or any other key vendors, could have an adverse effect
on us.
Certain private label products are manufactured by third parties to our
specifications. Many of these private label products have been designed or
developed by our in-house research and development teams. See "Research and
Development.”
Research and Development
Our research and development teams design and develop products for our
private label offerings. The individuals responsible for research and
development have backgrounds in engineering and industrial design.
This in-house capability provides important support to the private label
offerings. Products designed include PCs, servers, furniture, ergonomic
monitor support arms, printer and monitor stands, wrist rests and other
durable computer related products, storage racks and shelving systems,
various stock and storage carts, work benches, plastic bins and shop
furniture. We own the tooling for many of these products, including plastic
bins, computer accessories, furniture and metal alloy monitor arms. See
“Research and Development Costs” in Footnote 1 to the Consolidated Financial
Statements for further information.
Competition and Other Market Factors
Personal Computers
The North American and European computer markets are highly competitive,
with many U.S., Asian and European companies vying for market share. There
are few barriers of entry to the PC market, with PCs being sold through the
direct market channel, mass merchants, over the internet and by computer and
office supply superstores.
Timely introduction of new products or product features are critical
elements to remaining competitive. Other competitive factors include product
performance, quality and reliability, technical support and customer
service, marketing and distribution and price. Some of our competitors have
stronger brand-recognition, broader product lines and greater financial,
marketing, manufacturing and technological resources than us. Additionally,
our results could also be adversely affected should we be unable to maintain
our technological and marketing arrangements with other companies, such as
Microsoft®, Intel® and Advanced Micro Devices®.
While economic conditions in the United States have recently begun to
improve after several years of adverse conditions, economic conditions in
Europe continue to be unsettled, and, on balance, PC sales continue to be
slow. This continued slowness has resulted in lower selling prices among our
competitors, creating an extremely competitive environment that has
affected, and may continue to affect, profitability over the short-term. Our
long-term view of the PC market, however, remains optimistic, assuming that
the strengthening of U.S. economic conditions continues and conditions in
Europe improve.
Computer Related Products
The North American computer related products market is highly fragmented and
characterized by multiple channels of distribution including direct
marketers, local and national retail computer stores that carry computer
supplies, computer resellers, mass merchants, computer and office supply
"superstores" and internet-based resellers. In Europe, our major competitors
are regional or country-specific retail and direct-mail distribution
companies and internet-based resellers.
As with PCs, the continued slowness of the global economy means the
environment remains highly competitive, resulting in the continued reduction
in retail prices for computer related products, which may continue to
adversely affect our revenues and profits. Additionally, we rely in part
upon the introduction of new technologies and products by other
manufacturers in order to sustain long-term sales growth and profitability.
There is no assurance that the rapid rate of such technological advances and
product development will continue.
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