Cdw Computer Centers, Inc. Business Information, Profile, and History

Company Perspectives:

At CDW, our bottom line isn't about dollars and cents. It's about the people we do business with--our customers, coworkers and community members. We have a long history of providing computing solutions built for business customers--and we welcome the chance to share our story with you.

History of Cdw Computer Centers, Inc.

CDW Computer Centers, Inc. is a leading seller of brand name microcomputer hardware and peripheral devices, including desktop and notebook computers, printers, video monitors, data storage devices, multimedia equipment, networking products, and software. CDW markets primarily through direct mail to end users, particularly business customers, in the United States.

Emergence of a New Industry: 1984

CDW was launched in 1984 by former used car salesman and Burger King franchise school dropout Michael Krasny. Krasny, a 1975 graduate of the University of Illinois, had taken a job after college selling used cars at his father's Toyota dealership in Chicago. He did not like the work, but would later attribute much of his success to the simple truths he learned on his father's car lot. Bits of wisdom he would recall included: "Good luck many times comes disguised as hard work," "Pigs get fat, hogs get slaughtered," "Success means never being satisfied," and "People do business with people they like." Among other skills, he learned to negotiate. "Being that I was from the automobile business, I was good at negotiating," he said in the February 12, 1996, Forbes. "When I bought the machine [computer], I bought it right."

Krasny disliked the car sales business, but did enjoy trying to computerize the dealership's sales and finance departments. In 1982 he left the dealership, entered and then dropped out of Burger King's franchise school, and then decided to become a freelance computer programmer. The field was relatively young at the time--computers were just beginning to become common in homes and offices--and Krasny had trouble making ends meet. Frustrated and in need of cash, he decided to sell his computer system in 1984. He ran an advertisement in the Chicago Tribune classified section that read; "IBM PC 512K Memory--computer, color monitor, software, 2 disc drive, $1,500/best offer. Still in warranty."

To Krasny's surprise, he easily sold the system to the first person that responded to the ad. Furthermore, the second person that called to buy the computer offered to pay Krasny to set up a system for him. Cash-starved Krasny agreed. He bought a computer system, helped the person set it up, and charged a few hundred dollars for his services. Meanwhile, as people continued to call about buying his computer, Krasny developed a sales pitch designed to convince those prospects to let him set up a computer system for them. When some of them agreed, the venture that would become CDW (Computer Discount Warehouse) was born.

Krasny spent the next few years building a business of buying, selling, setting up, and repairing computer systems. Because personal computers were still relatively new, many people were intimidated by the technology. Thus, many of his customers were simply looking for someone who could tell them what to buy, how to set it up and turn it on, and how to keep it running. As computers became more user-friendly and buyers became more comfortable with PC technology, his emphasis shifted to sales. By 1985 Krasny found that he was selling many computer systems to a single buyer, a Chicago entrepreneur who simply resold them by mail at markups of about $300 per machine.

Devising a Formula for Rapid Growth in the Late 1980s

Krasny recognized the potential of the Chicago entrepreneur's mail-order idea, and he knew that he was just as capable of selling his machines by mail. In November 1985 he published his first national advertisement in PC World magazine. He hired a salesman to answer the phone, and never looked back. Krasny hired more salespeople and began running more and bigger advertisements in a number of national PC and computer-related publications. Sales shot past $10 million and would head toward $60 million annually by 1989.

While Krasny quickly discovered the power of direct marketing in the computer business, he also learned how to maximize the potential of that vast distribution channel. From the start, he decided to keep prices low and make money by shipping a high volume of units. While his nearby Chicago competitor tagged a $300 markup onto his gear, for example, Krasny charged only $25. He also maintained an intense focus on customer service, which became a hallmark of the CDW organization. The result was that CDW, unlike many of its competitors, managed to develop a loyal base of repeat customers--a valuable asset in the direct marketing business.

Thus, customer service and low prices became the foundation of CDW. "We have the right products at the right price due to our knowledge of what customers want and our close link with our vendors--distributors and manufacturers of computer products," Krasny said in the October 23, 1995, HFN. But CDW also prospered as a result of its savvy operational strategy. "Efficiency is the second vital ingredient for our competitive success," said Krasny. "Low overhead, high inventory turnover, and fast delivery to customers are the components of our cost-effective operating model. Third, we are dedicated to continuously improving everything we do."

The combination of a slick operating plan and a savvy marketing strategy helped make CDW one of the top two computer direct marketers by the early 1990s (the leader of the industry was Micro Warehouse). CDW's sales rose to $83 million before surpassing $100 million in 1991, and net income rose to $3.7 million in 1991. CDW's gains in 1991 displayed the value of the company's formula for success. The personal computer business suffered an ugly downturn in that year that squelched sales by most retailers. In contrast, the direct marketing channel continued to grow. As overall personal computer shipments plummeted 14 percent in 1991, traditional retailers watched from the sidelines as direct marketers increased PC sales by a whopping 76 percent. "These guys [direct marketers] are really putting the squeeze on the personal computer dealers," said Owen Linderholm, senior editor of PC World, in the April 19, 1993, Crain's Chicago Business. "All they [dealers] have left to offer is more service."

New Strategies for the Information Age: The 1990s

More service was exactly what the personal computer market needed less of as the 1990s progressed. Indeed, as computer makers scrambled to develop PCs and peripherals that were more user-friendly and the cost of computer systems dropped, direct marketers like CDW prospered. But CDW remained a step ahead of most of its competitors by continually employing new, shrewd tactics. For example, Krasny realized that many buyers were wary of purchasing expensive computer systems through the mail. To ease their fears, he established a storefront showroom that gave CDW more credibility. It also helped to boost sales, as about 10 percent of CDW's revenue was garnered from its two Chicago stores by the early 1990s.

Krasny also boosted profits by adopting cutting-edge automation technology. For example, Krasny learned from a lawyer friend about the owner of a local company, United Stationers, that had an obsession with automation. Krasny followed that company's lead, automating its billing system and eventually other parts of the company. CDW had been processing 200 orders daily with 12 people in its billing department in the 1980s. By the early 1990s, after implementing new information systems, the same department was churning out 5,000 orders each day with only four workers.

Nevertheless, Krasny continued to value his workers more than his technology, a trait he learned at his father's Toyota dealership. "My father asked people to work very hard, but gave them 150 percent of what they could earn somewhere else," Krasny said in the Forbes article. He paid CDW's employees with stock options and vacations, among other perks, and many of the company's salespeople earned well over $100,000 annually.

CDW continued to pursue its proven strategy in 1992 and 1993; it advertised its goods in PC trade publications and sold directly to customers via toll-free phone numbers. CDW targeted medium-size and larger companies, which often purchased large volumes of goods and became important repeat customers (business buyers accounted for roughly 80 percent of sales by the mid-1990s). The company also avoided manufacturing its own systems, a route that many of its competitors chose. Instead, CDW marketed a wide line of brand name computers and peripherals, focusing resources on its key strength of distribution. That simple strategy generated sales of $176 million in 1992 and $271 million in 1992, about $6.3 million and $13.55 million, respectively, of which was netted as income.

As CDW's bank account grew, so did Krasny's. Krasny took the company public in 1993 after changing the name from Computer Discount Warehouse to CDW Computer Centers. The initial public offering of stock brought expansion capital into CDW's war chest and provided Krasny just compensation for his efforts. (His profits from stock sales combined with his 43 percent ownership share gave the 40-plus-year-old entrepreneur a net worth of some $350 million by the mid-1990s.) Investor excitement about CDW's prospects pushed the company's stock price from its offering price of $6.25 to more than $25 within a year. After two years, moreover, the stock was selling at a high of above $60 per share.

CDW benefited in the mid-1990s from numerous industry trends, including a proliferation of multimedia and other peripheral devices, booming computer replacement markets, and an uptick in capital spending by its core business clientele. Important to CDW's success were several big accounts that helped to dump millions of dollars worth of product into its distribution pipeline. CDW had much earlier landed a deal to sell computers for Compaq, the leading computer producer in the United States going into the mid-1990s. Then, in April 1994, computer mammoth IBM granted CDW permission to begin selling its units. Shortly thereafter, CDW also won permission to start selling a new Apple notebook computer.

CDW's success at landing major new vendors reflected the intensifying trend toward direct marketing, particularly to businesses, which was becoming a much more accepted means of saving money on computer purchases. In addition, CDW benefited from an aggressive PC price war that broke out in 1994. Compaq initiated the contest when it slashed prices 11 percent to 22 percent on different models. IBM followed suit with a pugnacious 27 percent price cut. CDW's stock price rose immediately after each of the reductions as investors correctly anticipated big sales. CDW posted an impressive 52 percent gain in revenue in 1994 (to $413 million), and enjoyed record operating profits of $23 million.

Sustained Growth in the Late 1990s

To the surprise of many analysts, CDW maintained rampant growth throughout 1995. With major electronics producers like Hewlett-Packard, Digital Equipment, Sony, Toshiba, and others clambering to get their goods into its distribution system, CDW tallied steady sales and profit gains. By 1995 CDW was marketing 20,000 items through its catalogs, had a 250-member sales force, and boasted a database of nearly one million customers and prospects. About 80 percent of its sales were to repeat customers, which confirmed the wisdom of the company's longtime focus on customer service. Sales for the year hit $629 million, about $20 million of which was netted as income.

CDW broadened its marketing effort in 1995 with the establishment of an "outbound" telemarketing department to contact and sell to prospects. That effort, combined with the 30-plus million catalogs it shipped out every year, was expected to boost 1996 sales. In addition, CDW was planning to diversify its product line to include numerous electronics products of interest to its core business customer base, including personal data assistants, digital cameras, and devices related to video transmission. CDW also planned to launch an Internet marketing program in 1996.

Heightened Competition: Moving Ahead into the 21st Century

Changes in the computer industry in the late 1990s, however, including declining response numbers for catalog mailings, compelled CDW to consider more radical approaches to product marketing. As more and more computer manufacturers, notably Dell and Gateway, began to sell their products to consumers directly, CDW found its position as a major reseller in jeopardy. The company was also dealt a minor blow in November 1997, when Compaq Computers announced its intention to begin marketing its products directly to consumers. Although CDW continued to sell Compaq products, this overall industry shift towards direct sales made it essential that CDW bolster its own brand identity. In addition to redesigning its logo and its web site, CDW launched a television and print ad campaign targeted at small and mid-size businesses in October 1998.

In the mid-1990s, the company also redoubled its emphasis on direct sales, while shifting away from catalogue and Internet marketing. In contrast to major competitors including Dell, which was placing a greater emphasis on web-based sales in the new century, CDW continued to stress continued personal and phone contact with its customers. To this end the company began to build up its sales force, creating management positions for more than 480 sales personnel between 1996 and 1999. In November 1999 CDW installed a 500-member sales team in a new office in downtown Chicago. By the year 2000 the company had plans in place to create an additional 500 positions, with the aim of having a total sales force of 1,100 by the end of 2000. As CDW President Gregory C. Zeman told Forbes in November 2000, "It's an old-fashioned, feet-on-the-street model." In addition to establishing new offices in Chicago, the company implemented new incentive programs for its employees and built a 33,512-square-foot fitness and daycare center, nicknamed CDW@Play, at its Vernon Hills headquarters.

Although training such a large workforce put a temporary strain on the company's profits, CDW's revenues did not miss a beat, with sales increasing 43 percent in the third quarter of 1998. Overall, CDW's net profits grew an average of over 40 percent per year between 1995 and 2000. Because of its continued commitment to strong customer service, the company was able to avoid the fate suffered by several of its competitors, and by 1999 it was recording annual sales figures of more than $1.9 billion. Equally significant, the company was able to retain more than 80 percent of its extensive customer base. With 80 to 90 percent of CDW's total revenues coming from repeat customers, the customer service strategy appeared to be sound. For the year 2000, Internet sales only accounted for 12 percent of the company's total earnings.

Even with the economic downturn of the early 21st century, which witnessed a significant decrease in sales of new technology products, CDW continued to maintain its leading position in the computer reselling industry. A major reason for this consistency lay in the company's commitment to customer service. As overall Internet sales declined, and the company's competitors fought for market share, CDW saw its customer base increase by 15 percent in 2001. Although sales figures did dip slightly during this period, CDW's continued emphasis on direct sales, bolstered by a sales team that exceeded 1,200 by 2002, put the company in position to emerge from the economic slump with its profit margins intact.

Principal Subsidiaries: CDW Government, Inc.

Principal Competitors: Dell Computer Corporation; Insight Enterprises, Inc.; Micro Warehouse, Inc.

Chronology

• Key Dates:
• 1984: Michael Krasny founds Computer Discount Warehouse.
• 1993: Computer Discount Warehouse becomes CDW Computer Centers.
• 1994: CDW begins selling IBM products.
• 1996: CDW launches Internet marketing program.
• 1999: CDW establishes a sales office in Chicago.