THE EGGHEAD BALANCING ACT : After setting the standard for software sales, the company now faces copycat competitors all hoping that it takes a great fall.
Personal computer software once baffled the people who sell to the masses.
After all, how do you get the average consumer excited about a piece of plastic that comes with an obtuse, 2-inch-thick operating manual? And how do you even describe something as bizarre as a platter encoded with instructions that can direct anything from a sophisticated financial spreadsheet to the antics of a Pac Man?
One retailer after another tried to market software as they would books or records, and one after another flopped. Selling software, they learned, isn’t like selling books because booksellers don’t have to teach their customers to read. And it isn’t like selling records because stereos, unlike computers, are easy to operate.
Enter Victor Alhadeff, fresh from the collapse of his multimillion-dollar oil and gas tax shelter business. After a disastrous attempt to buy software for his young son’s Apple computer in 1983, he turned his attention to the software business.
And today, just five years after opening his first store in Bellevue, Wash., Alhadeff’s Egghead Discount Software is the nation’s largest software-only retailer. In the process, the chain--whose distinctive company mascot, Professor Egghead, resembles a cartoon cross between Humpty Dumpty and Albert Einstein--has changed the rules for the rest of the industry.
But changing the rules has its drawbacks: Scores of competitors are imitating Egghead’s techniques and are already cutting into the company’s business.
“Egghead said ‘We’re not just going to sell software, we’re going to merchandise the hell out of it,’ ” said David Wagman, founder and chairman of Softsel, an Inglewood software distributor.
Until Egghead arrived on the scene, software marketing was haphazardly divided among computer stores, mail-order outlets and direct sales by publishers. Attempts to open software-only stores generally were miserable failures. Alhadeff’s goal was to remove the mystery surrounding the product and promote it as no one had ever done before.
His timing was terrific. In 1984, personal computer sales were running at record levels, software programs were becoming easier to use and consumers were becoming far more comfortable with the whole notion of computers.
When its fiscal year ends in late March, Egghead’s annual sales are expected to total nearly $380 million, and the nationwide store count should stand close to 200. Alhadeff says the company is poised for more of the same robust growth over next several years.
However, some analysts wonder if Egghead almost hasn’t been too successful at leading its competitors to the gold mine that is personal computer software.
Personal computer software sales, which exceeded $4 billion last year, are expected to grow by at least 30% this year. So, plenty of competitors--several of whom have plenty of money and highly experienced management teams--are looking for a piece of the software action.
Computer hardware retailers, such as BusinessLand and Inacomp, now admit that they erred in ceding the turf years ago and now are playing a fast-paced, well-funded game of catch-up with new software retail outlets and mail-order catalogues.
Led by B. Dalton and its Software Etc. chain, book retailers are also cashing in on the rising demand for software by opening outlets or special departments within existing stores. And regional chains, such as Dallas-based Babbages, are sprouting in many metropolitan areas.
“There’s no question that Egghead has done a good job in addressing the market,” said Miles Walsh, vice president of direct sales at BusinessLand of San Jose, which operates 112 retail outlets across the country. “BusinessLand is following suit. We’ve left some money on the table, and we’re going after it.”
Profit Margins Shrink
Egghead already has felt the pinch.
Its meteoric growth rate has tapered off a bit in the last few months, and a well-publicized plan to open software concessions in all 800 Sears department stores over the next two years has been canceled, company insiders say, because an ongoing eight-store test has been disappointing.
Profit margins, traditionally razor thin, shriveled to 1.2% in the first six months of the current fiscal year and analysts have lowered their earnings estimates for the remainder of the year.
“Look what’s happening to Egghead’s numbers now that we’re pushing software, too,” said Rick Inatome, co-founder and chief executive of Inacomp Computer Centers, a 93-store chain based in Troy, Mich. “It took us all a while but now we’re going for it.”
Specialty retailing has traditionally seen more than its share of high-fliers crash. And although no one seriously suggests that Egghead is about to plunge, questions are being raised, especially as the competition heats up and profit margins shrink.
Skeptics point to Alhadeff’s earlier business venture, the tax shelter that lost millions for its investors when the bottom fell out of the energy market in the early 1980s. Alhadeff, who founded ENI Corp. in 1971 when he was just 24 years old, has been the target of 23 lawsuits stemming from the collapse and stands to lose all his investment in Egghead if the remaining unsettled cases go against him.
Alhadeff, a brash but engaging 42-year-old entrepreneur, says memories of the ENI debacle become more faint every day. And he rejects any attempt to compare Egghead, which he started just a year after leaving ENI, to his previous business.
Will Be ‘Back on Schedule’
“I don’t worry about a flameout. We’re not selling faddish products. We’re not selling Nintendo (video) games,” he boomed. “We’re in the basics of the business. We’re the dominant player in a business category that will always be there.”
Alhadeff, who sold shoes at Nordstrom while completing his undergraduate finance degree at the University of Washington, attributes the analysts’ jitters to an overall slowing in the personal computer market and Egghead’s failure to meet original deadlines for opening several stores on the East Coast.
He says the company will be back on schedule by the end of March and should open an additional 80 or more stores in the next fiscal year. “We have the capital and we have the inventory controls in place to manage this growth,” Alhadeff insisted.
Egghead has the attention of software publishers. As the No. 1 customer of MicroSoft, Lotus and Ashton-Tate--the nation’s top three software publishers--Egghead is able to get the deals it wants, when it wants. Edward Esber, chairman of Ashton-Tate in Torrance, admits that his company’s pricing and promotion policies have been influenced by Egghead and speculates that other publishers are equally accommodating to the retailer.
Alhadeff’s game plan is deceptively simple and not, analysts say, immune to cloning by competitors.
Egghead was the first mass retailer to regularly offer discount prices on every one of the more than 1,300 software titles on its shelves. The low prices are made possible by Egghead’s volume buying direct from the publisher. Further, Alhadeff’s holds down advertising costs by fully exploiting all the promotional allowances offered by software publishers anxious to publicize their programs.
Egghead’s aggressive advertising campaigns are written in plain, everyday English at the insistence of Alhadeff, who contends customers are turned off by jargony computer mumbo-jumbo.
But perhaps more important for consumers, Egghead allows and even encourages customers to test software in the store before making any purchase. And the company was the first to offer a no-questions-asked return policy, even though programs often can be copied easily.
“The average customer doesn’t know the first thing about buying software, and the whole process can be an anxious experience,” said Charles Wolf, an analyst for First Boston, a New York brokerage. “Egghead took the anxiety out of the experience. It was the first retailer to really understand how to sell software.”
Still, analysts say, there’s nothing about Alhadeff’s game plan that can’t be copied. “It’s nothing that other computer retailers can’t do,” said Jeffrey Tarter, publisher of Soft-Letter, a software market report. “There is nothing all that special or proprietary about Egghead’s formula. A competitor can still sell programs for $5 less.”
And many retailers already have jumped on the price-cutting bandwagon. B. Dalton’s Software Etc. cut prices across the board several weeks ago. BusinessLand has mounted an aggressive direct-sales catalogue and telephone-ordering system that it expects to generate $500 million in annual sales by 1991.
Miles Walsh, who directs the catalogue, credits Egghead for providing the impetus. “Egghead created a better awareness of software,” he said. “We’re taking it a step further.”