Discounters Plug Into PC Market : Retail: Warehouse stores are taking a big bite of personal computer sales. Smaller dealers may have to serve specialty markets to survive.

TIMES STAFF WRITER

After years of hiding behind the high-tech mystique of their goods, personal computer merchants are rapidly learning that they are no different from any other retailers.

And that, like so much else in the retailing world, means being vulnerable to the onslaught of the deep-discounting, warehouse-operating mass merchandisers: the computer-stocked versions of Price Club.

Dozens of these warehouses--with such names as Soft Warehouse and Micro Center--have sprung up across the nation over the last 18 months, but their presence has been masked by their relatively small numbers and a torrid overall growth rate for personal computer sales.

But now sales growth has slowed throughout the PC industry, and the warehouses are sufficiently entrenched to reveal what they have been doing all along: taking sales away from the more traditional storefront operators, including Businessland, Computer Land and a host of independent computer and software stores.

"It's a different retail market now," says Seymour Merrin, a Silicon Valley computer retail analyst. "You're either a boutique, deliver lots of service and command a premium price for it, or you're a superstore and sell at low prices. If you're in the middle, you're in what I call the 'bankruptcy gap.' "

This new order, coming nearly 15 years after the first personal computer burst onto the market, is the result of a variety of factors, but most importantly an increasing understanding of technology among customers, a ready supply of products at a wide price spectrum and eroding brand loyalty on the part of customers.

The effects are already showing.

According to Merrin, who tracks such matters, at least eight computer specialty stores have closed their doors in Orange County since Soft Warehouse opened its giant 17,000-square-foot facility in Fountain Valley last year. In Atlanta, where both Soft Warehouse and Micro Center operate stores, even traditional big-name computer discounters are feeling the pinch; Merrin says both sales and profit at Egghead Discount Software outlets there have slowed since the warehouse operators opened. An Egghead spokesman declined to comment.

Further, earlier this month, San Jose-based Businessland Inc., the world's leading storefront retailer, announced a $23-million loss for its 1990 fiscal year, including a stunning $21.5-million loss in the final quarter. The nation's No. 2 PC retailer, Computer Factory Inc., which operates a traditional and self-described "middle-of-the-road" business, checked in with a loss of $7.3 million in its most recently concluded quarter.

"I'm familiar with computers, so price is the main thing," said Ed Kolberstein, 59, an Orange County engineer who prefers Soft Warehouse because of its selection and discounts. "The best thing about the place is that they have everything organized in a catalogue so it makes the shopping much easier."

By some measures, computer retailing has never been better. Last year, according to Dataquest, a Silicon Valley market research firm, retailers of all kinds sold $22 billion worth of personal computers and ancillary equipment, about 62% of the total of such goods purchased in the United States. This year, Dataquest predicts that $28.2 billion worth of PCs and related goods will pass through retail, about 67% of the total. The remainder is direct sales from manufacturer to user.

Although total PC retail sales are expected to grow, Dataquest projects that whose cash register rings up those sales will change dramatically over the next five years.

According to Dataquest, the biggest winners over the next four years will be the warehouse operators and other mass merchandisers, including such traditional retailers as Sears, Roebuck & Co., which has installed computer departments. Their share of business PC purchases will grow from 6% in 1989 to 18% by 1994. At the same time, traditional storefront retailers such as Businessland will see their share shrink from 47% of the market last year to 38% by 1994.

Among buyers of PCs for home use, expected to be the most rapidly growing segment of the overall personal computer market, the erosion of the traditional retailer's hold is even more apparent. Among these buyers, Dataquest research shows the market share of traditional retailers will shrivel from 59% in 1989 to 35% in 1994, while the share held by mass merchandisers will leap from 14% to 45%.

By their own account, the discounters have few illusions about what they're doing.

"We are retailers who happen to sell computers," said Nathan Morton, chief executive of Software House, the Dallas-based discount chain that is about to open a store in the City of Industry, its third in the Los Angeles region. "Really, we're just like a supermarket or any other discount outlet." Before joining Software House, Morton was a senior executive of Home Depot, the home improvement discount chain.

Businessland, which has long prided itself on selling technology and not mere computer boxes to its business customers, attributes its problems to a long list of causes, a list that does not include the fundamental shift in retailing so often cited by analysts.

"We just got ahead of ourselves last year," explains David Norman, the retailer's founder and chairman. Norman said the retailer can compete as both a value-added supplier and a low-price leader by no longer offering super service as part of its basic price. "We want to unbundle the product from the service and charge extra for extra services," he explains.

But analysts are doubtful.

"Computer retailing is becoming just like all the rest. You either focus on the specialty markets, or you become a discounter," says Peter Rogers, a technology analyst with Robertson Stephens & Co. in San Francisco. "You can't mix the two strategies."

THE COMPUTER MARKETPLACE

Purchases by Purchases by business users home users Type of Retailer 1989 1994 1989 1994 Value-added reseller 13% 20% 3% 1% Storefront retailer 47% 38% 59% 35% Mass merchants/discounters 6% 18% 14% 45% Mail order 13% 11% 19% 16% Direct manufacturers' sales 16% 10% N/A N/A Other 5% 3% 5% 3%

Source: Dataquest

N/A = Not applicable

Times staff writer Dean Takahashi in Orange County contributed to this story.

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