A So-So Ho Ho Ho? : Some PC Retailers Are Up a Tree This Holiday Season

SPECIAL TO THE TIMES

The Christmas shopping season began Friday and the technology boom that has been underway for several years remains in full swing, yet much of the computer retailing industry is bracing for the holiday blues.

Sales of personal computers to consumers aren't growing like they were last year or the year before. Too many stores are battling for too few customers, wiping out already thin profit margins. PC retailers have been falling by the wayside all year long, and some that remain are facing a do-or-die Christmas.

"In my industry, there's not one person that's really feeling good about anything," said John Chun, manager at Personal Support Computers in West Los Angeles. "It's November and we should be booming by now. Instead, we are really suffering. I sure hope it gets better for Christmas."

It's not just small operations such as Personal Support Computers that are hurting. Superstore chain Computer City, owned by Tandy Corp., is struggling to stay alive after enduring rumors of a possible sale to industry rival CompUSA, and its sister chain, Incredible Universe, is also on the ropes.

Locally, Van Nuys-based consumer electronics chain Adray's has abandoned selling computers altogether. Even venerable Wal-Mart announced last month that it would stop selling computers in nearly a third of its 2,265 stores.

There are a few bright spots. Analysts say computer specialists CompUSA and Fry's Electronics are doing just fine, and so are smaller stores that specialize in sales to businesses. The PC industry as a whole, feeding off a fat cycle of business computer upgrades, is more than healthy, and the boom in the Internet and all manner of communications-related technologies shows no signs of abating.

But consumer PC sales growth is slowing significantly, from the torrid 25% to 30% pace of 1994 and '95 to a merely healthy rate of 10% to 15% this year. That downturn, combined with over-building of computer stores in recent years, has been enough to wreak havoc in much of the business.

"A lot of retailers have opened a lot of stores and now there's overcapacity," said Scott Emerman, a retail analyst with Dean Witter Reynolds in New York. "They have been hurt to some degree by themselves by offering very aggressive terms and promotional prices, which has made it a difficult category to make money in."

With PCs in nearly 40% of American homes--and nearly 50% of Southern California homes--the industry may be reaching a saturation point: A lot of people, after all, can't afford PCs or simply aren't interested in them. Computer owners can often be persuaded to trash their old machines and upgrade to newer versions, but that has been difficult this year given the lack of a sexy new technology or a must-have piece of software.

"The demand from consumers for PCs has slowed dramatically because there's nothing new," said Terence McEvoy, a retail analyst at Janney Montgomery Scott in New York. "The Pentium chip has been around for years, and Windows 95 is more than a year old. It's old news."

Worse yet, two important new technologies--digital videodisc drives and Intel's MMX multimedia chip--are due out in early 1997. Some would-be Christmas shoppers might use this as an excuse to hold off on PC purchases until next year.

The overcapacity problem might be even more damaging. Seymour Merrin, president of Merrin Information Services, a Palo Alto research firm that tracks computer sales, says there is now a computer superstore for every 500,000 people--an awful lot of stores. On top of that are computer-selling consumer electronics chains such as Best Buy, Incredible Universe and Circuit City.

Consumer electronics stores moved aggressively into computers during the go-go years of the early 1990s. They couldn't offer the wide selection of a CompUSA or a Fry's, so they compensated with lower prices.

"When the consumer electronics business was robust, they could offset low margins from the computer business with higher margins from consumer electronics," Merrin said. "This year the consumer electronics business is in rough shape, so there's nothing to offset with. They can't afford to offer phenomenally low-cost promotions, so they don't get customers and they don't sell. It's not a pleasant spiral."

While Best Buy's net sales climbed from $161 million in 1995 to $177 million in 1996, net income dropped from about $58 million to $48 million, reflecting lower profit margins. The company's stock is down more than 50% from its 1996 high.

Incredible Universe has closed two stores this year, and the remaining 17 are in jeopardy. Tandy, the chain's Dallas-based parent, said last month that it is committed to making the stores profitable, but that will probably require more store closings and tens of millions of dollars in additional investment.

The problems at Computer City involve a variety of strategic mistakes, analysts said. The stores tend to be in fairly expensive neighborhoods, and the higher rent makes it tough for them to match the lower prices offered by competitors. Analysts also fault the stores' layout and merchandising techniques that are too rigid to adapt to changing market conditions. Tandy's stock rose 25 cents Friday to close at $42.25 on the New York Stock Exchange, down from a high of $59.13 in May.

Since corporate PC sales are strong, stores that sell to businesses as well as consumers are doing better than most. Dallas-based CompUSA maintains a separate sales channel devoted exclusively to the corporate market, said President and Chief Executive Jim Halpin, and its 119 retail superstores make about a third of their in-store sales to small businesses.

CompUSA's sales grew by more than 25% to $3.8 billion in 1996, and profit rose from $23 million in 1995 to nearly $60 million this year. Still, the company's stock is down about 25% since October, closing Friday at $45, up 25 cents, on the NYSE.

PC System Design, a chain of three stores in the Southland, sells computers to the general public but has prospered by winning contracts to supply PCs to businesses.

"We are very aggressive as far as seeking corporate buyers," including aerospace and defense firms in the area, said Henry Ngo, marketing director for the store in Brea.

But among retail shoppers, caution is the watchword this Christmas. Shopping at CompUSA in Burbank on a recent Saturday, Steve Alfaro eyed a slick IBM Aptiva model--but said he was prepared to wait six months for new discounts before buying.

Some price cutting has already occurred, along with other financial incentives that retailers hope will clear the shelves so they can make way for spiffier new inventory in January. Bundling a free printer or a free monitor has proven popular among some chains. But with manufacturers mostly holding the line on pricing this fall, there's a limit to how good consumer bargains will get.

Retailers are loath to discuss their long-term merchandising plans, but analysts say many stores will have to devote less shelf space to computers and beef up their selection of peripherals and software instead. Some stores will certainly have to be closed altogether.

Certain new PC models could yet provide a short-term boost. One-year-old Monorail Inc. appears to be having some success with machines that sell for less than $1,000, while on the high end Sony and Toshiba have introduced elegantly styled products priced in the $2,500 range.

Increased interest in the Internet will continue to spur consumer sales in the years to come. And the rise of the global computer network may also encourage computer retailers to find a new line of work, as 2 Cow Herd owner Deb Howard did.

"Computer sales were slowing down so much and our margins were driven so low by Best Buy and Circuit City and CompUSA and Fry's that we decided we needed to seek other opportunities," said Howard, who sold computers successfully for five years before converting her Venice business into an Internet service provider. "We saw the handwriting on the wall. It was getting to be too much of a struggle."

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