Lower-Priced PCs Putting Retailers in a Bind

For computer retailers, Christmas could bring too much of a good thing.

Twelve months ago, high prices and delays in breakthrough technology kept consumers out of computer stores during the key holiday shopping season. The result: a dismal year for home PC sales. This year sales are booming. People are flocking to stores, for the most part drawn by fully loaded computers priced under $1,000 that have taken the industry by storm.

And therein lies the problem. While shoppers and manufacturers rejoice over low-priced machines, retailers are trapped selling hardware with profit margins so slim they make little or nothing on a sale, and may even lose money, according to industry analysts, retailers and manufacturers.

“If a retailer sells a $999 machine with a 5% margin, they won’t make their overhead,” said Barry Schwartz, a retail vice president at Irvine-based Toshiba America Information Systems’ computer division, which doesn’t sell a sub-$1,000 machine. “The more they sell, the more upper management will want them out of the business.”

To make up the difference, retailers will need to steer shoppers to higher-priced computers, printers and add-ons, all of which have higher margins, analysts and executives said.

The retailers in the best position to do this are computer and office supply superstores, which have the broadest product selection and most knowledgeable salespeople and which, in recent years, have solidified their dominant position in the home PC distribution channel.

Consumer electronics chains, discount department stores and membership clubs, which have seen their share of the home PC market remain static or falter, will attempt to pick up the slack through sales of non-computer goods.

“At Christmas, it’s not just computers [we promote]. We kind of spread it across all areas,” said Rick Borin, merchandising vice president for Tandy’s Radio Shack chain.

Over the long term, executives and analysts believe PC retailers will survive the current margin crunch if they adopt new inventory practices to keep overhead low, including adding built-to-order services where customers visit stores to configure their own machines and have them delivered directly from the manufacturer, thereby allowing retailers to keep less stock on hand.

They believe resellers also will need to expand sales through mail order and Web sites--channels CompUSA, Circuit City, Egghead Discount Software and others are already pursuing--in part to blunt the threat from manufacturers such as Dell and Gateway that sell to consumers directly over the phone and the Internet.

Some are zeroing in on small-business computer users to expand their customer base and shield themselves from the vagaries of the home PC market. Still others have chosen not to carry sub-$1,000 machines at all.

“We prefer to give our customers a little more value for their money, which is why Sony is so successful here. It’s not a $999 computer and probably never will be,” said Ron Seifert, computer buyer for Hollytron, a Norwalk consumer electronics independent with three local stores serving a largely Asian American clientele.

Retailers acknowledge that collectively they’re in a bind. Not surprisingly, few are willing to go on the record about current problems. But recent financial results for computer retailers and consumer electronics stores have been mixed.

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In January, Egghead closed 75 of 160 stores in a major restructuring. It continues to lose money, though officials say they’re making progress and the company is opening several new superstores. Tandy’s Computer City SuperCenters division closed 22 of 103 under-performing or unprofitable stores earlier this year, although the company planned to open five new stores this fall.

Despite record revenue, CompUSA--the nation’s leading PC superstore--showed only 6.1% growth in sales at stores open a year or more for the quarter ended Oct. 29. Comparable store sales declined 3% in September at Circuit City, where computers and other home office gear account for 24% of total revenue. “I’m disappointed” in retailers’ overall performance, said Charles Smulders, PC distribution analyst at Dataquest. “It means sales are growing because they’re opening stores, not because sales at existing stores are increasing.”

It’s not the first time computer retailers have had to tough it out during what appears to be a boom time. Prices and margins that have fallen consistently since the birth of the PC industry have left a trail of failed retailers in their wake, including onetime powerhouses such as Computerland and Businessland.

But retailers have high hopes that sales of home computers this year will blot out the memory of 1996, when unit sales of desktop and notebook models grew a paltry 12.3%. By contrast, unit sales should jump 22% this year to roughly 11 million, with the biggest boost coming from sub-$1,000 computers, according to Computer Intelligence, a La Jolla-based technology researcher. First-time buyers are snapping up cheap computers, but they’re not the only ones. Consumers shopping to replace older machines outnumber first-time buyers 2 to 1, according to industry analysts.

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But with smaller price tags come smaller margins. Typically, a gross profit margin on a mid-range $1,800 computer is $175, or a net of $75 after selling costs are deducted, said Matt Sargent, a Computer Intelligence analyst who tracks PC retailers.

“On a $999 machine, the gross margin is $80 and the selling costs are $90, so on every machine you lose $10,” Sargent said.

Because of their broad product selection and better trained sales staffs, PC superstores are most likely to weather any margin-induced storms, analysts and others said. Computer superstores also are in the best position to work hand in glove with computer makers to improve inventory controls, another avenue to beating lower margins.

Though they still represent a small piece of the pie, office supply chains such as Staples and OfficeMax are showing considerable growth, riding on the coattails of the home office boom, analysts said.

Less well off are discount department stores, membership clubs and software specialty boutiques, all of which counted on first-time buyers as customer mainstays. But as the percentage of first-time buyers dwindled, sales declined.

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Home PC Sales

Computer superstores logged more retail PC sales in 1996 than any other vendor. However, home PC sales from all sources have been unsteady since 1994. The desktop PC topped a list of home electronics products adults said they wanted as holiday gifts. A look at retail PC sales by stores, home PC sales since the third quarter of 1994 and consumers’ electronics holiday wish list:

Retail PC Sales by Category

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Category 1996 1995 Computer superstores 38.4% 34.9% Consumer electronics stores 22.3 23.2 Office products superstores 15.3 12.8 Discount department stores 5.0 5.5 Warehouse clubs 4.5 4.6 Other* 14.5 19.0

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Total retail PC sales: $26.8 billion in 1996

*Includes independent computer dealers, software specialty chains and children’s stores

Growth of Home PC Sales

Quarterly sales, in millions of units:

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Period Unit sales, in millions 1994 Q3 1.63 1994 Q4 2.04 1995 Q1 1.57 1995 Q2 1.35 1995 Q3 1.89 1995 Q4 2.32 1996 Q1 1.75 1996 Q2 1.58 1996 Q3 1.95 1996 Q4 2.45 1997 Q1 2.12 1997 Q2 1.97

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Computers Top Consumers’ Home Electronics Wish Lists for 1997

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Desktop PC 18 % Color TV (27-inch or larger) 7 Camcorder 5 Portable PC 5 VCR 4 Stereo system or component 4 Color TV (27-inch or smaller) 3 Video game system 2 Cellular phone 2 DVD player 2 CD-ROM drive 2 Computer printer 2 Cordless phone 1 Car stereo or component 1 Digital camera 1 Digital satellite system 1 Digital camcorder 1 Portable stereo product 1 Fax machine 1 Internet access device 1 Home speakers 1 Car navigation system 1 Answering machine 1 Pager 0 Hand-held computer or PDA 0 Computer speakers 0 Don’t know 28 Other 7

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Note: Numbers add up to more than 100% due to rounding.

Sources: Consumer Electronics Manufacturers Assn.; Computer Retail Week, Dataquest

Researched by MICHELLE V. RAFTER