Shifting Sales Focus, Dell Reboots Image, Product

By GREG MILLER

Oct. 23, 1997 12 AM PT

TIMES STAFF WRITER

Appearances aside, Michael Dell has a few things in common with Santa Claus.

Both have gotten a lot of attention for the way they deliver products directly to end users, and both have ambitious plans for this fourth quarter, by far their busiest time of year.

The difference is that Santa’s been at this awhile. For Dell, the 32-year-old founder of the world’s fastest-growing computer company, focusing on home users is something new.

Having all but conquered the corporate computer market over the last few years, Dell Computer Corp. has set its sights on the home market it had previously ignored. The switch is a gamble that the company can clearly afford to make, analysts said.

“Dell has succeeded in such a big way in the corporate market,” said Kurt King, an analyst at Montgomery Securities in San Francisco, “that management has been able to shift its priorities.”

That shift is likely to unsettle the nerves of Compaq Computer Corp., Hewlett-Packard Co. and IBM Corp., companies that have already seen Dell upend the corporate side of the industry by delivering PCs direct to customers and slashing costs with untempered aggression.

Invading the home market won’t be a walkover for Austin, Texas-based Dell. Home users are a different breed from corporate customers. They hunt for bargains, expect far more hand-holding and are often enamored with the kinds of marketing ploys and bells-and-whistle features that make a corporate account manager cringe.

For all its success, Dell has little experience with these cuddly touches. Until now, the company sold computers to home users only in a passive way, placing ads in PC magazines and taking orders from customers who called the company’s 800 number or visited its Web site. Dell’s real focus was on snagging accounts with behemoths, such as Ford Motor Co., Boeing Co. and Shell Oil Co.

But now Dell is publicly stating a goal of going from the No. 7 supplier of home PCs to No. 1, and the company has quietly spent much of the last year getting ready.

Dell recently created a business unit for consumer PC sales, and staffed it with executives from consumer companies, including the former head of AT&T; Corp.’s Internet service and a marketing manager from L.L. Bean. (The first Dell catalogs went out just two months ago.)

Dell has also made subtle changes to its product line, offering PCs that for the first time are equipped with bundles of entertainment and household management software.

And perhaps most importantly, Dell boosted its consumer ad budget to about $10 million this year, triple the level of a year ago. For the first time, ads for Dell machines are showing up in mainstream newspapers and magazines, on television, and on the Web.

“What we’ve been doing for the past year is building, experimenting and getting ready for prime-time,” said Paul Bell, vice president of the consumer group at Dell. “The main thing now is taking the message to a broader audience.”

Other companies, including such giants as Sony Corp. and Toshiba Corp., have also entered the consumer PC market in recent years. But if Dell’s entry is any more threatening, it is because of the way it does business.

Unlike most major computer companies, Dell doesn’t build a PC until it is ordered, and ships its products directly from factory to customers. Doing so cuts costs by eliminating distributors and retailers. It also trims from months to weeks the time it takes computers to go from unassembled parts to a customer’s desktop.

Simple as it sounds, the approach has shaken the industry. Dell’s sales this year are expected to top 2.4 million units in the United States, more than triple the number of shipments in 1993.

That success has unnerved other companies. Compaq and IBM still hold greater market share, but are scrambling to revamp their own production and delivery schemes to keep the gap from narrowing any further.

The company most threatened by Dell’s new consumer focus, analysts say, is Gateway 2000, the Sioux Falls, S.D., company that has done for direct sales to the home market what Dell has done for the corporate market.

Gateway has shown a deft marketing touch, cultivating a folksy image symbolized by the cow-print boxes in which it ships its PCs. And the company is moving to expand its market share by setting up demonstration stores where first-time buyers--who are typically reluctant to buy direct--can view Gateway PCs before placing an order.

Until now, Gateway and the other leading direct-sales company, Micron Technology, were largely alone in the direct-sales niche for the home market. Now Dell presents a third choice, one with a well-known brand name and millions to spend on marketing.

“The consumer decides first whether to buy direct or through a reseller,” said King, the Montgomery analyst. “Once the decision is made to buy direct, then the decision becomes which vendor.”

If Dell stumbles, analysts said, it is likely to be due to its inexperience working with home users such as Marissa Marsala, a San Diego marketing consultant who bought a Dell machine last month.

Marsala, 38, said Dell missed her scheduled delivery date, shipped a PC with a bug, and forced her to endure 20-minute waits on the customer-support line.

“I think Dell has exceeded its capacity to deliver quality products and customer service,” Marsala said. “They’re just growing too quickly.”

Dell executives say such complaints are rare, however, and point out that the company has expanded its customer support staff and bolstered its training program. The company has also devised novel ways to help consumers, including a Web site that enables users to punch in a serial number to get customized information about their particular machine.

When it comes to customer support, Bell says, “we’ve learned those lessons.”

Dell has shown some additional innovative touches on the consumer side, recently becoming the first manufacturer to offer a leasing program.

The program is targeted at home users tired of spending thousands of dollars on equipment that becomes obsolete in months. Dell marketing studies show that as many as 10 million Americans--about one-third of the most computer-savvy consumers--consider obsolescence a big issue and would consider leasing.

But Dell’s leasing terms might be a tough sell. The company requires a two-year lease, with penalties for early termination. And the rates are so high that consumers spend more in two years than they would have buying a machine outright.

The monthly payments on a 300-megahertz Dell Dimension PC, for example, are $151. That means after two years, the customer will have paid $3,624--or $241 more than the current list price. The program could appeal to customers short on cash, but analysts said many of those customers will opt to buy lower-priced machines anyway.

Dell is staying clear of the sub-$1,000 category, a market segment that has grown rapidly in recent years, but one that offers meager profits and big headaches because most buyers of those machines are first-timers who exhaust tech-support lines.

Instead, Dell is focused on second-time buyers, those comfortable ordering their PCs direct, and savvy enough to know how they want their PC configured, let alone how to load a CD-ROM.

“Dell is going right after the sweet spot of the market,” said James Staten, an analyst at Dataquest. “This is going to be a very competitive Christmas.”

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At Home and Work

Mail-order computer giant Dell Computer Corp. has upended the corporate side of the PC industry, placing second in market share in this category to Compaq Computer Corp. in the second quarter. Dell is now focusing on the home market. PC market share in the business and home segments for the second quarter of 1997, by unit shipments:

Business Segment

Compaq: 15.2%

Dell: 12.2%

IBM: 9.9%

Hewlett-Packard: 8.2%

Gateway 2000: 5.2%

Others 49.3%

Home Segment

Packard Bell-NEC: 25.1%

Compaq: 16.2%

Gateway 2000: 9.3%

IBM: 6.6%