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PC retailers in a squeeze
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December 23, 1997: 5:09 p.m. ET
Holiday sales are up but margins are down; for vendors, 'tis not the season
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NEW YORK (CNNfn) - When Dataquest, an eagle-eyed purveyor of PC sales trends, released its latest survey indicating that 10 percent of American households plan to purchase a home computer in the next six months, a megabyte buying bonanza seemed nigh.
With 43 percent of American homes already wired, the survey suggested, the PC juggernaut was all but unstoppable. And so it may be.
But with Yuletide around the corner, industry experts say, the much-ballyhooed Miracle on 34th Street is shaping up to be a mirage for many downcast computer retailers.
Far from cashing in on PC-mania, vendors are scrambling to break even at a time when putting a PC under the holiday tree is often just a double-click of a mouse away.
With the market for $1,000-and-under PCs accounting for a third of all sales this quarter, retailers' gross profit margins are being squeezed as never before.
Add to this the breakneck innovations of an industry that feeds on seasonal obsolescence and the pressures on retailers become even starker, says Paul Gillin, editor of Computerworld, an industry magazine.
"PCs have become almost a zero-sum game," Gillin said. "I think the vendors have taken a hit because the average price of a PC has come down so much."
And that's not all. Clouding the retail landscape further, Gillin and others say, is the incipient threat from direct-marketing computer upstarts such as Dell and Gateway. PC sales may be surging, but in many cases they are "virtual" sales of hardware snagged from virtual store shelves in cyberspace.
As of September, Dell reported, its Web site was generating computer sales of $3 million a day. That figure, the company contended, was up from $1 million six months earlier and represented nearly 10 percent of the company's direct-market sales.
Looking to the near future, Jupiter Communications has projected that the market niche for online PC sales will soar to $800 million by year's end.
The plummeting prices and growth of direct marketing have spawned feverish competition this season among the largest computer makers.
The retail sales leader through November, with nearly 30 percent of PC market share, was Compaq, followed closely by Packard Bell-NEC, at 23.6 percent, according to PC Data, which tracks sales figures. But in an indication of the market's volatility, PC Data's senior hardware analyst, Stephen Baker, noted that Compaq had slipped from first-place contention in the $1,000 PC category.
Trailing were Hewlett-Packard, at 16 percent market share, IBM, at 7.6 percent, and CTX International, with 6.8 percent of unit sales.
The average price being paid for a PC this season, industry analysts say, is $1,333.
For Ann Stephens, PC Data's president, computer sales are "looking very, very promising," despite the balance-sheet hardships for retailers. She said the current retail season heralds a breakthrough in access for information have-nots.
"For years, the average price of a home computer was $2,000," she said. But with low-end models packed with options now selling for under $1,000, "the functionality has gone up."
Nor, experts say, do shrinking profit margins spell doom for every retailer. Bill Howard, the senior executive editor of PC Magazine, believes retailers that are able to rejigger their business strategies to favor the market shifts ultimately stand to gain.
Where troubles arise, Howard said, it tends to be with retailers that lag the industry curve.
"Some of the less savvy computer stores are having a bad time, especially the stores that sell washing machines and computers side by side," he said. In the latest casualty on the electronic retailing horizon, Wiz Inc., a $1 billion behemoth in the Northeast, filed for bankruptcy protection last week.
By contrast, Howard said that computer-only or computer-dominant superstores like CompUSA, Office Depot and Staples have successfully made the market segue by catering to consumer tastes for PC commodities and follow-up service.
Others note that lower prices, while bad for retail profits, may also induce consumers to buy more peripherals for their computers, like printers and modems.
"We see some anecdotal evidence among buyers that as a price comes down, a person spends more on accessories," Howard said.
-- by staff writer Douglas Herbert
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