February 16, 2001 8:01pm
Dell strategy: Keep cutting prices to
gain market share
By Joe Wilcox, Special to ZDII
Can Dell Computer conquer the world?
As PC sales slow worldwide, the Round Rock,
Texas-based company has embarked on a broad
campaign to gain market share by cutting prices,
according to analysts.
In the past, the company focused on keeping profit
margins high, leading to strong profitability, robust
revenue growth and relatively high average selling prices
on its PCs. Now, with the maturation of the PC market,
Dell is undercutting competitors in price to rapidly gain
market share.
But the short-term cost to Dell could be high: reduced
profitability.
"It's very apparent that in the last quarter Dell traded
profitability for market share," IDC analyst Roger Kay
said Friday. "It was very deliberate."
Dell is currently the No. 2 computer maker worldwide,
with 12 percent market share. And it's the No. 1 PC
maker in the United States, with 16.9 percent market
share.
Analysts now expect Dell will pass Compaq Computer
as the No. 1 worldwide PC maker during the first
quarter.
The short-term results of the price-cutting are apparent.
On Thursday, Dell missed its lowered fourth-quarter
estimates by a penny. At the same time, operating
margins fell to 18 percent from 21.3 percent in its third
quarter. And quarterly revenue, down 8 percent from the
previous quarter, represented the first sequential decline
ever in Dell's history.
During a Thursday conference call with the media,
Kevin Rollins, one of Dell's two vice chairs, said the
company in the short term would continue to pursue
market share over profitability.
"We've seen an opportunity most recently to get more
aggressive with pricing and subsequently you've seen
our margins change," he said.
Meanwhile, overall demand will remain low. "Many
market observers are projecting a double-digit
sequential decline in computer systems units in the
first quarter, with an even higher decline in market
revenues," Dell Chief Financial Officer James Schneider
said.
Dell's opening gambit in price began last year.
"Toward the end of the year, I saw Dell step forward to
really get aggressive in pricing," ARS analyst Toni
Duboise said. "Dell is by far the first to pass on the
benefits of lower component prices, and that is
important in this heightened state of competition."
Using Dell's entry-level Dimension L series consumer
desktop and high-end OptiPlex 300 corporate PC as
examples, Duboise showed how dramatically Dell's
average selling prices have fallen since June.
Between June and October, the OptiPlex price dropped
40 percent and another 2 percent between October and
January, she said. During the same period, the
Dimension's price dropped first 18 percent and then
another 21 percent by January.
"This came at the expense of gross- and operating-
margins," said U.S. Bancorp Piper Jaffray analyst
Ashok Kumar.
High-stakes Risk
Analysts described Dell's gambit--trading some
profitability for big market share gains--to playing the
board war game, Risk. By expanding its lead in more
markets--or in Risk controlling enough countries--Dell
hopes to overrun competitors.
"What Dell is try to do is use the bad climate to gain
share, and from an enhanced share position rebuild the
liquidity, profitability, revenue growth triumvirate that is
their kind of mantra," Kay said. "They can't abandon
that model."
But he warned that Compaq, Hewlett-Packard and other
companies that embarked on a similar strategy found it
to be a "tried-and-true folly."
By contrast, Technology Business Research analyst
Brooks Gray said the strategy could pay off, particularly
as Dell looks to sell to a mature rather than growing
U.S. PC market.
"Dell could be in a favorable position if it continues to
ramp market share around the world, because of its
successful customer retention rate," he said. "The risk
is that Dell will grow too quickly and the quality of
customer service start to decline, which we have
already started to see."
Whether or not the strategy works in the long run, Dell's
strategy to sell, sell, sell has chalked up some
impressive gains during the fourth quarter.
In the quarter, overall shipments rose 43 percent,
compared with the same period a year earlier. Server
shipments jumped 63 percent, for a worldwide market
share gain of 2 percent, according to IDC. Notebook
shipments rose 45 percent.
"One in four laptops sold in the U.S. is a Dell,"
Schneider said.
Making life miserable
Dell's pursuit of market share puts many competitors in
a defensive position, according to analysts.
"Dell has a way of making life more miserable for
people who are already in a bad way," Kay said. "For
example, when Compaq, HP or some other another
company has a big inventory of imminently aging
equipment hanging in the wrong place, Dell has a habit
of dropping prices and making that inventory even more
valueless."
Smaller companies will face even greater problems and
may have to face the ultimate question of whether to
continue to participate in the PC market.
Far worse for competitors may be Dell's determination
to undercut them in price in higher-margin products like
servers and storage systems.
"The aggressive pricing environment in PCs is now
spilling over into the enterprise market with Dell pricing
its high-density rack servers at sub $1,000 and NAS
(network attached storage) products at 6 cents per
megabyte," Kumar noted.
Whether Dell's market share gambit will pay off is
uncertain, but many Wall Street analysts like the
company's strategy in spite of lowered margins.
"Dell is doing everything right in a bad economy,"
Morgan Stanley Dean Whitter analyst Gillian Munson
said in a research note Friday. |
