February 16, 2001 11:52am
Dell: No backing off aggressive
pricing plan
By Ken Popovich eWEEK
In good news for PC buyers, but bad news for its rivals,
Dell Computer Corp. says its recent aggressive
low-price strategy is paying dividends and it has no
plans to back off now.
The decision could put a nail in the coffin of some
smaller computer makers, as well as turn up the heat
on Compaq Computer Corp., which may lose its title as
the world's largest PC vendor this quarter to its
cross-Texas rival.
Dell has slashed PC prices in recent months to match
cost-cutting moves by its largest competitors, many of
which were forced to take the action to get rid of unsold
inventory amid a slowdown in demand.
But in a potentially risky move to subsidize its cuts,
Dell, based in Round Rock, Texas, reduced its profit
margin on each PC sold to historically low levels.
While several analysts predicted the aggressive pricing
strategy would be a short-term maneuver, Dell
executives yesterday declared it was here to stay.
"I don't think that you are going to see the margins on
our desktops and notebook PCs ever climbing back to
the levels that they were before," said Kevin Rollins,
Dell's vice chairman, during a conference call with
market analysts Thursday following the release of
fourth-quarter earnings.
Specifically, Dell's gross profit margin fell to 18 percent,
compared to 21 percent in the third quarter.
Strategy is here to stay
Highlighting apparent concern over the strategy,
analysts repeatedly questioned Dell executives about
the decision.
Lower profit margins on PCs were somewhat offset by
the company's surging sales of more profitable
enterprise hardware, such as servers and storage
devices, which were up more than 40 percent compared
to the same quarter a year ago.
Rollins also credited the low-price strategy with
enabling Dell to further expand its market share.
"We believe we can profitably gain share and really
intend to stick with this strategy for the foreseeable
future," he said.
Dell's decision could have the greatest impact on
smaller PC makers, which are struggling to survive
amid the harsh pricing environment.
One such example is eMachines Inc., a low-cost
computer maker that is the third most popular brand
sold at retail stores. Hard hit by a slowdown in demand
and further undermined by steep price cuts by rivals,
the computer maker said yesterday its fourth-quarter
revenues plummeted 56 percent.
All eyes on Compaq
But Dell's largest rival, Compaq, may also face
increasing pressure as it continues to see its share of
the PC market erode.
Indeed, a recent report by Morgan Stanley Dean Witter
predicted that Dell would overtake Houston-based
Compaq as the world's top PC vendor this quarter.
Last month, a Compaq executive belittled aggressive
PC pricing strategies, calling gains made using price
cuts as "fleeting."
"I think we will continue to be more prudent and
reasonable in the pricing world," Mike Winkler,
Compaq's executive vice president, told analysts.
But the PC maker eventually may be forced to cut
prices further to fight off Dell, said market analyst
Ashok Kumar of U.S. Bancorp Piper Jaffray in
Minneapolis.
"Compaq cannot continue to afford to take a passive
posture and continue to lose market share," Kumar
said, "because when all is said and done, PCs are half
their revenues."
And although Compaq has taken comfort in the
success of its server business, where it's number one
in sales of Intel-based systems, Dell is increasingly
encroaching in that area as well.
For the fourth quarter, Dell's sales of high-density,
rack-mounted servers more than tripled, and the
company showed significant improvement in sales of
the more profitable eight-way servers, a market niche
Compaq currently dominates.
"I don't think Compaq is going to continue to have its
full reign over that market as it may have had in the
past," Michael Dell, the chairman of the company, told
analysts yesterday.
"They are eating into Compaq in the rack-dense servers
because their pricing structure is superior," Kumar said,
"and now they're making inroads in the high end as
well."
The inventory issue
Another factor working in Dell's favor is the recent
accelerating drop in component prices.
"In an environment where processor and memory
pricing is all falling rapidly, having no inventory gives
you a major advantage over all your competitors," said
Dan Niles, an analyst with Lehman Bros. in San
Francisco.
Companies that sell thousands of computers through
retailers, such as Compaq and Hewlett-Packard Co.,
must keep several weeks of inventory to ensure store
shelves are stocked.
But that puts them at a price disadvantage when
component prices fall quickly, since PCs on store
shelves were likely made weeks earlier and ultimately
cost more to make than a comparable Dell system.
"The environment that Dell operates best under is a very
aggressive price environment," Niles said. "If the prices
are stable, who cares whether you have inventory or
not."
Yet Dell is not immune to the recent economic
slowdown and slump in PC sales, as was highlighted
by the company's announcement yesterday that it is
cutting 1,700 jobs, or 4 percent of its workforce, and will
take a charge of $105 million related to the layoffs and
consolidation.
"The good news is that Dell is probably the best
positioned computer maker for weathering this downturn
because of its 100 percent direct model," Niles said.
"Having said that, they're still going to feel it."
In fact, Dell lowered its previous projections for the first
quarter and is now forecasting an 8 percent decline in
revenue from the just-ended quarter. |
