stock bull,
Dell sold 32,000 pc's priced at around 2k each in one night on QVC
More on their consumer push.......
Dell Modifies Business Model to Try to Improve Profitability
12/17/2001 - 8:23:00 PM
By Bob Keefe
Dec 17, 2001 (Austin American-Statesman - Knight Ridder/Tribune Business News via COMTEX) --Just a few years ago, it seemed Dell Computer Corp. couldn't care less about consumers.
Dell made computers for businesses, founder and Chairman Michael Dell declared. And while his company didn't turn away less-profitable sales to individual customers, it didn't pursue the market, either -- especially after a short-lived attempt to sell machines through warehouse retailers and other stores during the early 1990s.
But at a time when the consumer computer business is anemic, Dell is jumping into the market once again. This time around, Dell believes it can dominate the consumer market segment just as it does almost every other area of the PC industry.
The drive for consumers is simply in keeping with the basic principles Dell built the company on, said John Hamlin, who runs Dell's U.S. consumer business: "We go after the largest share of the largest profit pool you can find, and then you move on to the next largest profit pool."
The company already is the biggest seller of PCs for business, government agencies and other institutions such as schools. The general consumer business is the only place where it is No. 2 by most measures -- behind only Hewlett-Packard Co.
As it seeks to dominate the consumer market, Dell has launched a price war that has pushed computer prices to bargain-basement prices.
It is remaking its image in television ads and marketing campaigns to attract younger customers ("Dude, you're getting a Dell") who once shied away from its plain- vanilla machines.
Even though it built its business on just-in-time production and made-to-order machines, Dell recently introduced a pre-configured consumer desktop that is similar to the off-the-shelf model competitors sell.
And although it still relies almost exclusively on direct-to-the-customer sales over the Internet and telephone, Dell even is cautiously wading back into retailing. Last month, it set up kiosks in shopping malls in suburban Dallas and in Nashville, where consumers can learn about and place Internet orders for Dell machines.
"For us, five years or so ago, certainly the priority was first and foremost on the business market," Michael Dell said in a recent interview. "We're not exactly just getting into the consumer market, but it's become a larger, more important part of the business."
Moneymakers
So far, Dell is understandably happy with his company's progress. Last month, Dell reported that the number of consumer PCs it sold in the third quarter was up 38 percent from a year ago -- at a time when other PC makers reported sharp declines. In the second quarter, its consumer sales were up 39 percent.
Just as importantly, Dell says it's making money on every machine it sells -- something that's unmatched in the beleaguered PC industry, where prices have fallen precipitously. Dell's cheapest model, its new pre-configured SmartStep machine, is priced at $599. A few years ago, Dell scoffed at building sub-$1,000 machines.
Given the soft market and tumbling prices, the timing of Dell's latest courtship of consumers at first seems questionable. But in the past few weeks, the market has suddenly started to show signs of life again, driven by low prices and interest in Microsoft Corp.'s new Windows XP operating system.
"They (Dell) are doing really well," IDC analyst Roger Kay said. "There's a lot of people selling boxes, but they're growing share quite rapidly, and (Dell) assures all of us that they make a profit on every box that goes out."
The company declines to say how much it makes on a typical consumer PC, but analysts estimate Dell makes a 3 percent to 5 percent profit on its desktops and notebooks.
Even so, some question if Dell is wise to so aggressively pursue a low-margin market that's shrinking instead of sticking to what it does best -- building higher-priced business computers.
This year, PC sales are predicted to shrink for the first time in the 20-year history of the industry.
Everybody who wants a home computer -- about 60 percent of the U.S. population -- already owns one, some analysts say.
As a result, PC sales are expected to dip almost 2 percent worldwide this year -- by 13 percent in the United States, IDC predicts. Low prices will continue to drive down profit margins too.
"They just won't make as much money off of consumers as they could off of others," said AG Edwards & Sons Inc. analyst Brett Miller. "Think about it this way, he said. "If you sold a can of Coke for a buck one time, then sold it for 60 cents the next and then 40 cents the next, that's a pretty (lousy) business to be in."
Problem is, for Dell, there's no place else to grow. It doesn't have the horsepower to make the kind of play in services that has kept IBM Corp. afloat in a stormy technology market. Dell also has had difficulty establishing itself in data-storage and other high-end markets that could offset the sagging PC business. So it's relying on what it knows best -- PCs, which still account for half the company's revenue.
Dell expects consumer PC sales will continue to grow, with increased demand for digital music players, digital photography and video storage and high-speed Internet access.
At the same time, consumers are generally more comfortable with computers, which plays to Dell's order-it-direct, configure-it-yourself business model, Dell said.
Courting consumers
Hamlin, who at 36 is the same age as Michael Dell, took over the job as U.S. consumer chief in June 2000 with marching orders to jump-start consumer sales.
Hamlin re-bundled machines to emphasize hot consumer components such as DVD players, stereo sound systems and re-writeable CD drives. He introduced the SmartStep in October.
Hamlin also refocused and increased the company's advertising -- he won't say by how much -- and expanded it beyond business publications and computer-centric magazines and into mainstream publications and television.
The company's recent TV spots, in which a kid named Steven smooth-talks friends' parents until he can assure them "Dude, you're getting a Dell," has worked out better than Dell executives ever thought.
"It works better than talking to cows, let me tell you," Dell said, taking a poke at commercials by struggling rival Gateway Inc.
The kiosks Dell opened in November, where customers configure and place orders online, may be the company's most unusual push into the consumer market. The company is planning to close them in January, but if results are good, it could decide to keep them open and add more.
Dell spokesman Bob Kaufman cautioned that the kiosks are tests and declined to say how they're doing so far.
Don't expect the company to open any stores -- Dell has always been against that. But with the kiosks and other marketing tools, it can get in front of more consumers without incurring the costs of retailing.
Kaufman also pointed out that since the kiosks carry no inventory and since they are staffed by Dell employees, the experiment remains true to Dell's direct-sales philosophy.
Dell shot to the top of the PC market on the strength of its direct-sales strategy, and it may be the company's best bet to conquering the consumer market as well, some industry watchers say.
"The problem with all the others is that they've got to pay retailers 5 percent (or more) just to get into the game," said Kay, the IDC analyst. "They also have to worry about existing inventory, and therefore they'll always fall behind Dell.
"Their (Dell's) business model is quite good."
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(c) 2001, Austin American-Statesman, Texas. Distributed by Knight Ridder/Tribune Business News. |
