Computers & Technology Dell's Direct Price Breaks Aren't So Great Anymore
Investors Business Daily, Thursday, February 19, 1998 at 12:06
As its competitors race to cut costs, Dell Computer Corp. is
losing the key to its meteoric rise - its much-ballyhooed price
advantage in personal computers for business.
Last year, the Round Rock, Texas-based company sold PCs for about
15% less than its competitors, analysts say. Its directselling model
and practice of not building a PC until it's ordered have been
essential to Dell's success.
But major rivals Compaq Computer Corp., IBM Corp. and Hewlett-
Packard Co. are squeezing more efficiency out of their supply chains.
They've embraced parts of Dell's direct-selling model and quietly
slashed PC prices when bidding on large accounts.
The result: Dell's price advantage percentagewise over its main
rivals is dipping well into the single digits. That means Dell
either must get customers to appreciate its other qualities or find
new ways to cut costs, pundits say.
"Dell's real difference is still pegged to its price advantage,"
said Kevin Hause, an analyst at Framingham, Mass.-based International
Data Corp. "If that totally went away, Dell would not be able to
sustain its growth and make serious market-share gains."
IDC figures show that the gap between Dell and the other three is
quickly narrowing. On a similar, 233-megahertz Pentium II PC, Dell's
price now is 4.1% lower than that of HP, 7.5% below IBM and 11.2%
under Compaq.
No Dell executives would respond to requests for interviews. Dell
spokesman T.R. Reid wouldn't discuss specific comparisons. But Reid
didn't deny hardware price differences were diminishing.
"We have a significant and continued price advantage," Reid said.
"(But) we think there's a preoccupation with the price of the box."
Whether a negligible price difference on Dell's boxes - industry
jargon for the device containing a PC's inner workings, a prime cost
driver - makes a difference remains to be seen. But offering a
bigger price break hasn't hurt Dell in the past.
Dell's growth spurt is unparalleled in the PC industry. Earnings
for fiscal '98 were $2.56 a share, a 94% increase compared with the
previous year. Sales hit $12.3 billion, up 59% from last year. In
'90, sales were just $389 million.
Dell found its niche selling PCs directly to corporate customers.
The build-to-order strategy allowed the company to keep its inventory
low, with turnover occurring roughly once every 11 days. The other
three average once every 26 to 30 days.
Dell's rivals could be catching up, though. They're cutting
little slack to their partners in the channel, offering less price
protection and taking back fewer returns. Houston-based Compaq, for
one, expects to have 30 inventory turns a year by '99.
And Dell's threat is forcing its big rivals to play hardball.
When going against Dell on large corporate contracts, they're
offering PCs for well below their list prices, analysts say.
Compaq has been known to reduce prices to 45% below that of
wholesale prices in order to win large deals. Ed Ellett, Compaq
director of desktop product marketing, says the company can be more
aggressive on PCs if a company orders other high-end hardware such as
servers.
"We are at price parity on average across product lines (with
Dell)," Ellett said.
According to Dell, though, the importance of a price advantage is
overblown.
"With our large customers, price has never been the sole
consideration," said the company's Reid. Service, customization and
direct contact with customers are all key, he says.
But in providing service for high-end computers, Dell has a tough
time competing with HP and IBM. And, thanks to its planned
acquisition of Digital Equipment Corp., Compaq should soon have a
formidable service force.
Compaq, HP and IBM also are challenging Dell on its build-to-order
model. The three companies are working with distributors and
resellers to customize PCs on demand. The effort should cut down on
inventory, and could lead to lower prices.
Dell, meanwhile, is not as direct as it claims to be, say market
observers.
"That's the dirty secret of Dell," said Steve Baker, an analyst at
PC Data Inc. in Reston, Va. "A lot of Dell's products stop at one of
the big system integrators for their final software loads."
That means the customer ultimately pays a higher price, Baker
adds. Dell officials say that some customers prefer that a system
integrator load on software for them.
Dell's price advantage has by no means disappeared forever,
though. Analysts point out a number of efforts that could keep
Dell's prices low and its sales growth high:
* Size: As Dell's growth explodes, its sheer size will help the
company cut costs. International markets provide huge potential for
growth. Dell is already the third-largest supplier of PCs in the
world.
* Higher-margin fare: The overall market for high-end systems and
notebooks is growing fast. The number of highend systems shipped
worldwide grew 41% last year, according to IDC. Portable PC
shipments grew 20%.
Dell has gotten more than its share of this success. Its high-end
business grew 250% during '97, while its portable PC shipments were
up 74%.
As Dell sells more high-margin servers, workstations and
notebooks, it can afford to cut prices on desktop PCs.
* The Internet: Dell's online store, launched in mid-'96, already
is generating more than $4 million a day. As more customers begin
buying over the Internet, cost savings could be huge.
IDC's Hause says Dell can save on the cost of printing catalogs
and can cut down on its staff.
"This is one of the last bastions they have for making significant
efficiency gains," said Hause. |
