How Did Santa Carry All Those
Computers?
They flew out of stores--and retailers made money
For many retailers, this Christmas didn't live up to expectations. Unseasonably high
temperatures put the kibosh on holiday sales of coats, sweaters, and gloves. And
without an unlimited stock of Furbies, toy stores saw below-average traffic, too.
But the folks selling personal computers had no such complaints. Business was
good--and continues to be, as consumers seek out post-Christmas bargains. After all,
with prices starting as low as $399 and a blizzard of mail-in rebate coupons, who can
resist?
LOTS OF TRAFFIC. As a result, market researchers such as PC Data Inc. are
looking for a strong December to produce a record volume year for computer
retailers. The Reston (Va.) firm says U.S. unit sales at yearend will be up more than
20%, to 7 million.
The question is: At these prices, did retailers make money? Analysts and dealers say
yes. Look at Best Buy Co. and Circuit City Stores Inc. The two largest national
electronics chains announced record sales and earnings for the quarter ended in
November, and analysts are predicting that December revenues will be up 7% in both
categories. In fact, overall, this year's retail PC sales are expected to match the $8.2
billion set last year. ''There's simply more traffic than last year,'' says Harold F.
Compton, executive vice-president at CompUSA Inc., the Dallas-based superstore
chain.
The traffic rose as the prices fell: In November, the average selling price of a PC
without monitor dropped below $1,000 for the first time, driven by low-end
computers priced at less than $599. The volume is ''awesome,'' says Stephen A.
Dukker, CEO of emachines, a Fremont (Calif.) startup that makes computers selling
for as little as $399. Since the company started shipping in mid-November, it has sold
200,000 computers, Dukker says, and could have sold twice that number with more
production.
In the past, falling prices have squeezed retailers: They somehow had to work off
bloated inventories of higher-cost machines. But this year, they reined in stocks and
say they got reasonable terms from PC makers, which have a big interest in keeping
PC stores whole. And then there are all those rebate coupons, which allow stores to
advertise superlow prices--but still sell at retail. It's up to the consumer to collect the
difference from the manufacturers. A system from Packard Bell NEC Inc. with a
monitor and a color printer, for example, listed for $1,399. But it could be
advertised as a sub-$1,000 PC because of its five separate mail-in rebates: $100 each
from Circuit City, NEC, and Internet service provider EarthLink Network, plus $50
each on a printer from Lexmark International and a built-in disk drive from Imation.
What's more, stores are willing to accept relatively low margins on computers--in the
6%-to-8% range--because they can make up profits from higher-margin software,
monitor upgrades, and extended warranties.
The bargain-PC trend is great for appliance merchants such as Circuit City and Best
Buy. The cheapest PCs are often bought by first-timers, who are more likely to shop
where they buy other appliances rather than at a specialized computer store.
''They're making a family type of purchase rather than a home-office purchase, and
Best Buy and Circuit City are their kind of store,'' says Douglas A. Gordon, an
analyst at NationsBanc Montgomery Securities Inc. in San Francisco. ''At Circuit
City, it's the strongest piece of the store.''
The trend, however, is not good news for the likes of CompUSA, which is already
struggling to make a comeback from the 65% drop in earnings it suffered in its
quarter ended Sept. 26. That hit was caused by lower prices, a slump in sales to
businesses, and the purchase of its biggest competitor, the Computer City chain, from
Tandy Corp. In trying to consolidate and pare overhead, CompUSA shuttered 55
Computer City stores. All told, the deal slashed earnings by 5 cents a share, or $4.5
million, and the company says that it expects profits to be off by 1 cents or 2 cents in
each of the next three quarters as well.
Still, CompUSA volumes are up, Compton says. As for dollars, he is waiting for the
end of the year. ''Traditionally, Santa always comes, but sometimes I hold my breath
right up to the end,'' he says. Then again, there's always January, which brings in the
buyers holding out for even lower prices. And, once again, they are finding them. |
