OK, but don't tell anyone I gave it to you:
Compaqting the PC
Distributor Business
By Jim Seymour
Special to TheStreet.com
5/10/99 2:29 PM ET
Compaq's (CPQ:NYSE) widely anticipated announcement
Monday that it's cutting its list of authorized distributors by
90% -- Ingram Micro (IM:NYSE), Tech Data
(TECD:Nasdaq), Inacom (ICO:NYSE) and Merisel
(MSEL:Nasdaq) seem to be the four survivors, from an
utterly unmanageable 40 -- is a nice reinforcement of
Chairman Ben Rosen's oft-quoted determination to be
much more than a caretaker, while the company searches
for a replacement for the deposed Eckhard Pfeiffer.
But it's a lot more important than just a positioning
statement for Rosen. Compaq has got to rebuild its
distribution channels, with an emphasis on direct sales --
something it's never done well. So despite brave words
about much closer and more intimate relationships with the
surviving Four Mohicans, Compaq's gain here mainly lies
mainly in reducing, short-term, its reliance on distributors,
period. The fewer distributors you have, the fewer angry
phone calls when you very visibly shift away from channel
distribution. Plus, with only four, not 40, firms competing for
the limited profit that will remain in distributing Compaq
products, the business remains worthwhile longer for those
in the winner's circle.
But no one should mistake this move as a vote of
confidence in a bright future for the present, aging
distribution model for PCs.
Sure, PC makers will need some channel distribution for a
while longer. But as the relative importance of big
box-movers such as Best Buy (BBY:NYSE), Office Depot
(ODP:NYSE) and CompUSA (CPU:NYSE) increases to
Compaq, IBM (IBM:NYSE) and a few other big names --
with most smaller resellers moving to so-called "white box"
house-brand systems and the direct model continuing to
squeeze all retail PC sales hard -- computer distribution is
not a good place to be. PC makers that rely on channel
distribution will increasingly sell and ship directly to
retailers if they want to keep their business. (Of course,
they deny that; you and I would, too.)
Meanwhile the alternative paths to making dough out of
PCs that distributors have tried -- such as so-called
"channel assembly," in which big distributors such as
MicroAge (MICA:Nasdaq) actually build the IBM Aptivas
and other computers they ship to resellers -- have largely
failed, leaving only losses and abraded relations with PC
brand-name owners. (How can we call them
"manufacturers" if their distributors actually build their
machines for them?)
It's hard to spot a long-term winner among PC distributors,
even among the four chosen by Compaq. Take a look at
the performance charts of Compaq's four choices -- pretty
clearly the strongest performers in their industry -- over the
last year, and you'll see that there's an overall downward
trend in all four.
There's a reason.
Likely ahead: ultimately profitless consolidation.
Greasing the Palm
Did you notice that right in the midst of our TSC special
package on the future of handheld PCs last week, 3Com's
(COMS:Nasdaq) Palm Computing division cut prices on
its two bottom-of-the-line models?
The manufacturer's suggested retail price on the aging
Palm Pilot Pro, which has been pulled from production
and will be available only so long as retailers' stocks
remain, was cut from $199 to $149. The price of the newer,
more desirable Palm III fell from $299 to $249.
These cuts, while not exactly down to the bone, will be
appealing to some who have not yet jumped into the
handheld personal digital assistant game.
My advice: Don't do it. Both marked-down models have
dim, hard-to-read screens and less memory than you want.
The Palm you want right now -- by far the best machine
Palm's ever produced -- is the thin, bright, elegant Palm V,
which is better in every way ... but still lists for $449.
Longtime Palm users may prefer the IIIx, which is in the
vein of earlier, thicker Palm Pilots, but with a better display
and more memory; you can buy a Palm IIIx for $369 list.
FYI, the best price I've found for Palm Vs is at onsale.com
(ONSL:Nasdaq), which lists them for $374, but also usually
shows the device out of stock. Reminds me of the old saw
about the retailer who tells a customer complaining that
Joe, down the street, has something for a few bucks less.
His rebuttal: "I'll beat that price ... as long as I don't have it
in stock, either."
Babbling Brookstone
I put Brookstone (BKST:Nasdaq) on my 25 Stocks to
Watch in 1999 list back in January, in the expectation that
management would end its Rip Van Winkle act, and make
a major move to the Web, in many ways the natural
demographic home for its merchandise mix. And I kept it
there in up update of that list last month, because there
were signs of progress.
Brookstone offered its investment in an expensive redesign
and remerchandising of its retail stores as one reason it
had to move slowly on the Web front. That answer was only
marginally satisfying, but so be it. Well, I finally got to see
one of those new Brookstone mall stores this weekend ...
and I wanted to run for the nearest telephone and scream
"SELL! SELL!" into the handset.
Brookstone stores had long attracted customers by offering
an appealing mix of unusual, genuinely useful and only
slightly trendy merchandise, much of which you couldn't
find anywhere else. What I found Saturday in one of those
new Brookstone stores was an appalling effort to become a
Sharper Image (SHRP:Nasdaq) clone: cheeseball goods
of the most transient and ephemeral appeal, in
claustrophobic and wildly disorganized displays.
Brookstone's off my list, and unlikely to return. Especially
with its determined tilt towards brick and mortar, vs. online
sales, these new stores, and especially the new
merchandise mix, give me little hope the stock will get
back on track.
Heck, even Sharper Image is having trouble being Sharper
Image these days. Why would Brookstone choose such a
model?
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