*NEWS*DELL’S EDGE IS GETTING DULLER

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*NEWS*DELL’S EDGE IS GETTING DULLER

 user 2005-11-14 at 10:23:00 am Views: 69
  • #12979

    Dell’s Edge Is Getting Duller
    The PC maker isn’t luring consumers the way it used to
    When
    Dell Inc. announced disappointing quarterly sales a few months ago, CEO
    Kevin B. Rollins explained away the problems as an “execution issue.”
    But if investors were worried then, the company’s Oct. 31 news that it
    would miss the mark again this quarter is prompting some to ask a
    question that once seemed unthinkable: Is the much-feared Dell Way
    running out of gas?
    It could well be. While Dell still dominates
    PC-related gear sold to corporations, it’s stumbling in its efforts to
    sell to consumers — a critical growth segment that has helped power
    brisk PC sales in recent quarters. At the same time, resurgent rivals
    such as Hewlett-Packard Co.  and Gateway Inc.  are pricing their
    products more aggressively and taking advantage of being in thousands
    of retail stores — unlike direct-selling Dell. “Dell traditionally has
    led with the lowest price,” says FTN Midwest Securities Corp. analyst
    Bill Fearnley Jr. “Now it’s not unusual to see even lower price points
    than Dell’s.”
    The PC maker has always had mixed emotions about how
    to target consumers. While Dell focused all its guns on the corporate
    market, it reaped consumer sales opportunistically — never entering
    markets where it thought it couldn’t achieve its profit goals, and
    quickly pulling money-losing products. For example, it still hasn’t
    wholeheartedly targeted the vast Chinese consumer market, believing it
    too costly to court so many far-flung newbie customers.
    Such
    pragmatism is one reason for Dell’s past success. Selling one computer
    to a consumer isn’t nearly as profitable as signing a contract to sell
    thousands of PCs to a corporation. Churning out hits for today’s
    tech-savvy consumers also requires design savvy and the ability to
    gamble on creating and marketing new features — both expensive
    propositions. And selling to consumers means investing in help desks to
    hold customers’ hands when their PCs melt down.
    But the limitations
    of Dell’s consumer strategy are becoming clear. The Round Rock 
    company’s consumer business is expected to grow only 10% this year, to
    $8.4 billion, estimates FTN Midwest Securities, down from 13% last year
    and 18% in 2003. And Dell’s stock has fallen from about $40 per share
    in August to $29. Dell declined to comment, citing the quiet period
    before its Nov. 10 earnings call. All this creates a major dilemma. To
    maintain its status as a hot-growth company — it grew almost 19% in
    2004 — Dell needs to tap consumer PC demand, which is expected to grow
    8.4% next year and 10% in 2007, according to researcher IDC. Meanwhile,
    the corporate market is projected to grow 5.9% next year and 7.8% in
    2007. With revenues expected to hit about $55 billion in the fiscal
    year ending in January, Dell is now fighting the problem confronting
    all large, maturing companies: how to keep growing.
    Can Dell avoid
    that fate? It faces an uphill battle in righting its consumer business.
    At least for now, Dell seems to have run out of cost-cutting
    efficiencies to enable it to underprice its rivals enough to gain share
    and maintain earnings at the same time. Analysts expect Rollins to
    maintain Dell’s bottom line even if it means losing customers to
    lower-priced rivals. The goal: to stem eroding operating margins in its
    consumer business, which last year fell to 5.2%, from 5.9% in ’03.
    Dell’s
    rivals, meantime, can accept lower margins without disappointing
    investors. HP, for example is spending far more on research and
    development. Gateway, meanwhile, has fought its way back to
    profitability, despite low prices for its eMachines Inc. brand
    machines. And Lenovo plans to reenter the retail notebook market, using
    the IBM  ThinkPad it acquired as part of its purchase of IBM’s PC
    business last year.
    Dell has two choices, according to Gartner Inc.
    analyst Charles Smulders: “Follow the consumer market down in pricing
    and adjust its costs accordingly. Or focus just on  products” and
    sacrifice market share and growth rate for profits. Wall Street will be
    watching.