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AnonymousInactiveDell’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. -
AuthorNovember 14, 2005 at 10:23 AM
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