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IBM ThinkPads' Retail Restoration

Lenovo Group (LNVGY) hasn't made much marketing noise since it closed on IBM's (IBM) PC division back in April -- until now. The Chinese-American company made a big splash Nov. 3 by announcing that it will reenter the U.S. bricks-and-mortar retail market with the IBM brand -- six years after IBM withdrew in defeat. Think of it as the Lenovo counterattack.

Lenovo plans to start selling its IBM ThinkPad line of laptop computers at 1,000 Office Depot (ODP) stores in mid-November. Starting at $699, the 'Pads include the ThinkPad Z60t, which will sell for as much as $2,300. The Z60t, introduced in October, features a wide screen, a titanium case, and an integrated fingerprint reader.

The target market is small-business owners, but Lenovo also expects to reach consumers. "We're looking forward to being back and having a presence, where everybody can see we're in the business and we're here to stay," says Craig Arnold, Lenovo's program director for business development in the Americas region.

ON THE OFFENSE. Lenovo's announcement comes at a time when PC king Dell (DELL) is showing signs of weakness. Dell on Oct. 31 announced it will miss its sales expectations for the fiscal second quarter -- mostly because of a slowdown in its U.S. consumer business (see BW Online, 11/1/05, "It's Bad to Worse at Dell"). Lenovo, the No. 3 PC maker, didn't time its retail move to capitalize on Dell's problems, but the IBM brand's return to U.S. stores serendipitously places Lenovo in positive contrast to Dell. That's a real plus for image-building.

The reappearance of the IBM brand in the U.S. retail market also coincides with Dell's shift toward higher-end PCs. Round Rock (Tex.)-based Dell is missing sales forecasts in part because it had become too aggressive in cutting prices (see BW Online, 9/28/05, "Will Dell's Up-Market Move Compute?").

Other PC makers clearly can smell the blood in the water. No. 2 contender Hewlett-Packard (HPQ) apparently plans to sell laptops in Wal-Marts(WMT) for as little as $398 after Thanksgiving. That's according to a Web site, Black Friday 2005, which claims to have been leaked scans of upcoming Wal-Mart newspaper ads.

The Office Depot deal signals that Lenovo is back on the offense. "I'm so impressed with these guys," says analyst Leslie Fiering of market researcher Gartner. "They're doing smart things."

VEHICLE FOR EXPANSION. After Lenovo announced last December that it would buy Big Blue's troubled division, IBM PC sales went into a slump. At first, the companies' combined market share declined amid the uncertainty surrounding the complex deal. But once it was closed, Lenovo's share seemed to stabilize at 7.7% in the third quarter, according to market researcher IDC. Lenovo unit sales are now growing at the same rate as the overall market -- about 13%.

Lenovo on Nov. 1 reported its first full quarterly financial results that completely included numbers from the IBM division. Revenues were up 404%, to $3.67 billion, and net income rose 22%, to $46 million. The profit was slightly lower than consensus forecasts, which deflated the stock price by 7%. But Lenovo shares had risen more than 50% since the deal closed Apr. 30, so analysts viewed the recent drop as a healthy adjustment to a stock price that had gotten ahead of itself.

The retailing deal emerged from a long-term relationship between IBM and Office Depot. The Delray Beach (Fla.)-based retailer has for several years sold ThinkPads through its online and telesales business and its direct sales force, primarily to smaller businesses. So, once Lenovo execs sized up the market, they saw Office Depot as a perfect vehicle to reach small businesses, a market where the PC maker would like to expand. According to IDC, 12% of Lenovo's notebook shipments in the U.S. go to small businesses, which it defines as having fewer than 100 employees.

FULL STEAM AHEAD. Office Depot says in Lenovo it found a chance to sell a PC brand with a sterling reputation for quality and innovation. "ThinkPad is a great brand," says John Lostroscio, vice-president for merchandising at Office Depot. "From a competitive advantage, we'll have it, and other retailers won't. It gives me a differentiator in the marketplace."

Office Depot, which will sell the computers in large end-cap displays, plans to give sales clerks special training so they can explain ThinkPad features. The retailer is responsible for its inventory of computers, so Lenovo won't be on the hook for returns or rebates if sales slacken.

That's completely different from the style of retailing IBM abandoned in 1999. It had been selling PCs in Circuit City Stores (CC) and Best Buy (BBY), right next to super-low-cost rivals -- with no opportunity to explain the advanced features that made its laptops more expensive. It was a price game, and IBM couldn't profit from it.

Can Lenovo make a go where IBM couldn't? Analysts are optimistic. "They'll do well with the smaller businesses and the pro-sumers -- the sophisticated consumer buyer," says Gartner's Fiering.

Lenovo, already a force in the Chinese consumer market, has made clear that it eventually wants to enter consumer markets in other countries. The Office Depot deal signals that the push is under way, and -- if the gambit works -- it may soon gather steam.


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