Whatever Happened To The Corner Computer Store?Lois Therrien
Eager to outfit his new home office, Oscar Katov recently went shopping for his first personal computer. The 64-year-old convention planner tried two Washington-area computer stores but left empty-handed, put off by the salespeople's technical jargon. Then he went to a Sears, where, he says, a salesman described the technology "in plain English." Katov plunked down $5,300 for a PC, fax machine, and other supplies.
Corporate America may not be shopping for computers at the mall--and probably never will. But from one-person shops to billion-dollar businesses, computer buyers are finding new places to purchase the latest PCs and accessories. Everybody's selling computers, it seems: office-supply outlets, department stores, warehouse clubs, and consumer electronics chains. The latest trend is computer superstores--cavernous, no-frills outlets with floor-to-ceiling stacks of discounted gear.
Thanks to all this new competition, just 46% of the $51 billion worth of PCs and related equipment purchased in the U. S. last year was bought at conventional computer stores such as ComputerLand. A decade ago, when businesses were buying their first PCs, such stores sold about 90% of them.
BAD TO WORSE. For computer dealers, all this is taking what has always been a difficult business and making it worse. Gross margins for fivetop chains--Businessland, ComputerLand, ValCom, Nynex, and MicroAge--had plunged to 13% by last February, from 19% two years ago, says market researcher WorkGroup Technologies Inc. That's forcing chains to consolidate to survive (table). Even then, the outlook isn't good: Computer store sales will expand just 3% annually through 1995, predicts market researcher BIS Strategic Decisions, while PC industry revenues will grow about 8%.
Now, 15 years after PC makers helped create a national system of computer stores to sell their wares, the declining clout of chains is spurring them to seek other outlets. IBM, Compaq, and Apple are all expanding beyond computer stores. Big Blue, which experimented with department-store sales in the mid-1980s, went into mass-merchandisers in earnest last summer, when it began selling its PS/1 home computer in Sears and other department stores. Apple Computer Inc. and Compaq Computer Corp. now allow some superstores to stock their machines. And to push its high-end gear, Compaq has been signing up "systems integrators."
REVERSE COURSE. Ironically, computer makers helped bring on the chains' current woes. In the mid-1980s, PC makers insisted that dealers operate from costly store-front locations to attract walk-in business. But a market slump and a resulting price war forced scores of independent stores out of business. Dozens of others were merged into the big, national chains. The survivors, again taking their cues from the computer suppliers, scrambled to increase profits by shifting their focus to the corporate buyers who ordered hundreds of computers at a time. Dealers hired polished sales reps to call on the big accounts and technicians to do installations--figuring corporations would pay top dollar for such service.
By last year, however, it was clear that the effort to boost profits by catering to giant corporations wasn't working. A growing number of big customers aren't interested in paying extra for services. They simply want low prices and fast delivery. "We don't need a computer store to help with networking," says Allan J. Kalb, systems director for St. Louis-based investment banker A. G. Edwards Inc. "We have an in-house staff to do that."
Perhaps the biggest victim of that trend has been Businessland. The chain invested heavily in an army of pin-striped sales reps and technicians. Then, to hang on to its high-volume customers, the chain resorted to deep discounts--despite its high overhead. The result: Last year, Businessland lost $23 million on revenues of $1.35 billion. Since last June, the company has cut its work force by 843 people, to 2,450 employees. For fiscal 1991, ending June 30, analysts figure it will lose $35 million on $1.23 billion in sales.
Now, computer dealers are fighting back--by making wrenching changes. Some are investing heavily to develop superstores of their own. CompuCom Systems Inc., a 35-store chain based in Dallas, just shelled out $38 million for New York-based Computer Factory. It plans to shut many Computer Factory stores but will convert others into superstores. Intelligent Electronics Inc., a 1,058-store chain, has a similar strategy. It plans to open 100 new superstoresby 1996.
But mostly, the big chains are trying to fine-tune their approach toward the coporations that still buy most PCs. They figure that even huge companies need help with emerging technologies such as engineering workstations, which are just now coming into use in offices. "There's still an awful lot of education that's got to go on, and if you don't provide it, you'll lose," says Richard D. Sanford, chairman of Intelligent Electronics, which operates several chains, including Entre Computer.
MicroAge Inc., a 280-store chain based in Tempe, Ariz., sees growth in corporate sales, too. It recently teamed up with KPMG Peat Marwick to provide sophisticated consulting services to its customers. A lot of big customers, it reasons, would still prefer to have someone else worry about all the bits and bytes--no matter how knowledgeable they've become about computers. "It isn't necessarily a good way to concentrate our efforts," agrees James E. LeGere, vice-president for information services for Businessland customer Quaker Oats Co.
ComputerLand, the biggest chain, remains focused on the business market, too--but it has gone further in altering its strategies to keep up with the times. The chain has automated its inventory system, slashed overhead, and urged many of its big-city franchise stores to relocate to low-cost facilities in warehouse neighborhoods and dispatch their sales forces from there. Chief Operating Officer Ed Anderson jokes that the new stores are "one step away from embarrassment." But 90% of ComputerLand's $2 billion in 1990 U. S. sales were to big business--customers that sales reps call on and that don't come to a showroom. Anderson says corporations do want some hand-holding. "The most sophisticated customers are saying, `Don't think the only way to win this account is on price. I want quality people on the account and support.' "
Still, a sizable chunk of the market may be lost to traditional computer stores. Businesses, even the biggest corporations, are willing to purchase PC clones, which are sold through the mail and in department stores and superstores. In its fiscal year ended last February, Dell Computer Corp. sold $262 million worth of PCs to corporate buyers, mostly through the mail. Packard Bell Electronics Inc., which sells its personal computers through such mass-merchandisers as Circuit City Inc., last year was the No. 3 seller of IBM clones--after Tandy Corp. and Compaq, according to researcher International Data Corp.
Another force working against traditional computer stores is the change in personal-computer buying. More than 70% of big businesses, dealers' best customers, are already computerized and are buying fewer new PCs. But only 35% of small businesses and 27% of homes have PCs. These are the fastest-growing class of customers, but they're too price-sensitive and too intimidated to shop at a regular computer store. "Those people are shopping for appliances," says Lise J. Buyer, an analyst for Cowen & Co. "And where do you buy appliances? Sears."
BUSY DEPOT. They'll also be buying them at superstores, which will post a 60% boost in sales this year. Office-supply chains are getting a chunk of the business, too. David I. Fuente, chairman of Office Depot Inc., says he expects computers and accessories to account eventually for 25% of his chain's sales. In 1990, after just a year in Office Depot stores, these items accounted for 15% of the company's $903 million in revenues.
Then, of course, there's Sears, Roebuck & Co. The giant retailer now plans to open PC departments in several hundred of its regular Sears stores. "We have the advantage of Sears real estate, distribution, and a nationwide service network already there," says William F. Lenahan, the executive who heads Sears' computer retailing efforts. Not to mention the fact that his salespeople are fluent in plain English.