A Surprise Lift For Computer Retailers

The price war in personal computers has been fun for consumers. But for those who make and sell PCs, the situation is perilous: Shrinking margins, layoffs, and losses are routine. And with everybody from mail-order houses to huge discount chains selling computers, the local computer shop is beginning to look like a goner.

So why are some computer dealers smiling? Because the price war has gone mainstream. Compaq, Apple, and IBM have all joined the party--and that's dragging corporate customers back to traditional computer dealers, such as ComputerLand Corp. and MicroAge Inc. Business buyers, the customers who kept the chains busy in the '80s, had been bargain-hunting through mail-order outlets or at no-frills computer superstores--or sitting on their wallets.

Now that top brands have bargain-basement prices, "we're seeing corporate customers coming back in droves," says Rick Inatome, chairman of Omaha-based InaCom Corp., owner of two dealer chains. ComputerLand Corp., the No. 1 computer-store chain, had a 14.2% hike in sales this September over last year, and MicroAge says it just finished its best month ever. "We're doing handsprings in the hallway," says ComputerLand CEO William Y. Tauscher. "As Compaq and IBM get back into the game with a vengeance . . . it's going to be a very, very good deal."

It can't happen soon enough. Despite the recent improvement, the computer retailing business is in an upheaval. Intelligent Electronics Inc., for example, tried to get into the superstore business by acquiring the BizMart chain last year. But the company, which serves as a wholesaler for franchised resellers, including the Connecting Point and Entre Computer Center chains, after paying for rebates and write-offs, lost $4.3 million in the quarter ended Aug. 1, the first quarterly loss in its 10-year history. The stock nose-dived to around 10 from a 52-week high of 30 3/8 last February.

Ambitious expansion plans also caused major disruptions for JWP Inc., a Purchase (N.Y.) miniconglomerate. JWP bought Businessland Inc. last year for what seemed a bargain price of $74 million. But the troubled chain, which had been close to bankruptcy, had more problems than JWP realized. In August, after a review by its auditors, JWP took a $64.5 million write-off to cover unanticipated charges related to the acquisition, reserves for accounts receivable, and restructuring costs. The fallout exacerbated JWP's financial problems and prompted the departure of its president after less than a year in the post.

SHRINKING FAST. Other major chains are doing better right now, but the long-term picture for all the dealers isn't great. Just five years ago, retailers were responsible for more than 60% of personal computers sold in the U.S. This year it's more like 30%--and shrinking fast (table). Why? They became too pricey for corporate customers and too intimidating for consumers and small businesses, says Seymour Merrin, head of Merrin Information Services Inc., a Palo Alto (Calif.) market researcher.

Small businesses and individuals are the fastest-growing market segment. And they're flocking to new PC outlets, including the biggest superstore chain, CompUSA Inc., which saw sales jump 55.8%, to $263.4 million, in its first quarter, ended Sept. 26. ComputerLand, by contrast, says its U.S. revenues will be flat, at about $2.6 billion, in its fiscal year, ended in September.

The dealers' lift could be short-lived. As IBM, Compaq, and Apple end their almost exclusive dependence on traditional dealers by adding new channels, such as direct-response sales, superstores, and mass merchants, the traditional dealer concept could wind up "no longer viable," warns Merrin.

Maybe, but not just yet. Small computer stores, traditional dealers, and VARs (value-added resellers that add software and services to PC hardware) remain the largest channel, moving up to $25 billion worth of computer gear annually, according to International Data Corp. That's not going to go away overnight. Plus, dealers are still the distribution channel of choice for many large corporations that don't want to buy through the mail, shop at superstores, or head down to the local consumer-electronics outlet.

The dealers also have an ace up their sleeves: They still offer the personal service that Corporate America likes and computer makers rely on. The edge can be as simple as getting the product to customers exactly when they want it--and having the staff to install it and make it work. "The dealer structure in the U.S. is all built and structured to be value-added," says Sam M. Inman, president of IBM PC Co.'s North American operations. "About half of all PS/2 buyers want to buy from a value-added channel." True, Inman is hedging his bets, branching out into superstores, office supply stores, department stores, and direct response--but not for his big corporate customers. "I haven't found a decent scenario yet that shows any one channel dominating or the traditional dealer disappearing anytime soon."

FORCED RETREAT. That's the lesson that Intelligent Electronics drew from its disastrous expansion effort. The Exton (Pa.) company had been having a steady success wholesaling to dealers in its 1,700-member franchise network. After paying $180 million for BizMart, it zoomed from 57 outlets to 100 in 15 months and sold franchises to run PC departments within those stores. But when PC makers slashed prices, the departments started losing money and pulled out, forcing Intelligent Electronics to rebate $1.1 million in franchise fees. Now it's trying to sell BizMart to Kmart Corp. and go back to wholesaling. The consumer side, laments Intelligent Electronics Chairman Richard D. Sanford, is "a tough, tough business. The margin pressure has been enormous." But there's good news, too, he says: "This industry has absolutely segmented into more complex systems, and that's us and our core business."

In other words, back to basics. Dealers can still succeed by playing the value-added card. And by hoping that corporations will continue to think that value is worth a few dollars more.