Custom P Cs Are Hot, And Dell Could Feel The Heat

Everybody in the PC business is trying to copy Dell's successful formula

In the world of personal-computer marketing, it seems everybody wants to be like Mike--Michael S. Dell, that is. Dell Computer Corp.'s build-to-order strategy has made his company the industry's hottest and fastest-growing company. In its first fiscal quarter, ended Aug. 3, profits more than doubled on a 67% increase in sales, and its stock is up 259% this year. "Dell is everybody's target," says Roger Kay, senior research analyst at International Data Corp., a market research firm. "No matter who you talk to in the industry, you hear the same thing: Dell is the guy to beat."

So just about everybody in the PC business is trying to figure out how to copy Dell's success. Its formula: bypass distributors and other resellers and sell directly to customers. That enables Dell to build a customized configuration for every buyer and sell its PCs at below retailer prices. Compaq, Hewlett-Packard, and Packard Bell NEC have all been tweaking their strategies to include some form of build-to-order (BTO) production. And now, the nation's largest computer retailer is joining the fray. On Sept. 17, $4.6 billion CompUSA Inc. launched its own BTO PC business. Says CompUSA CEO James F. Halpin, "There's a big pull toward build-to-order, and that's the only arena we aren't playing in. It's time to go after that market."

NEW KIOSKS. Indeed, it's high time. IDC says more sales are shifting from retail to direct sales--about 5.5 million PCs will be sold by manufacturers in the U.S. in 1997 compared with 1.4 million direct in 1993. Computer dealers need to grab part of that market. Tandy Corp.'s Computer City and RadioShack units as well as OfficeMax have already gotten into the build-to-order business. Wal-Mart Stores Inc. is offering build-to-order computers made by ACI Microsystems through its Web site. And Posen (Ill.)-based Proteva Inc. is installing kiosks in PC and electronics stores to let consumers select customized PCs.

The Dell model is clicking because the PC market is maturing. Customers, particularly corporate buyers, are well-versed in technology. They know what options to choose and how much to pay.

Build-to-order is also compelling to manufacturers. If done correctly, it lets them keep inventory and sales costs to a minimum. Compaq, which launched its BTO plan in July, hopes to lower costs by as much as 10% to 12%. By the end of the year, 80% to 90% of its business will be BTO, although most products will still be sold by dealers. Packard Bell NEC's new BTO program, in which customers order direct from the company via phone, already appears to be paying off. Crows Packard Bell Executive Vice-President Luis F. Machuca: "We're having the best September we've ever had."

Other PC makers are relying heavily on so-called channel-assembly programs to help wring costs out of their systems and be more competitive. IBM began allowing dealers to assemble computers to customer specifications at its factories in late 1995, and on Sept. 15, the company expanded its program. IBM hopes to cut the cost of its business computers by up to 10%. Says William E. McCracken, general manager of sales and services for IBM PC Co.: "It closes the gap to the direct model" that is used by Dell.

How will retailers figure in the build-to-order market? Salomon Brothers analyst David C. Childe says CompUSA could carve out a "mid-to-upper single-digit market share" of the BTO business. The 134-store chain will offer two lines of desktop computers, and customers will be able to order at stores, by phone, from a Web site, or through CompUSA's corporate sales force.

COMING PRICE WAR? The BTO strategy carries risks for retailers, though. They could alienate PC makers should they capture too much of the BTO market. However, says Hewlett-Packard marketing manager James P. MacDonnell, "they'll compete mostly with the Ma and Pa screwdriver shops."

CompUSA, for one, clearly has its sights on the big guys and is willing to use price as ammunition. Its goal is to undercut Dell by $200 on each configuration. "If I were Dell, I would be worried," says Halpin.

Dell says it isn't. "We don't think right now anyone has anything out there that replicates our strategy, much less that can keep pace with the rate at which we are moving," says a spokesman. Maybe not, but the footsteps are getting louder.

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