Best Buy's Bid to Be a Player in PCs

The electronics retailer is out to succeed in a business that has defeated plenty of others: Private-label computers

Shopping for a personal computer at a Chicago Best Buy store on a recent Sunday, Juan Herrera stopped at the display of a new line of desktops. The prices -- from $900 to $1,400 -- certainly grabbed him, being about $100 less than comparable PCs. Herrera noticed they also had slightly better performance specs than the Hewlett-Packard PCs lined up next to them. But he wondered about the brand: "I never heard the name vpr Matrix before," the 38-year-old postal worker said.

Seeking to succeed where virtually every other electronics retailer has failed, Best Buy quietly launched its own brand of PCs under the vpr Matrix name during the week of Jan. 21. The nation's No. 1 consumer-electronics chain is aiming the brand squarely against the key national-brand PCs it sells -- HP, Compaq, and Sony. "Our goal really is to make this a dominant brand in the same way our other brands are," says David Morrish, senior vice-president in charge of computer merchandising at the Eden Prairie (Minn.)-based chain of 470 stores.


  It couldn't have picked a more challenging time. PC sales fell last year -- the first time that has happened -- and the industry is poised for another round of price wars. Add to that the inherent difficulties of selling a so-called private-label machine, which have already forced retailers Radio Shack, Computer City, and CompUSA out of the business.

The hurdles range from building brand awareness and jousting with existing suppliers to managing inventories. Besides, making computers isn't Best Buy's core strength. "They will be out of this in 24 months," predicts David Goldstein, chief executive of Channel Marketing, a Dallas consulting firm.

Much like Wal-Mart Stores sells private-label goods such as Sam's Choice detergent, Best Buy is seeking to capitalize on its clout with consumers and capture the higher profit margins such products can bring. At nearly 20%, it already controls the largest share of PC sales at the retail level, followed by Circuit City. But PC gross profit margins are among the lowest earned by electronics retailers, averaging about 8%. By dealing directly with third-party manufacturers, analysts say, Best Buy could potentially gain several percentage points of margin.


  Analysts say Best Buy is also trying to put itself in a stronger position should the HP-Compaq merger go through. It will now have machines to fill the void left on the display shelves if the combined company unifies its product line. Also, having its own line would give Best Buy more leverage against the combined company's increased market clout.

Best Buy is moving gingerly. It's using Equus Computer Systems, a Minneapolis-based build-to-order company, to assemble the three models of central processing units it is selling under the Matrix name. People close to Best Buy say Equus is making only about 22,000 units for the retailer for the first quarter.

For future orders, the retailer has lined up a major Chinese supplier to do partial assembly of the CPUs, says Best Buy's Morrish. Final assembly, including the faster-changing components, will be done by another U.S. company. Morrish declined to give specifics. Equus also declined to comment.


  Best Buy isn't targeting the low end of the market, as have other retailers that sold private-label PCs. All three Matrix CPUs have Pentium 4 processors and, depending on the processor speed, sell from $899.99 to $1,299.99. Once bundled with other makers' monitors, keyboards, and printers, the packages sell for about $100 more. All three Matrix CPUs have CD and DVD players, CD burners, and graphics cards that allow digital cameras and camcorders to plug in. Matrix prices run from $100 to $150 below the competing HP and Compaq machines and even further below Sony units.

As it develops the line, Morrish says, Best Buy plans to add its own monitors and other peripherals. It also plans to create a unique design, much like Apple, to create a distinctive look. With the music, DVD, and graphics components, Morrish adds, Best Buy is trying to position Matrix as an "entertainment solution" that dovetails with the CDs and other entertainment products the chain sells.

In that respect, he explains, Best Buy is attempting to outflank direct PC seller Dell Computer. Dell and Best Buy both aim to launch machines with upgraded components at a faster rate than do HP and Compaq, which would give the chain another advantage, he says.


  The strategy isn't without risks. The key one, which has dogged retailers that took this route in the past, is profitability. The prices of PCs and components generally tend to go down -- and often tumble. This can force the retailer to take aggressive markdowns that eat into profits, says Michael Flink, a former Computer City executive who now works for Levin Consulting of Beachwood, Ohio.

Flink says Best Buy won't have the benefit of the markdown allowances that national PC brands give retailers. Morrish counters that Best Buy's inventory-control expertise and knowledge of what its consumers want will help it to escape crippling markdowns.

Best Buy also runs the risk of alienating HP, Compaq, or Sony, which could respond by deciding to work more closely with rival Circuit City. Morrish admits the Matrix launch has caused some "stress and strain" with those vendors, but adds: "We are working through the issues." HP and Sony officials declined to comment.


  Perhaps the biggest test will be whether Best Buy can establish Matrix as a brand that resonates with consumers. By launching Matrix, it's betting that PCs -- like the private-label goods sold by Wal-Mart -- are becoming more commoditized items that are bought for their features and price more than the brand name. It's also betting that the power of the Best Buy name will give customers the confidence to buy.

When Chicago's Herrera shopped for computers at Best Buy, he was looking for national brands. He gave the Matrix machines only a quick glance before heading to HP models. "I'd be willing to pay the higher price for the name," he says.

Morrish says Matrix is off to a strong start, however, with Best Buy having sold out of the machines after advertising them for the first time in its circulars on Jan. 27. Matrix may prove to be a success, but history isn't on Best Buy's side.

By Robert Berner in Chicago

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