What's Dell Doing at Wal-Mart?

The author, president of Endpoint Technologies Associates, wonders whether the computer maker's latest experiment will work

Last week, Dell announced that it would begin selling two Dimension desktop computers through Wal-Mart Stores. It was a watershed moment. For years, Dell embraced the tagline "Be Direct," a phrase that highlighted one the company's main differentiators: It sells directly to consumers rather than by way of retailers. The Wal-Mart deal, limited as it is, represents the most visible departure from the company's hallowed mantra.

But the change is at least as much talk as substance. For example, Dell (DELL) recently came clean about its indirect commercial operations. In the course of publicizing its intentions to step up its indirect business, Dell disclosed that it already sees about $4 billion in annual revenue from indirect sales in the U.S.

A Public Shift

The company has four groups that sell indirectly: Solution Provider Direct, which sells to VARs of all stripes without going through a dealer such as Ingram; Global Alliances, which sells to large systems integrators like EDS (EDS) and Accenture (ACN); Industry Solutions, which sells hardware to other vendors that jigger the technology in some way (e.g., adding a GPS system) before reselling it; and a branch that sells to VARs that service the federal government. That's a lot of indirect business for the Be Direct company.

However, the Wal-Mart announcement represents a public shift in philosophy and has therefore set off a round of tongue-flapping and finger-wagging among the digerati. Despite the noise, there's a good explanation for what's going on. Dell is going through a transformation akin to the one the U.S. went through under Franklin Delano Roosevelt during the Great Depression.

When FDR took over in 1932, he undertook a series of rapid-fire legislative moves. Passing one bill after another, he set out to fix what was wrong with the nation, and when something didn't work, he'd rescind it. The key to the Roosevelt administration's success was its willingness to try things. Rather than be paralyzed by fear of a plan not working ("…fear itself!"), FDR threw lots of pasta at the wall, fully willing to discard those strands that didn't stick.

With Both Barrels

In the same way, Michael Dell is guiding his company forward by trying different things. Distribution through Wal-Mart is one of them, but, as the company has made abundantly clear, not the only one. This small deal could get larger or go away, depending on its success. In any event, Dell is going to expand its distribution in numerous ways, and part of the formula is to shake things up through rapid decision making.

For those of us who thought that Best Buy (BBY), Fry's, or Circuit City (CC) would have been better matches for Dell, stay tuned. The company has signaled that there will be many moves, including a reconfiguration of its kiosks, perhaps more company stores, and other retail arrangements. Dell has been courted by every retailer in the world. As a highly desirable supplier, it can pick and choose partners. Look for a Gatling gun approach to distribution in the future.

The deal with Wal-Mart does bring up a question, though, about what kind of image the company is trying to convey. Wal-Mart (WMT), as a general merchandiser, is pretty down-market. Recently, Wal-Mart made big news for being unable to sell a line of designer clothing. Its core customers prefer jeans and T-shirts. This type of thing doesn't square with Dell's efforts to polish its brand image.

Plenty of Company

The good news for Dell in shifting toward indirect sales is that the company finds itself at the right end of a one-way street. A vendor that moves from indirect to direct sales can irk existing distributors, angering some enough to switch to rival suppliers. This factor kept Compaq from using direct sales to compete against Dell in the late 1990s. But when going in the reverse direction, from direct to indirect, the only players who suffer are internal salespeople.

One thing is for sure: Dell won't have Wal-Mart all to itself. Hewlett-Packard (HPQ), Gateway (GTW), Acer, Toshiba, and Lenovo, among others, all sell through the big retailers.

In some cases, Wal-Mart bends its suppliers to provide custom packaging and is known for dictating terms, such as "Thou shalt keep inventory in warehouses near our distribution points." But Dell does the same to its suppliers. It will be interesting to see which company in this new relationship gets to hold the whip handle and which feels the business end.

Before it's here, it's on the Bloomberg Terminal.