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Its grand strategy is coming up a billion dollars short

At Packard Bell NEC Inc., it looks as if the Grinch stole not only Christmas but the whole year. The company, which as recently as June bragged that it would soon be the leading U.S. seller of personal computers, has watched its sales and market share slowly slide since last January. A weak fourth quarter for computer retailers has only made matters worse.

The setback comes in stark contrast to Packard Bell's big plans. In April, it acquired Zenith Data Systems Corp. from France's Groupe Bull in exchange for 20% of the company. Three months later it took over NEC Corp.'s PC operations outside Japan and China--NEC got almost 40% of Packard Bell in stock and options in exchange. The resulting company, said Packard Bell CEO Beny Alagem then, would ring up $8 billion in sales in its first year--making it No. 1 worldwide.

THE PROBLEM. Alagem is coming up about a billion dollars short. The problem isn't Zenith, which picked up an Air Force contract in 1996 to supply about $1 billion worth of computers over the next three years. And it isn't NEC, which has been posting rising sales all year. It's the core Packard Bell brand, the one that almost single-handedly created the retail home computer market. ''Packard Bell makes up a much smaller percentage of the business than it did at the beginning of the year,'' says Stella Kelly, an analyst at market researcher Computer Intelligence.

It shows. Last year, Packard Bell accounted for 47% of all desktop computers sold through retailers, including computer and office superstores, consumer-electronics stores, and mass merchants such as Sears, Roebuck & Co. and Wal-Mart Stores Inc. Through October of this year, according to Audits & Surveys Worldwide, a New York-based sales tracking company, Packard Bell's share was down to 39%.

The competition is catching up in more ways than market share. Packard Bell won consumers over in years past by bringing new technology to market first and by pricing its computers below everyone else's. Rivals such as Compaq Computer Corp. and IBM, which in 1995 had yet to introduce home computers using Intel Corp.'s new Pentium chip, now are aping Packard Bell. ''The know-how that Packard Bell accumulated, and the approach to the market that they pioneered, is no longer theirs exclusively,'' says Richard J. Zwetch- kenbaum, an analyst at International Data Corp.

Plus, as the market moved from novice buyers to second-timers, many experienced consumers shied away from Packard Bell, citing its reputation for shoddy quality and indifferent service and support. And there are powerful new players in the market, including Sony Corp. and Toshiba Corp., which launched home computers for the first time this year. Those models are hot sellers in electronics stores, where their brands are well known: At the Good Guys Inc. electronics chain, based in Brisbane, Calif., Sony accounted for 40% of PC sales in October. ''Sony is doing extraordinarily well for us,'' says CEO Robert A. Gunst. ''It's really taking sales from Packard Bell.''

Packard Bell professes not to be dismayed. ''A year ago, we decided to walk away from certain low-end price points,'' says Mal D. Ransom, senior vice-president of the privately held company. ''In doing so, we walked away from market share.'' Besides, he says, Packard Bell planned conservatively. ''We're taking a company focused on desktops at retail--a market that's bombarded by competition--and building an infrastructure to go far beyond our core business.''

There are signs that CEO Alagem is remaking the company. ''If Packard Bell wants to be the market leader, it will have to be a leader in brand loyalty and customer satisfaction, and they've figured that out,'' says IDC analyst Zwetchkenbaum. It mounted its first national TV advertising campaign this fall, aimed at building an image rather than pushing specific models. And Ransom says his first priority is to be the industry leader in quality, service, and support.

That's a tall order for a company that has been only marginally profitable at best. But Alagem has two big new investors in Groupe Bull and NEC, and he promised them an initial public offering within two years. He had better be planning on more than a lump of coal for Christmas 1997.

By Larry Armstrong in Los Angeles


CHART: The Bell Curve

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Updated June 13, 1997 by bwwebmaster
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