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The Pc Is Not In The Mail


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THE PC IS NOT IN THE MAIL

The boom in direct-mail computer sales has gone bust. Just two years ago, personal-computer manufacturers were falling all over themselves to set up 800 numbers and send out product catalogs. They were trying to break into the hot mail-order business fueling hypergrowth at such PC marketers as Dell Computer Corp. and Gateway 2000 Inc. Even conservative corporate PC buyers were drawn into ordering PCs sight unseen at rock-bottom prices. And analysts were projecting that by 1995, as much as 30% of all PC purchases would be by mail.

No more. Mail-order sales are cratering. Unit sales, which were up by 89% in 1992, will increase by 18.7% this year and just 8.9% in 1996 (chart), figures researcher Computer Intelligence InfoCorp. A sign of the stress building up in the business: On June 23, Gateway, based in North Sioux City, S.D., announced that it expects to take an $18 million to $20 million charge for excess inventory in the quarter that ended June 30. Despite a 13% jump in first-quarter sales, to $616 million, the industry's leading supplier of PCs sold by mail got stuck with systems based on earlier--and slower--versions of Intel Corp.'s Pentium chips.

The bust in mail-order PCs is hitting manufacturers just as the overall PC-industry growth rate has started to fall. InfoCorp estimates growth in PC shipments will dip to 10% this year, down from 15% in 1993. Already, signs of a slowdown are cropping up: Lotus Development Corp. and PC distributor Merisel Inc. both reported disappointing second-quarter earnings.

Top-line PC makers are feeling the mail-order slump, too. "A few years ago," says Ross A. Cooley, senior vice-president for Compaq Computer Corp., "we were arguing whether direct sales would be 50% of the [entire PC] market." But now, with retail and dealer sales booming, mail-order represents just 3% of Compaq's $7.2 billion in sales.

IBM hasn't fared much better. Richard Zwetchkenbaum, PC analyst for market researcher International Data Corp., says Big Blue's Ambra Computer Corp. mail-order subsidiary isn't profitable, although he figures it's only "a minor drain" on earnings. In February, IBM folded Ambra's European arm, and analysts say the U.S. unit could be dismantled, too. G. Richard Thoman, the IBM senior vice-president who took over PCs in January, won't discuss Ambra's earnings or future. He says he has been focusing on stemming market-share losses in IBM's main PS/2 and ValuePoint lines. "I don't think I've spent an hour on Ambra since I've been here," Thoman says.

So what happened to the booming mail-order business? Price wars, shorter product-development cycles, and faster chips hit hard. At one time, low overhead and toll-free order lines gave

mail-order companies "an immense advantage," says Seymour Merrin, president of consultant Merrin Information Services Inc. But PC makers got wise fast. "Once you take away the price advantage, buying direct doesn't sound quite so good to customers," explains Compaq's Cooley. There also used to be fewer good shopping options for PC buyers. Now, choices abound, from Sears to computer superstores such as CompUSA.

NOT DEAD YET. What's more, mail-order companies used to be able to get a jump on adding the latest technology to their machines. Now, every PC company is pushing hard to quickly adopt new technology into its machines, says IDC's Zwetchkenbaum.

Still, the mail-order business is far from dead. Dell and Gateway are taking steps to improve their performance. Dell, the first darling of mail-order, has invested in new inventory-control systems that help slash prices and get more-powerful systems out faster. Says Joel J. Kocher, president of worldwide sales for Dell: "We're very serious about reemerging as the leader in the mail-order business."

Meanwhile, Gateway is planning to expand. It hopes to lure customers by offering new subnotebook PCs, developing its European operations, and going after more corporate customers. One tactic: At PC Expo, the personal-computer convention that started June 28 in New York City, Gateway shelled out for a big stand, its first ever at such a gathering. The goal: for its distinctive Holstein logo to catch the eye of some of the estimated 110,000 corporate buyers wandering the floor. "There is no fundamental reason why direct response can't grow," says Gateway CEO Ted Waitt. But with the mail-order business so tough, Gateway knows it also has to cultivate greener pastures.Paul M. Eng in New York, with Peter Burrows in Dallas


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