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More Red Meat, Please


Information Processing: COMPUTERS

MORE RED MEAT, PLEASE

It wasn't all that long ago that analysts and competitors alike dismissed Packard Bell Electronics Inc. as yet another wannabe personal-computer company. Sure, it was the leader among the ragtag band of PC makers--brands such as Magnavox, Everex, and Leading Edge--that sold to consumers through mass-merchandise chains. But when the real competition jumped in--IBM, Apple, and Compaq--Packard Bell could kiss the home-PC market goodbye.

Or so they said. Not only has Packard Bell withstood the arrival of stiff new competition in home PCs, it has emerged as the country's hottest PC maker. Half of all PCs sold in chain stores are Packard Bells. In two years, sales have tripled, pushing the privately held company to $3 billion in annual revenues in 1994. This year, sales are expected to nearly double, to around $5.5 billion. Instead of ceding market share, Packard Bell has blown by the competition. Last year, it shoved aside IBM for the No.3 spot in the U.S. In unit sales, Packard Bell has been No.1 for the past two quarters.

Not bad for a company that has yet to buy its first national ad. Now, executives at the Westlake Village (Calif.) company have their eye on something bigger than the U.S. home-PC market. They're trying to jump-start an international expansion and push upmarket to sell low-cost PC clones to businesses, too. The company is already investing heavily overseas: It opened a factory in France last fall, started assembling computers in Brazil last month, and set up an Asian division in Singapore earlier this year and is searching for a Far East manufacturing site. Last year, less than 10% of the company's sales were outside U.S. borders. Compaq and IBM, by contrast, sell more computers overseas than they sell in the U.S.

WOOING THE SUITS. The company is also making aggressive moves closer to home. Packard Bell has largely ignored the corporate PC business. But last fall, it recruited a Compaq Computer Corp. executive to build a new commercial division. This summer, the company will launch a new line of PCs, called Packard Bell Executive, which is expected to include laptops and network servers. It has started building a technical support group dedicated to corporate buyers. "We have always sold PCs to small and medium-size corporations through our retailers," says Beny Alagem, the company's 42-year-old Israeli-born founder and CEO. "But as we go forward, we will put more emphasis on our relationship with corporate resellers." Translation: Packard Bell will start selling through computer-store chains, too. It has quietly signed up two chains to sell business PCs already.

No one expects Packard Bell to take the corporate computer market by storm. For one thing, this is the lucrative home turf of such mainstream computer companies as IBM, Compaq, and Dell. They will defend it fiercely, and--if they have to--they'll cut their prices to match Packard Bell's expected come-on: prices hundreds of dollars below competitive models.

Packard Bell may also find that low prices are less important to corporate buyers than they are to consumers. Businesses tend to look at other factors, such as the cost of training, software, maintenance, support, and upgrades, areas where Packard Bell has scant experience. "Price is not a good long-term differentiator," says Michael S. Dell, CEO of Austin (Tex.)-based Dell Computer Corp., which pulled out of mass-merchandise chains last year.

STROKING RETAILERS. But low prices aren't Packard Bell's only gambit. It knows better than anyone how to help its retailers--discounters and electronics chains--sell computers profitably. "Packard Bell is not a PC company, it's a consumer-electronics company," says Stephen Baker, a senior analyst at International Data Corp. in Framingham, Mass. While Compaq and IBM mount national TV advertising campaigns, Packard Bell funnels its entire ad budget into co-op advertising, giving retailers an estimated 6% of sales for local advertising, roughly three times as much as its competitors.

It has also structured its returns policy to accommodate liberal "satisfaction guaranteed" policies. Packard Bell tears down returned PCs, recertifies parts as new or returns them to suppliers, and uses most parts to build new computers. It also sells refurbished computers to liquidators. On Apr. 10, however, Compaq challenged the policy in a lawsuit charging Packard Bell with deceptive practices. Says Alagem: "Compaq is just trying to create a marketing ploy to stall our growth and momentum."

Another key to Packard Bell's rise has been its remarkable speed in building the newest technology into its PCs. It was first to preload software so the computer would work right out of the box. In early 1993, it added an easy-to-use interface that bypasses Microsoft Corp.'s Windows software. Now, other PC makers have introduced similar programs--as has Microsoft. The company also saw that consumers, fearing technological obsolescence, would switch quickly to Intel Corp.'s Pentium chip. That led to a Packard Bell sales surge last fall, a turn in the market IBM and Compaq missed. Now, the company is the first to bundle in surround-sound technology and dual CD-ROM drives. "Packard Bell is successful because they build a quality product and bring it to market fast," says Alan C. Bush, president of Tandy Corp.'s Computer City chain.

Alagem concluded a decade ago that the PC would become just another home appliance. So in 1986, he and two partners, who were running a small California distributorship of electronics parts, launched their fledgling PC company by buying the name Packard Bell--a well-known TV brand in the 1950s--from Teledyne Inc. Then it set out to be the low-cost producer. The company doesn't pump money into fancy overhead. Earlier this year, it moved most U.S. operations to the 50-year-old former Sacramento Army Depot, a 1.8-million- square-foot facility that it leases for a dollar a year.

There has been a trade-off to Packard Bell's lean and mean approach: It developed a reputation for shoddy customer service that it is still trying to shake. Alagem claims that stems from the company's high proportion of customers who are computer novices. "It has nothing to do with the quality of the product," he says. "More than any other company, we deal with a lot of first-time users who have never turned a computer on before." To address the problem, the company has revamped its technical support operation. The original support center was destroyed in the 1994 Northridge earthquake and a new center, employing 1,400, has since opened in Utah. A second unit is being hired at the new Sacramento factory.

Until Packard Bell cleans up its reputation for mediocre service, it may not grab much of the corporate PC market. But with home PC sales still surging and a new world outside the U.S. to conquer, it may not really need to.By Larry Armstrong, in Westlake Village, Calif., with bureau reports


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