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In a bid to recoup share and revive revenue, the computer maker will introduce a new line of PCs and sell through retailers other than Wal-Mart
Dell Chief Executive Michael Dell is making a habit of using the InterContinental Paris-Le Grand Hotel as a backdrop for bold pronouncements. In 1996, the European landmark is where he first told Dell directors of a plan to branch out into servers. At the time, many observers believed Dell didn't have a prayer in the market of high-powered machines that run Web sites and corporate networks. Today, servers are a $5 billion business for Dell.
On June 7, Dell used the luxury hotel to announce another set of plans he hopes will turn out just as successful. As part of the company's attempt to regain lost momentum in the consumer market, Dell (DELL) will introduce a new line of computers with an eye toward selling them through a variety of retailers around the world. The announcements fit with Dell's plan to boost revenue through a wholesale revamp of its approach to sales.
Dell, who returned as CEO in January after the ouster of Kevin Rollins, also confirmed reports that the company is phasing out its TV business in response to consumers who increasingly watch programming on PCs. Analysts say Dell simply wasn't selling many TVs. "We are doing quite a few things differently, and we will have to see how it works," Dell said during a briefing with a small group of journalists.
Filling More Retail Shelves
The company raised eyebrows May 24, when it announced it would begin selling computers through Wal-Mart Stores (WMT), a departure from its long-standing method of selling directly to buyers via the Internet (see BusinessWeek.com, 5/24/07, "Dude, You're Getting a Dell—at Wal-Mart"). A question left unanswered at the time was whether Dell would sell through other store chains.
The suspense is ended.
Over the next 12 months the company plans to forge "10 to 20" key agreements with major retailers around the world, Dell said. The new line of computers, initially available over the Web, will eventually be sold through stores as well, depending on arrangements worked out with each retailer. On offer will be a whole new line of computers designed from scratch to appeal to consumers. This line goes well beyond the two Dell Dimension desktops that will be offered in more than 3,500 Wal-Mart and Sam's Club locations across the U.S., Canada, and Puerto Rico. Dell declined to disclose more details until the lineup is released in coming weeks.
Focus on Design
Dell insists that it is now making design a priority—something it has claimed in the past without much evidence to back it up. Dell said the company has increased its investment in design by more than 50%. "As we move to mobile computing, the notebook is becoming a fashion accessory and individual users are deciding what kind of fashion they want," he said. That's especially important as the line between consumer and business customers blurs, and companies give employees more choice on which work laptop they will use.
Analysts say the announcements are further evidence that Dell understands it has to reinvent itself. The company was knocked from its perch as the world's biggest seller of PCs by Hewlett-Packard (HPQ) and has lost share both to HP and low-cost Asian manufacturers. Many consumers have flocked to computers that are considered cooler, such as those sold by Apple (AAPL). "There is an aura that Apple has created that is highly attractive," says Mark Margevicius, a vice-president and research director at technology consultancy Gartner (IT).
"The million-dollar question is whether a Dell or any other vendor can do the same." Consumer sales account for only 15% of Dell's $57 billion total, though they account for 40% of PC sales worldwide (see BusinessWeek.com, 2/2/07, "Dell's Not on Easy Street Yet").
In Europe alone, there's plenty of room for growth on the consumer side. In France, for example, Dell is a leader in business computers, with 27% of the market, but it has only about 3% of the consumer market. Even as Dell steps up its pursuit of consumers, business customers remain a big focus. Dell and other executives are in Paris for the company's annual meeting with its biggest European customers.
The company is trying to figure out what the next billion PC users are going to want to buy. It has already designed an entry-level consumer PC for the Chinese market that sells for about $275 and sees huge potential in other developing markets such as India, Eastern Europe, Russia, and Brazil.
Adapting to Change
The question for Dell, though, is not just how consumers will react, but whether Wall Street will warm to its aggressive new retail strategy, which is sure to increase operating costs.
Not only do retailers take a cut on each PC sold, but Dell will need to stock inventory for the first time. That means giving up a huge historic advantage of selling only direct—it must now try to guess what models customers will want and slash prices to move products that gather dust on shelves. "The thing we have questions about is whether this is a market share play or for profitability because dealing with the [retail] channel involves significant overheads," says Gartner's Margevicius. "What I think Michael is trying to do is reset expectations on who Dell is, but they may get hurt because of this on Wall Street."
Indeed, after news of the Wal-Mart deal was announced, Dell stock took a hit. On June 7, the shares slipped just over 1%, to $26.99.
An ability to adapt to changing demands is also what has prompted Dell to rethink its approach to TVs. Dell pulled out of the plasma TV market in February and is now offering Sony (SNE) LCD 40- to 46-inch TVs. For the time being it is continuing to offer Dell-branded television sets that are 37 inches and smaller, but the writing is on the wall. Dell says more consumers are watching TV on their digital displays, so the company will focus on a new generation of products that marry the TV and the PC.
The new, stronger focus on consumers is only the beginning. Five years from now, says Dell, the company will become far more customer-centric. Maybe then, he'll be back in the City of Lights to unveil Dell's next new direction.