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APRIL 6, 2005
By Olga Kharif Dell: Time for a New Model? [Page 2 of 2]
EURO SLIPPAGE. In India, China, and many other fast-developing markets, Dell's market share has barely moved up over the past year. "We're going against competitors who've been in the business there much longer," argues a Dell spokesperson. "We feel good about our growth. We'll just have to expand our customer relationships." But even in Europe, where Dell slightly raised its share of the overall PC market in 2004, it's losing ground in notebooks, the fastest-growing PC segment. From fourth-quarter 2003 to the same period last year, Dell's market share slipped from 8.4% to 8.3%, according to IDC. Such declines -- this time, to Taiwanese manufacturer Acer -- used to be as foreign to Dell as high prices. What's happening? "In a lot of countries, it's very hard to reach customers without the retail presence," explains Roger Kay, an analyst at IDC. THREE OPTIONS. The consequences of that reach far beyond PCs. Today, more than 80% of Dell's printers -- a product line that has generated lots of buzz among financial analysts in the past year -- are sold or given away with purchases of PCs, says Charles LeCompte, president of imaging consultancy Lyra Research in Newtonville, Mass. Thus, the lower the PC sales growth, the lower, potentially, are the printer sales. Bottom line: Dell has three options. One, it could stick with the direct-sales model, waiting for markets like India and China to mature technologically. Two, it could exit the PC business, as IBM has done. Or three, it could establish more of a retail presence in developing countries to ensure that it grabs a chunk of their PC sales in the next few years. That can be done through a partnership with or purchase of a local manufacturer already commanding a substantial market lead over U.S. companies in countries like India and Russia. Or Dell could set up relationships with retailers and system integrators in these countries. For the time being, however, Dell says it's sticking with option No. 1. "We're completely committed to the direct-sales model and have no plans to go retail outside of the U.S.," says a Dell spokesperson. MURKY OUTLOOK. Indeed, investors wouldn't likely be enthusiastic about any moves away from the direct-sales model. After all, that could reduce Dell's margins. Today, at 8.6%, they're way higher than HP's 5.4%. However, much faster revenue growth that might result from modifying that model could cover up some of that disappointment. More important, it might allow Dell to reach its $80 billion target faster. Of course, even if Dell's growth slows as expected, chances are investors will stick with the stock. After all, most other tech companies can't grow above the high single digits, says Larry Eakin, senior director of large-cap-growth equity at Armada Funds. Yet, Dell shares have already lost some ground, and for the first time in years, the future looks murky. Times have changed. Maybe Dell should, too.
 Kharif is a reporter for BusinessWeek Online in Portland, Ore. Edited by Phil Mintz
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