Dell’s retail detour starts to look smart

June 17, 2009

Eric Auchard— Eric Auchard is a Reuters columnist. The opinions expressed are his own —
Dell Inc’s move into retail sales might seem poorly-timed, discretionary spending being what it is. In fact, the world’s No. 2 personal computer maker looks like it’s making the right choices that can get its long-struggling consumer business rolling again.

Dell is gearing up to feature several refreshed lines of consumer PCs in 30,000 stores around the globe. The company’s consumer retail chief Michael Tatelman has set aggressive growth targets for the business.

These targets come despite predictions by market research firm Gartner Inc that the PC industry this year will suffer a nearly 12 percent decline, its biggest-ever unit sales drop.

But Dell appears to have learned the right lessons from its historic build-to-order approach to making PCs and is well positioned to take advantage of some of the few positive trends at work in a PC industry facing relentless commodity pressure.

Dell’s ambitious retail strategy can be traced to Tatelman’s background as president of Motorola Inc’s mobile handset business. As PCs shrink into handheld devices with built-in mobile connections, there are fewer differences to phones.

And its latest products stand out from other PC boxes by their brightly colored designs from prominent graphic artists. What’s impressive about the new line-up is Dell’s ability to translate the thinness and sleekness of its top-of-the-line Adamo into its more affordable Inspiron notebook line. Dell’s strategy could help it win some fanatical followers and even steal back some of the elusive “cool factor” of Apple Inc’s ultra-thin Macbook.

Turning computers into lifestyle accessories makes sense. Dell looks smart to be acting like a cellphone marketer with hundreds of custom design options rather than a stodgy PC seller living on old glories with only a handful of models to offer.

Dell was widely mocked two years ago when it began to embrace the retail religion, instead of relying solely on direct sales and build-to-order manufacturing that were the basis of its original success. It was said to be having an identity crisis.

Yet the company has engineered a retail strategy that allows it to vastly expand its sales distribution while still allowing PC buyers to customize their own machines, giving Dell an edge in product differentiation over many retail rivals.

The reality of consumer behavior these days is that some like to window shop first in stores then buy online. But others prefer to compare online, then go and “kick the tires” before buying a particular product in a store. Dell is agnostic on how consumers choose to buy. In effect, it’s managed to preserve some of the best aspects of its direct sales model.

In Europe, where Dell’s consumer business has suffered severe market share losses in recent years, Tatelman told me in an interview that he expects to return to near a 10 percent market share. According to IDC, Dell’s market share in the key European countries of Germany, France, Italy and Spain have fallen to the low single-digits. “There is no reason we should not have low double-digit share,” Tatelman said of the four countries, some of Europe’s largest PC markets.

Of course, fixing the consumer business is only one of the problems facing Dell.

Far and away the largest chunk of Dell’s revenue still comes from sales of computers — and related equipment and services — to large corporate customers.

As such, the company remains exposed to the mercies of a weak global economy, tight corporate spending and an over-dependence on PC hardware versus its main rivals, Hewlett-Packard, IBM and Apple. Many analysts believe Dell should consider large-scale deals to expand in services or software.

But at long last the company is fixing what ails its consumer business. With hot products at attractive prices and vastly expanded distribution, Dell looks well positioned for an upcoming Microsoft Windows upgrade cycle late this year. Zippy industrial design can bolster its brand identity and shore up, if not improve, margins.

PC sales, like the economy, are weak. But replacement demand is likely to grow for Dell products that are thinner, lighter, better designed and have longer battery life and built-in mobile broadband connections. This adds up to a credible consumer story for the first time in many years at Dell.

— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —

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