Supermarket - Ringing cash tills

Leading retailers are enjoying a sales boom, pulling first-time buyers with the lure of low-cost PCs. Paul Bray discovers that with supermarkets starting to muscle in as well, times look tough for the smaller independents.

Napoleon once dismissed England as a nation of shopkeepers. But those same shopkeepers had the last laugh on Bonaparte, and their counterparts today look set to do the same to parts of the channel if it does not wake up to the challenge posed by the retail industry. Retail sales of PCs grew by almost 80 per cent in the last quarter compared with the same period last year, according to research company Context, while figures from analyst Romtec suggest that more than a third of all PC sales now go through the retail sector.

Leading retailers are riding the crest of a wave on consumer PC spending.

These are mostly first-time buyers who are used to purchasing electrical goods from superstores.

Retailers have brought their prices more in line with the reseller and mail-order market.They are offering more value-added services and are well placed to benefit from the trend towards cheap or free PCs, according to Nicky Baird, research analyst at Romtec. "Prices have come down a considerable amount in the past year. Retail is certainly not looking uncompetitive on price. Consumers are much more aware now."

This view is supported by Clive Longbottom, analyst at research group Strategy Partners. "PC World used to be incredibly hyper-priced. But it really brought prices down, and now that product prices are relatively competitive, PC World is creaming it."

The Dixons Group - including PC World, Dixons and Currys - accounts for about 70 per cent of the entire consumer PC market, according to Context, giving it enormous influence. Direct retailers such as Tiny and Time have dev-eloped highly successful networks of showrooms (see box, page 32), while supermarkets are also beginning to take an increasing interest in the opportunities that are becoming available in the market.

Meanwhile, the visibility and volume of the multiples gives them enormous power over their suppliers. Christophe Galtier, European PC retail analyst at Context, says: "You would expect the multiples to fix their own margins."

But big multiples are accused by independent PC retailers of using cheap PCs as low-margin leaders - sold at a margin of a few per cent to encourage people into the store. Once the customer has been enticed into the shop, there's a greater possibility of making higher margins on software, consumables and value-add services such as extended warranties and installation. This principle is based on the theory that people don't shop around for lower cost items such as these.

As a result, Clive Bishop, general secretary of the National Association of Specialist Computer Retailers (NASCR) - which represents 250 small independents - believes many small independents are struggling to survive.

"Margins are ridiculously low. If you talk to other retail sectors, they can't believe how low PC margins are. It's short-term thinking by people who have the ability to mould the market without considering the consequences," he says.

"The market is not as buoyant as it was a year ago. We are seeing a lot of very aggressive marketing from some of the leading multiples. This is bound to have an effect, even if service is compromised."

Bishop adds: "The multiples target first-time buyers who aren't so discerning about what they buy. They take sales from independent retailers that don't compromise on service and aftercare, which are almost built out of the price."

According to research firm Compubase, there are 1,191 independent resellers in the UK which sell from a shop, out of a total of 5,563 independent IT resellers. This compares with 599 mass distribution outlets - including department stores, multiples, supermarkets and IT superstores.

Simon Wallis, sales manager at Compubase, says: "It's quite surprising that 20 per cent of dealers are still selling from shops. Unless they change their business model, they're not going to survive. I think those 1,191 that are selling from shops will quickly disappear."

But it's not small stores per se that are the problem. Software Warehouse mostly operates from units of about 1,000sqft. When it experimented with units three times the size, it did not prove any more successful. But circumstances are conspiring against the independent retailer. With a small advertising budgets, the company is finding it difficult to get its message across.

In the meantime, high street shops are dying, as customers go to out-of-town shopping centres and rising rates and rents squeeze out independent retailers. Ironically, measures designed to revitalise town centres, such as pedestrianisation, can make things even worse for the PC retailer - without vehicle access to the shop, people won't buy things they can't easily carry.

More fundamentally, the independents don't sell enough PCs to be able to compete on price with the big chain stores. Without low-priced hardware, they can't get customers through the door - despite the fact that, on small ticket items such as software, hard disks or consumables, they can still undercut the big multiples, which charge more for these to offset the low margins they make on hardware.

To compete, the independents are looking to assemble their own PCs or sell unbranded imports.

But with leading brands available from the big retailers at lower prices, unbranded products are likely to become less attractive to retail buyers.

However, some small independents are more upbeat. Jenny Stimson, chairwoman of NASCR, runs RTS Computers with her husband, trading from two shops in rural Lincolnshire. Like many independents, her business is diverse: assembling PCs, tackling repairs; selling consumables and software; and carrying out upgrades and installation work.

Stimson believes independents can survive if they play to their strengths.

"They have to examine their own geographical area and look at what people actually want. We know that we need to be more specialised and provide clients with the backup as well as the goods."

Despite the boom in first-time buying, more than half of Stimson's customers have bought from her before. These include schools and small businesses, as well as individuals. If they pitch their services at the right level and manage not to compete with established Vars, small businesses could just provide a lifeline to independent retailers.

"Many retailers are finding that more of their revenue is generated from small businesses," says Bishop. "Companies aren't quite so worried about price and they want someone to hold their hand."

Co-operation is another escape route, according to Stimson: "In many respects we have to work together and promote the independent sector.

But the prospects are not good. NASCR has done bulk purchasing deals with some smaller brands such as Ashima and Digitus, but hasn't managed to win the interest of any leading brands. And its free ISP service, NASCRnet, which is promoted through NASCR members, has attracted just 3,500 users since its launch in April.

The retail boom is not necessarily a boon for PC manufacturers either.

Dell, AST and Olivetti among others, have bailed out as tough terms from retailers mean sacrificing profit for market share. Those that remain have few illusions about the sector.

David Brabham, product manager for the Pavilion range of PCs at Hewlett Packard, says: "If you don't have retail presence, you have a limited market to go for." Pavilion sells consumer PCs, which are sold through PC World, Tempo, Staples and John Lewis.

"In France, we sell through 14 different retailers. In the UK, we only sell through four retailers because there aren't very many choices," Brabham says.

He adds that HP doesn't like to sacrifice profit for market share, but accepts that the "retail model does affect our profitability".

This inevitably shifts the balance of power towards the big retail chains, which can be very fickle. Longbottom says: "There is no loyalty within the channel. It spot-buys as it sees fit, to maintain low prices."

In effect, it is the retailer's brand which is becoming important, rather than the manufacturer's. Leading retailers are increasingly reluctant to display point-of-sale literature from manufacturers. "The A brands as we know them, are pretty much going to disappear," says Wallis.

Brabham agrees: "PC World is a very strong brand and people buy products on the strength of that. This makes it difficult for manufacturers to drive their own brand values," he says.

A strong retail brand is exactly what consumers like, especially if they are buying something they don't really understand, such as a computer.

Most retailers and industry observers agree that consumers form the bulk of retail customers and the majority of these are still first-time buyers.

Linda Redmond, retail director at Software Warehouse, believes that once hooked, customers can be quite loyal. "Our most successful stores are the ones that have been open longest because customers come back. Price is always an issue, but it's not the only one. It also comes down to the service they receive and whether they can come back if they find they've made a mistake."

If the leading retailers have the first-time consumer market sewn up, at the opposite end of the spectrum, they are unlikely to seriously threaten corporate resellers. It is in the middle ground of experienced consumers and small businesses that the real battle will be fought between retailers and the alternative channels of reseller, mail-order and the web.

Retailers are already seeing an upswing in the number of small businesses visiting their stores. According to Context, the trend seems particularly marked this quarter. Canny retailers are trying to cater for them. Of Time's 150 outlets, 20 now employ managers to specifically encourage small business sales. PC World sells networking kit and has business centres open seven days a week.

Value-add services for consumers are also increasing, with upgrade, repair and maintenance services available instore, plus internet access, finance deals and extended warranties which increasingly come from the retailer itself, rather than the manufacturer.

Time still has its free PCs deal, and many of its rivals are likely to follow suit in the near future. Meanwhile, Tiny claims 90 per cent of all its customers sign up to its ISP service, to which it recently added an MSN portal.

With competitive pricing and more value-added products, retailers seem to pose an increasing threat to resellers in the consumer, Soho and SME sectors, forcing them into higher value-add areas such as networking, consultancy and systems integration.

But the prospect for non-retail channels is not as bleak as it may appear.

Tiny has tested a business centre in its Birmingham store since late last year, with some success, but Jim Buchanan, marketing manager at Tiny, is cautious. "It's a different market. There are a lot of resellers that already cater for that kind of small business market and we need to ensure we're providing as good a service or better."

Training levels for staff are still poor at some big retailers, with sales people giving the impression that they are only interested in selling products of which they have a great amount of stock. Stock levels are a nightmare for retailers in such a fast-changing sector as PCs. They increasingly have to be on their guard against being stuck with outdated models which they would have to sell at a discounted price once specifications change.

"We reduced our stock levels by half about 18 months ago - our stores became more profitable, and it didn't affect sales in any way," says Redmond.

Some big retailers have tried build-to-order services, but without great success. It is only the direct retailers, such as Time and Tiny, that can treat their stores as showrooms where customers order PCs, which are then shipped direct from the factory. "If we were to hold stock, we would find it would put our overheads up enormously," says Buchanan.

However impregnable they may seem today, the leading retailers probably owe their success more to the present state of the market than to their own marketing brilliance or quality of service. First-time consumer buying is booming and first-time consumers like to buy from retailers.

With experience, buyers are likely to switch to more direct channels such as off-the-page and the web. In the US, where the replacement PC market is already extremely strong, retail growth has slowed in favour of online sales.

Nor will PC World and the other multiples have the market all to themselves, as competition intensifies from other retail outlets. Already, photographic shops sell digital cameras and scanners, and other possible entrants include DIY stores, petrol stations and cash-and-carry outlets, as well as trade wholesalers and telcos.

Wallis says: "We expect both the numbers and types of retail sales outlet to increase substantially as more IT products become perceived as plug-in, and telecoms and IT start to merge.

"Some phone shops are taking an interest. Selling mobile phones is no longer enough for them. If they're going to expand, they will need a wider range of products."

Above all, supermarket giants including Tesco, Safeway and Sainsbury's - arguably among the strongest retail brands in the land - have begun to take a keen interest in the changes in the market (see box, page 27), and analysts predict that this will increase.

"I would almost guarantee that within six months, Asda and Tesco will be doing similar deals to Tiny and Time - offering free PCs with access to their websites," says Wallis.

In France, specialist PC retail chains once had a strong grip on the market, but now only one, Snac, is left. The rest of the market has been taken over by the supermarkets and hypermarkets, which now account for more than half of all PC sales in France.

Galtier says: "Supermarkets are one of the main driving forces in the European PC market. The mass-merchandisers have high visibility among consumers, who can see and try the machines in a familiar environment.

"The supermarkets can carry out huge promotions with products, internet deals and free PCs because they can work on lower margins than other retailers.

"In the UK, we'll probably start to see the same trend. In a couple of years, PC retailers are going to feel a real threat from the supermarket chains," Galtier adds.

A French concept that will put a spanner in the works of a generation of English shopkeepers? May-be old Boneparte will have the last laugh yet.

TROLLIES AT THE READY ... SUPERMARKETS ARE PAVING THE PC WAY

Supermarkets and hypermarkets could be the next big players in PC retail - as they have become in France, where they sell more than half of all the latest PCs.

Fujitsu machines are now sold by Tesco, which began a pilot scheme a year ago and now has 300 stores selling PCs.

Sainsbury's began in February and will have 150 stores involved in the scheme by the end of August. Safeway, which began a pilot in May, aims to have stock in more than 100 stores by the end of August.

Noel Lynch, general manager for consumer products at Fujitsu, says: "We're after the experienced user who recognises the value of the deal when they walk past it."

The deal usually consists of a single product spec in each store, starting with a 128Mb, 10Gb Pentium III for £899, including software package, modem and 15in monitor. The monitors are priced separately, so users replacing older PCs can continue to use their existing display if they prefer.

"We're trying to sell the message that the specification that's being sold by the supermarket is the right one for family buyers. We might increase the range, but only if we get feedback saying people want it," says Lynch.

From the supermarkets perspective, the PC is treated like an outsized box of cornflakes. There is no pre-sales support, hence the emphasis on experienced buyers, and after-sales support is provided by Fujitsu, from replacing dead on arrivals (DOAs) to a 12-month warranty.

The package includes free home installation by an engineer, which customers accept. More than 32,000 units have been sold to date. "I'm expecting to treble this by next April," says Lynch. "Most of the business we've done has been at the expense of off-the-page sales, because of the higher specs. I don't think it will threaten traditional retailers or resellers at all, but it will expand the market."

There is plenty of scope. Fujitsu in Germany sells 750,000 PCs a year through the retail channel, half of them via supermarkets.

ONE STEP BEYOND - TINY AND TIME TRY TO STAY AHEAD OF THE GAME

As retail and online sales have started eating into the traditional mail order market, two direct vendors have decided to meet the challenge head-on.

Tiny now has 111 showrooms across the UK, through which the manufacturer says it sold more than 90 per cent of the 257,000 PCs it shipped last year; it plans to open between 20 and 30 more showrooms.

Time has 150 outlets, including about 45 franchises in Powerhouse and 40 in OfficeWorld.

Neither company sells PCs instore. Instead, customers can try out about 10 different specifications, then have one delivered from the factory within a few days.

Time sells peripherals onsite, but Tiny carries no stock at all - everything is ordered and delivered, either instore or via its website. Buyers are mostly first-time, although replacement sales are increasing.

With only one margin to extract, compared with a conventional retailer which must make margin for itself and the manufacturer, the direct retailers believe they can stay on top of the game. "Three or four years ago, we used to have a price difference of between £300 and £400 with the superstores.

That's changed, but we always want to keep the edge and stay one step ahead," says Buchanan, marketing manager at Tiny.

Although not a manufacturer, Software Warehouse runs a similar mix of channels, with about 30 shops, a recent web-based reseller Jungle Online, plus its existing corporate and mail-order businesses. Its instore prices are the same as in its mail-order catalogue and the company plans to open more stores next year.