It's a fact of life. It's been one for quite some time now. Dealers know it and distributors know it. Vendors know it, but until recently have been reluctant to admit to the rest of the channel that they know it.
There's no margin to be made selling PCs - fact. With entry-level boxes below the £500 threshold, manufacturers simply cannot afford to pass product down a tiered channel - incurring costs as it goes - because customers simply will not stomach it. The traditional model is in danger of collapsing, taking those who are unable to adapt with it.
So what's going on? Simple - it's shakeout time for dealers. But this isn't a recent phenomenon. A look at the past six months reveals that the impending resellers' bloodbath was predictable.
Figures released early this year showed that the fourth quarter of 1998 was a healthy period for PC sales in both the UK and western Europe. According to market research firm Context, sales in 1998 soared 21.1 per cent across western Europe, with Compaq retaining its number one slot and IBM slipping back into second place. During the period, analysts say the IT spend in large corporates remained high due to the ongoing year 2000 problems and euro implementation - the combination of these 'must-resolve' issues contributing to strong overall growth.
The three largest PC markets in Europe continued their good run. France led the pack with a growth rate of 23.9 per cent, followed by Germany at 21.2 per cent and the UK at 18.6 per cent. On the vendor side, Compaq retained the top European slot with 16.9 per cent market share. Dell slipped to third place with 7.3 per cent, overtaken by IBM with 9.3 per cent.
Hewlett Packard, meanwhile, regained fourth position with 5.9 per cent, closely followed by Packard Bell with 5.8 per cent.
Then, as now, Compaq is king of the hill in the European PC market. With 1,485,097 units shipped in the fourth quarter of 1998, it achieved a 26.6 per cent year-on-year growth rate, higher than the European average. Growth rates in the top three countries were above average, reaching 19.8 per cent in the UK or 257,799 units shipped, 36.8 per cent in France or 252,528 units shipped, and 36.4 per cent in Germany or 194,945 units shipped.
But with the New Year came a new threat - the direct vendor. Context's figures for the first quarter of 1999 revealed that as PC prices continued to fall, large companies were increasingly turning to the direct sell PC vendors to fulfil their requirements (see Market Watch, page 54). According to the research, UK prices were down about 26 per cent on the quarter and Dell had climbed back to the number two spot.
While Compaq did well in the first quarter of this year, accounting for 23.8 per cent of UK sales or 280,000 units shipped, Dell's strategy has been one of intensive advertising and selling into specific segments of the direct sales channel. According to Context, Dell's 46 per cent year-on-year European growth was among the highest rates achieved. In the UK, Context recorded 39 per cent sales growth for the direct vendor with 237,000 units shipped.
On the downside, the research shows that both the direct and indirect PC sales businesses are becoming ever more volatile and, if anything, more price-sensitive. On the upside, however, Context reports that the UK PC market, achieving a growth rate of 19.2 per cent year-on-year, has improved significantly compared with the end of last year.
Fears of a recession that hampered IT investment in the second half of 1998 have now receded. And as in the rest of Europe, shipments in the UK market were helped by drastic price drops.
According to Context, the average European desktop price fell by 19.4 per cent in the first quarter of this year compared with the same period in 1998. In the UK, the drop amounted to 26 per cent. Sub-£500 PCs, including a monitor, proved hugely popular.
And there's no sign of this trend receding. As the end of this quarter approaches, pricing pressure and competition from the direct vendors appear to have intensified. Second-quarter figures from Context are not yet available, but IDC figures, released last week, confirm the trend identified by Context - the champions of the direct sell are taking sizeable chunks out of the indirect channel.
Granted, the IDC report is a global one, with an emphasis on the US channels, but it shows the 21.3 per cent sales growth in the second quarter of last year was followed by a lull quarter-on-quarter. Sales volume in the second quarter of this year is set to decline by about 2.3 per cent from the first quarter, despite healthy demand in the US and Japan. This all points to the fall guy being Europe, particularly the UK, where the direct sell merchants are killing sales for the indirect channel.
But according to John Brown, research manager for quarterly sales tracking at IDC, US sales may hold a glimmer of hope for the UK because the very low prices of PCs have actually triggered a surge in sales. 'The downward migration of prices has continued to heat up consumer demand,' he says.
'It has also strained vendor margins as revenue continues to stagnate.'
IDC states consumer interest in inexpensive PCs and the internet, plus a sound economic picture, will drive the western European market to second-quarter, year-on-year unit growth of 13.7 per cent, with sequential volumes down a seasonally normal 3.5 per cent.
Brown believes the key to vendor growth this quarter is alignment with growing consumer and small business sectors and a strong line of portable products. Solid internet strategies will also be key.
According to the IDC report, the vendors that appear well positioned for the quarter are Dell, Gateway, IBM and Apple. These companies, says Brown, are placing increasing emphasis on the small and medium business markets, pushing specialised programmes and products designed to meet the needs of this market segment.
IDC predicts that Apple - with an upgraded notebook product and volume increases in all markets - should grow above the market average. Last, but not least, HP is also showing signs of improving its volume position.
HP's bid to increase volume sales has ruffled more than a few feathers.
After pruning the low end of the channel with the infamous HP Connect programme earlier in the year, the vendor raised more than a few eyebrows in the channel this month by fulfilling orders over its PC sales Website.
The company has contracted with Irish Express Cargo for its fulfilment operation, which began on 3 June (PC Dealer, 19 May).
HP has revealed that it expects about six per cent of UK sales to go via the Website and if the operation is a success, similar operations will be started in Germany and Sweden. Simon Mitchell, divisional manager at HP, says he does not expect the operation to be big business, but senior managers at the vendor have set the six per cent target for three years down the line - equating to about £400 million of sales.
Preparations for the Web sales operation have upset some of HP's distributors, but it continues to offer some very competitive machines to dealers. The latest kit in the Vectra and Brio series, for instance, are pretty competitive on the face of it. The Vectra small-form-factor PC with a Celeron 466MHz processor, 64Mb Ram, 8.4Gb hard disk drive, 24X CD-Rom drive and 3Com Fast Etherlink XL 10/100 Lan card, will sell for £690 through HP's dealers.
In addition, a Brio business PC with a Celeron 466MHz processor, 64Mb Ram, 8.4Gb Ultra-ATA hard disk drive and 32X CD-Rom drive will sell for £556 - just above the magic £500 threshold.
Another company pushing hard for volume sales through dealers is Siemens Computer Systems, which is promoting its range of Celsius workstations into the Cad/Cam market. According to Gary Cove, workstation business manager at Siemens, the UK market for Intel-based workstations will more than double between 1998 and 2001 and Cad/Cam will be a key factor in this growth. 'Dataquest figures confirm that the UK is Europe's largest market for Intel-based workstations and we're looking to build on our European success,' he says.
Until now, Cove adds, Cad/Cam resellers have been reluctant to sell Intel-based workstations as part of their overall Cad/Cam systems because the hardware has been distributed through traditional PC channels with less than five per cent margin. 'We're looking to make our Celsius systems an attractive proposition both for customers and the UK Cad/Cam industry.
With Celsius, we're pricing the systems aggressively and we'll be working closely with our expanding reseller base to make them attractive to UK Cad/Cam customers,' he says.
Cove says Siemens has recruited a number of leading Cad/Cam resellers, including NT Cad/Cam, Aurora, Tech Solutions, Solid Box and Solid Solutions, and will be developing business with these and other partners during the summer. In addition to increased margins, the vendor is developing express delivery programmes and recruiting focused industry account managers to support the drive.
But as is so often the case, the focus returns to Dell. While HP is getting its Web-based PC sales operation off the ground, one company that has embraced the internet substantially in the past year is Dell. The only snag is, of course, that Dell is a direct-sell operation and has caused much gnashing of dealers' teeth when its price points are quoted by corporate customers.
One area of Dell's internet strategy that vendors would do well to take notice of is its recently announced plans for a pan-European, free-subscription internet operation. As most PC vendors and sellers know, because of the way call revenues on internet calls are divided up in the UK, the past year has seen a massive surge in subscription-free operations such as Dixons' Freeserve.
According to Dell EMEA, the DellNet service, as it is known, will offer unlimited free access to the internet with fast and reliable connections, free email addresses and a customisable home page with news and information channels, but on a pan-European basis. Jan Gesmar-Larsen, president of Dell, says there is no registration or setup and monthly connection fees to pay - just the local call charges for time spent online.
DellNet will initially be available in the UK, France and Germany and will be implemented in other European countries later this year. The idea is for each country to have its own DellNet Website to offer localised information and news, and provide a means to download the necessary software for internet access.
According to Kevin Rollins, vice chairman of Dell, a third of vendor sales come in via the internet. Dell's strategy over the coming months, he says, will be to transform the entire business from a direct physical model to a direct internet model. Speaking at the PaineWebber Growth and Technology Conference in New York earlier this month, Rollins claimed the internet has the potential to double the advantages realised by the direct sales model.
According to Rollins, this transition involves three main initiatives: using the internet to conduct e-commerce and provide support services to customers; using the Web to work with suppliers; and using the internet to manage Dell's internal infrastructure. He told delegates that the company is 'one third of the way there' on each of these initiatives.
Rollins added that communicating with customers via the internet saves Dell money, since email campaigns are less expensive than catalogues and physical mailshots. In addition, internet sales usually carry no commission.
Dell's customer sales support division has seen a 75 per cent reduction in order status calls and 25 per cent fewer technical support calls, saving the vendor between $3 and $8 a call, he claimed.
So what can dealers learn from DellNet? No matter how much they battle to add value, there will be a significant shift in corporate sales, migrating over to the internet. This in itself does not spell disaster for the indirect channel since, with internet sales - as HP's deal with Irish Express Cargo clearly illustrates - there is still a need for a fulfilment operation to service those orders.
Other PC vendors look increasingly likely to turn to the internet as an ordering mechanism trim their pre-sales costs. Dealers should not despair of this, since they can continue their relationships with the vendors concerned and even prosper from muscling in on the fulfilment business.
History has shown that a quasi indirect/direct sales model, such as that employed in the mid-90s, can work. Customers may interact with the internet to place their orders, but there is still room in these transactions for dealers to fulfil these orders.
The scramble for market share between the various vendors is certain to continue and margins will continue to be eroded. But with the pre-sales aspect of the sale effectively out of the picture, dealers may yet find that an internet sales model may work for them. After, all if it works for Dell, why shouldn't it work for everyone else?
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