PC SALES - Wild in the aisles

Tesco PCs have been selling like hot cakes from the in-store bakery, so should dealers be concerned?

At the end of last month, Tesco extended its two-store PC saleskery, so should dealers be concerned? experiment to take in a number of outlets nationwide. Fujitsu, one of its two hi-tech partners, said it would broaden its range with plans to sell sub-#1,000 laptops through supermarkets by the end of the year. All the signs point to a successful trial and industry observers say it's only a matter of time before rival supermarket chains jump on the bandwagon and another PC sales channel emerges.

But traditional IT resellers have been quick to ridicule the scheme.

'You can't stack 'em high and watch 'em fly. PCs aren't baked beans,' scoffs one. 'To sell such a highly specialised product in such an environment would be a nightmare,' warns another. And archrival high street retailer Dixons has curtly dismissed the Tesco experiment as a 'stunt'.

On the other side of the fence, Fujitsu describes the move in glowing terms as nothing less than a 'revolution that will provide a better deal for the British customer'.

Clearly, they can't both be right. But even when you cut through the shouting match between IT traditionalists and those who believe they're heralding a new era of PC retailing, Tesco's experiment still raises questions about existing PC sales models.

The claims of the likes of Fujitsu may be little more than hot air, but the traditional channels fear that the answers Tesco may come up with could affect them as much as their retail colleagues.

The experiment itself began in two stores - New Malden, Surrey and Pitsea, Essex - selling a single spec, 266MHz Pentium II MMX-based box plus 15in monitor, 56K modem and a decent bundle of productivity and entertainment software, all for #799.99 including VAT. That, claims Frank O'Brien, sales director at Fujitsu UK, is about #250 less than an equivalent bundle if customers bought from a traditional PC outlet.

Fujitsu is only supplying the New Malden site - Pitsea's PCs are being provided by Siemens Nixdorf. Both vendors have installed in-store personnel to handle customer enquiries and are also handling after-sales support.

Fujitsu is even sending an engineer out to set up and check newly purchased PCs, if customers request help.

It's tempting to assume that the manufacturers have increased the price of the system - so Tesco takes an even bigger margin cut - to cover themselves for the support costs that would otherwise be taken up by the retailer, but both insist that's not the case.

'I'm selling boxes to Tesco at the same price that I'd sell them to any other outlet,' claims Terry Cooke, sales and marketing development director at Siemens Nixdorf UK. 'The low price is entirely down to Tesco being willing to accept far lower margins than any other retailer would be happy with.'

That willingness seems to have paid off. Both stores were initially allocated 300 machines, all of which were sold within the first two weeks. Tesco was always sure of a good response, claims Ian Sinclair, the store's project purchasing manager with responsibility for the enterprise, but the launch has taken the store by surprise.

The retailer has now given the green light to five more stores - in Gloucester, Banbury and three others in the London area - to sell Siemens kit. This time, it will offer a lower performance CPU (233MHz Pentium II) at a lower price (#699.99 including VAT) to extend the trial to learn how buyers balance price with what Sinclair calls 'a more compromised spec'. Fujitsu has extended its reach to stores in Birmingham, Berkshire, Manchester, Wales and Kent.

'There's no doubt Tesco has answered the question of whether people will buy PCs from supermarkets,' says Cooke. 'Now we have to find out what's the best way of selling them.' That involves figuring out the way buyers balance paying for service and support with getting the cheapest possible PC.

But traditional IT resellers and retailers aren't the only ones awaiting the outcome of Tesco's foray into the computing arena. Britain's other supermarket chains are following the trials too - after all, it's as much about new IT channels as a new IT brand name.

In fact, Tesco's rivals are reticent about discussing either the trials or their own potential as PC retailers. Traditional IT players may put that down to their own realisation of how 'inappropriate' their outlets are to PC sales. However, their unwillingness to talk about the issues raised by Tesco's move suggests plans may already be afoot.

There's certainly no doubt about their interest. O'Brien claims most of the supermarket chains he contacted earlier this year to discuss working together on PC sales showed considerable awareness of the possibilities.

'Almost everyone I spoke to was interested in the concept and in the success Fujitsu has had in Germany,' he recalls. 'But they had no one who knew how to handle it.'

Six months and two successful Tesco trials later, they may be working out how to do so. Those chains that would comment were still reticent, but most are leaving their options open when it comes to following Tesco's lead. Safeway, which operates more than a dozen stores large enough to sell white goods and consumer electronics products in addition to groceries, is reviewing the PC sales situation, according to a representative.

Meanwhile, a Sainsbury's representative did rule out the appearance of PCs in the company's stores: 'We will stay focused on grocery sales.' But the company's other brand, SavaCentre, already sells hardware. A SavaCentre representative would only say: 'I think we've tried that,' before announcing that no one from the company was able to discuss the matter.

A tantalising hint came from the UK arm of German supermarket giant Aldi.

In its home territory, Aldi already offers PCs (see box, p33). Here, one of the company's head buyers, Brian Houlihan, would only say: 'I can't comment on our PC buying strategy.'

Independent observers are in no doubt that Tesco's success will soon energise its rivals. 'It's only a matter of time before the other supermarkets start playing catch up,' predicts Jeremy Davies of market research company Context. Tesco's experiment 'could have a significant effect on PC retail if it succeeds', he believes. 'It removes the entry-level market from the main electrical and PC retailers.'

Davies is right to focus on the entry-level market. The logical assumption that many people in the traditional IT resale and retail channels have made is that the vast majority of Tesco PC customers are second or third-time buyers, people who have sufficient understanding of what they need and how much they want to pay, not to require in-store help.

One of the chief arguments against selling PCs through supermarkets has always been that the machines are too complex to sell that way. First-time buyers need the hand-holding that only specialists can provide. As Hamish Haynes, manager of Compaq UK's consumer business unit, recently put it: 'I don't believe people feel confident enough, to buy a computer from Sainsbury's.'

Yet Tesco's experience shows that some PC buyers do have that confidence.

According to Fujitsu's O'Brien, about half of the customers who have bought a machine from the New Malden store have taken up the free installation and set-up offer. So only 50 per cent of buyers are those the channel would expect to use this kind of outlet.

That suggests inexperienced buyers may prefer to be given a machine by a name they trust - Tesco - rather than risk being blinded with science and jargon by a dealer's sales rep who may have more than half a dozen different specs from as many manufacturers.

That can be as true of other buyers as it is of new ones. And Tesco's customer base appears wider than home users, new or experienced. Sinclair, O'Brien and Cooke all cite examples of business and education buyers who have arrived at the New Malden and Pitsea stores to snap up a dozen computers to replace machines they have currently installed. After all, why wait for a mail-order delivery when you can pop round to a nearby superstore and pick up all the kit you need, there and then?

The question is, how many of these buyers would, were Tesco not selling PCs, go to traditional resellers and retailers. Anecdotal evidence from would-be buyers suggests many of them wouldn't, unless recommended by someone they trust. Essentially then, Tesco - and other supermarkets, that look set, ultimately, to follow it - is putting computing on the agenda of a whole new group of buyers.

As Peter Day, analyst at research company Inteco, puts it, a supermarket-based channel will raise awareness of PCs among the public and actually expand the market.

THE CONTINENTAL EXPERIENCE

The supermarket PC sales channel is far more advanced in Continental Europe than it is in the UK. In France, the Carrefour chain has been offering computers, monitors and modems for some time and shifts about 35,000 of them every two weeks throughout the country. According to Business Week magazine, Germany's Aldi chain has been selling $600 PC bundles at the rate of 100,000 in two days.

But while the supermarkets are forcing prices down, causing real trouble for some specialist retailers, sales have grown overall. Market researcher Dataquest has reported that sales of PCs in Europe during this year's first quarter were up 26 per cent compared with the same period last year.

Analysts believe much of that is the result of the likes of Aldi and Carrefour moving into the market.

It's important not to assume that the continental experience will be mirrored over here. Fujitsu's tirade against the UK PC retail channel made use of an Inteco report that revealed the average total spend for a PC in the UK was #1,393, compared with #1,194 in France and #1,012 in Germany.

But it fails to take into account differences in the way each territory's market works. 'In Germany, the cost model is very different,' says Terry Cooke, sales and marketing development director at Siemens Nixdorf UK. 'Customers aren't used to the level of support and back-up that British buyers are, which means margins can be tighter and prices lower.'