PC Dealer Roundtable ? Retail: Holy Orders

PC Dealer invited seven industry figures for tea and a chat about the changing face of PC selling. Lisa Barnett reports on the discussion

• There?s been a lot of talk in the channel about changes in distribution models and the way we sell hardware. But what exactly is it that people in the industry are finding particularly frustrating?
• Cusack : ?The two-tier system annoys me. One set of systems for Dixons and one set of systems for everybody else.?
• Atherton: ?It is fairly safe to say that vendors do not operate a level playing field when it comes to supply with Dixons Stores Group and supply to anyone else. My main contention is that if you took just the people around this table you would be getting on for the turnover of Dixons Stores Group (DSG). Add in three or four more at the top in mail-order and you would exceed DSG turnover.
• ?Take the whole of Personal Computer World magazine as an example. Put together all the advertisers who sell off the page and you?ve probably got six or seven times the turnover of DSG. I believe DSG turns over more than #400 million in computer products. The combined turnover of the four mail-order companies who have turned up here is #260 million, and there are three, no, four companies bigger than Software Warehouse ? Tiny, Time, Misco and Action. It?s not hard to see that mail-order as a group is considerably bigger than DSG.
• ?Vendors can treat mail-order firms identically since, as models, they are very, very, close. There is variation if you invest in a chain of retail stores, and so you get some breaks in terms of demonstration stock etc. But, essentially the models are the same.
• ?I don?t mind if Dixons Stores Group gets one piece of demonstration stock for every 50 it buys. That?s the sort of thing I don?t get because I haven?t got a store. It doesn?t worry me in the slightest. Nor do I mind if proportional money is put into national newspaper advertising if I?m not prepared to do that. What I really object to is when they can buy 25 per cent less than I do ? that really, really hacks me off.
• ?The reason they give for the reduced prices is that Dixons says to vendors: ?We won?t be able to sell at the lowest mail-order price and still make 30 per cent.? And vendors say, OK. I wouldn?t mind if they said retail was huge, but the reality is that mail-order is just as big if not bigger.?
• Isted: ?I would disagree with the two-tier comment. We as a company certainly support the four mail-order companies around this table, as well as the others. Obviously, all of your businesses are diverse, even more so now in terms of expansion of the industry.
• ?The reality is that in the past, Dixons? first discussion point to vendors would have been mail-order pricing. Today I don?t think it is. I think Dixons accepts that the customer face is very different and I think we are in a very unique market. The market is still very much dominated by you four. That doesn?t exist anywhere else in Europe. I think a lot of vendors, especially pan-European vendors, tend to look at things on a very general scale. That obviously causes some problems in the way we support our channels to market.?
• Atherton: ?I would like to counter that. All vendors have a larger presence in north America, where the mail-order model is well established, than they do in Europe. So the line, ?because we are based in Germany or Switzerland we don?t understand mail-order? is rubbish. They do, and they would understand it more if they talked to their US companies.?
• Mackay: ?I think Simon [Isted] touched on an important point: the reason why PC World doesn?t talk much about mail-order pricing at this particular juncture is that the market is different. If you look at the penetration into the UK home, you are looking at a different consumer. Five years ago, someone would walk into a PC World store waving a magazine and saying: ?That?s what I want to buy but that?s the price I?m buying at.? It?s not happening so much any more. I think there are two different markets out there. Also, the kind of price differential and favouritism you are talking about, while it still exists, is in different formats. You?ve touched on some of them and how they differ, but what matters more than anything else is the two distinct markets. You can?t have a massive difference in price between what consumers pay in one area and what they pay in another.
• ?Two things have happened. First, there is less favouritism shown by some of the serious vendors that have come in. So as you move into more serious product, they?re not supporting retail as much as the early entrants. The products they are selling are different, so they?re not having to support them to the same extent. Second, I think that because the consumer is different, retailers have decided they need a different model.
• ?PC World has reduced its price expectation, so while it still goes to a vendor and says 30 per cent, whether it actually gets 30 per cent is a different matter. At the end of the day, we all have to make money.
• ?However, I would like to know how you guys are going to expand your business. The numbers you are targeting are not growing at the same rate as the number of consumers coming into the market. So by definition, you are reaching less and less of the market. Secondly, with the kinds of margins you are operating on, how do you expect to continue increasing your business?
• Atherton: ?We also want to make enough money to plough into expansion. I think there is enough money to do it. Our models are leaner, so we strip our services out: we?ve stripped out the touch and feel. I agree with you about products that are not primarily viewed as retail. If you look at networking products and the like, there doesn?t appear to be a pricing advantage given to retail-only people. The worse thing is business items, for example fax machines. We in mail-order have always aimed at consumer and business, but you don?t really bother to find out which the customer is. If you?ve got the right product and they like the price, they buy it. Not everybody in mail-order can tell you precisely whether they are private or not. We did a survey into our private customers and found they were nearly all business. I suspect that PC World?s customers are all consumers.?
• Mackay: ?But the conversation we are having is about margin. I?m not singling out mail-order in that comment, it affects the whole channel. Look at the games vendors; they go in with a heavy marketing force to drive their product through. But there are all these exciting new things coming through, like PC photography. If there is a man sitting at home with a Pentium 75, how do we tell him about this new world? Now you guys have a very important part to play. You have to get across the clear message to the consumers.?
• Bennett: ?I think you will see mail-order change its face over the next two years. Two years ago, mail-order meant a price advantage over retail, big time. There are two reasons for that. For a start, the average price per order was higher ? a flatbed scanner was #2,000, a colour printer #200, and Microsoft Office was #300. Now it?s down to #80 or #90. So, as the price point comes down, you?ve also got Dixons, which used to work on a 30 per cent model but is now accepting a lower price model because it has got higher volume. And the higher volume has come about through better market acceptance.
• ?When Dixons first came into the market, you had a chicken and egg situation. It had maintained high margins to make its stores as profitable as possible. With the drop in average price per order per product, and the fact that Dixons now works on a smaller model and to some extent gets favourable deals from manufacturers, there is no longer an out and out price war against mail-order. In fact, the lower the price gets, the further mail-order crosses over and the more expensive it becomes. So at around about the #30 point we are more expensive than PC World.
• ?I think mail-order was a price game in the past. In the future it?s going to be a service game ? that is where we are turning our business around. To me, PC World is still Dixons. It?s still the spotty kid who knows nothing about computers. There?s no service there. It?s about taking the order at 8 o?clock and the guy receiving it at 9.30 the next day. And if he has a problem, he phones you up and you support him, you handle the return. But in order to do that you have to make margin. And to make more margin, you have to go head-to-head with PC World. So I would say that in two years? time, mail-order will be the same prices as retail but with a different approach. We will be higher value, higher service.
• ?We have all developed a raw cost-effective way of marketing in the past, but it is less effective because magazine advertising works so well. Today, we are working with very small margins because we have all had a cost-effective model and we haven?t had to worry too much about the level of service we are offering. But long-term it is all about service. If a mail-order company doesn?t offer the right service, it doesn?t mean that the customer will move away from company X to Software Warehouse because it gets bad service. It means they?ll buy from retail. I want to encourage everyone to be sensible with margins, build a good technical support department and build on logistics, so when you say you will deliver tomorrow, you do. We have to stop fighting each other so much and start fighting retail.?
• Mackay: ?There are two ways to expand the market. Either get into the corporate side because they are looking for price, since they don?t need a dealer to hold their hand. Or alternatively, you go to consumers. And consumers don?t understand the product. So what you have to do is be able to help them use it. I entirely agree with Bennett. The market says that to grow, stay in the business you?re in.?
• Atherton: ?There is the perception that the people who buy retail have had bad experiences in the 80s with mail-order companies. The message that people are getting now is that mail-order is a respectable way to buy. Compaq, Toshiba and people like them give accreditation to dealers on the level of their service. We could come full circle to the point where vendors will authorise us because of our service.?
• Mackay: ?Will the convergence of the industries change the way you guys go to market? Such as set-top boxes or TVs??
• Berry: ?I think that is one of the advantages we have in our market ? that it is easier for us than retail. We offer the choice without the risk because we don?t hold the stock.?
• Mackay: ?If you take the consumer electronics stores, you now have the situation where they supplied TVs, and they are now offering PC systems.?
• Atherton: ?I?ve always said that if Ingram and other distributors carry a product and my marketing vehicle creates demand, you will get orders. Take digital cameras. Word has got back to the vendors that we are better at selling the products than their retailers. We would love to sell #900 cameras with #2,000 peripherals. I would put in high-level specialists to deal with it. We are geared up to deal with high-level consumer electronics. If you sell it and my customers want it, I would feature it in my catalogue.?
• Mackay: ?I?ve no doubt that you could sell more to the customers than you have, but what I want to return to is, how do we sell to those who aren?t your existing customers??
• Atherton: ?If you have the margin, we will do it. You can?t market the product outside of the focus area. If you have the deal from the vendors and distributors, you can invest in some national advertising. But national advertising is only a quick hit and it is too expensive. I don?t want set-top boxes to go as brown goods. We need to move on to the internet. Lots of things are possible for our catalogue, but to reach people we need the internet. And as far as the internet goes, we are all doing it.?
• Bennett: ?We are doing it today. You can place an order on our Web site, pay by credit card, and it is there next day.?
• Atherton: ?Our Web site isn?t pretty, it?s plain text. We are getting about 20 orders a day. Other are still buying traditionally but you can still look at us and email us to get more information. We get one email enquiry a day.?
• Berry: ?I have found that you have to be better on the internet than on the phones. The response times have to be quicker.?
• Bennett: ?We put out a corporate side on ours, whereby they got cost plus five points. But we only got one order a week.?
• Isted: ?We recently conducted an experiment, selling on the internet. The product was not high-margin. What we did was link our Web site to four mail-order companies. Our experience was that consumers who know the internet, know mail-order. Obviously, the internet is going to be the next medium for your catalogues.?
• n Berry: ?I feel there is a general trend not to use retailers. If you look at the banks, they are moving to telebanking, electronic banking. If you look at retail, it is concentrated in high street stores, superstores and specialist shopping areas such as airports. I don?t think the traditional high street will last in the long term. Look at the US ? there are no high streets there.?
• Isted: ?I think that if it wasn?t so difficult to get the sites in the UK, we would see more superstores here. But superstores are the most dominant forum. The high street is dying. Clearly, if it was easier to get the sites, we would see a US retailer chain coming over here.?
• Atherton: ?Unfortunately, the political pressure to retain the high street has created non-entrepreneurial outlets with power in the town.?
• Berry: ?There is pressure on people?s time so they haven?t got time to shop in the traditional way. People want to save time and the way you save time is to do business on the phone or over the internet. And you do it at the time you want to do it. Then you?re the one who?s running the experience of buying, not the retailer.?
• Isted: ?We have to believe that the PC base will grow, and as vendors and distributors we need the growth to be at the consumer level ? the touch and feel. You can walk around a superstore today and touch and feel a number of PCs. There is a lot of choice.?
• Berry: ?Also, I think that there is a great number of people who use the PC as part of their work, and this will follow through into the home.?
• Mackay: ?If you look at the young consumer, there were concerns that bookclubs would hit the young consumers, but HMV and Virgin are still there, they are still expanding. So there is market for both, and it hasn?t yet been proven which works. There is certainly a consolidation in shopping. Ten years ago it was the move into shopping centres. Now it is out-of-town sites. It is still a shopping experience, still a cinema, still a hamburger joint. You know it is a day out. I think that touch and feel is still there for consumers. As long they keep building the social aspect into retail, as long as we are clever about the way we develop the experience, the market will still be there.?
• Bennett: ?While the consumer market is still growing, there are roles for both mail-order and retail, which is why we are going down both routes. There are increasing developments such as direct banking because there is such a wide audience, it has become an acceptable way to do business.?
• Berry: ?Look at the cable shopping channels, like QVC. These are changing the way we do our shopping.?
• Atherton: ?It is my perception that mail-order companies are growing faster than retail.?
• Mackay: ?My feeling is that at the moment we are getting second-time purchasers. The figure for installed base per household is 22 per cent. Commodore and Amstrad are the two brands that people are naming, so they have got 286 and 386. So when they come out to buy, they are going to be second-time purchasers. What seems to be indicated is that the clones are doing better on second-time purchases. So you guys should have a pretty good hit rate of hardware.?
• Atherton: ?If you take a look around the table, we are all primarily hardware-based ? even Steve [Bennett] with his title Software Warehouse. Customers want hardware.?