December 22, 2000 4:00 AM PST

Christmas isn't coming for PC makers, retailers

It's official. Santa's bringing coal for the Christmas stocking.

Plummeting PC sales shocked manufacturers and retailers in October and November, but analysts say December sales are even bleaker.

Preliminary estimates for the first two weeks of December put retail computer sales down more than 20 percent compared with the same period last year, according to market researcher PC Data.

Online sales also show stiff declines, according to OneChannel.net. Online sales of PCs and notebooks for the week ended Dec. 16 were down 14.1 percent compared with the average weekly sales during 2000. That's the lowest figure since the weakest sales period so far this year: Thanksgiving.

PC Data analyst Stephen Baker described December sales as "bleak" and said he saw no signs of a pickup for the period leading up to Christmas.

The sudden decline in consumer PC sales caught many manufacturers, retailers and industry analysts by surprise. NPD Intelect put retail PC sales in October down more than 18 percent year over year after one of the best sales months of 2000. November was equally disappointing, with a year-over-year decline of 17.5 percent, according to PC Data.

"The structural issues that kept people from buying in November really haven't changed at this point in December. We don't anticipate they will this month," Baker said.

With hopes of a sales recovery in December dashed, PC makers and retailers must figure out what to do with an average of about eight weeks of stock on dealers' shelves, more than twice the normal levels.

The reasons for this year's PC holiday sales bust are multifaceted, analysts say.

The economy played an important role in the sudden sales slowdown, noted Dataquest analyst Martin Reynolds. After four quarters of 5.3 percent growth in the gross domestic product, the figure is expected to decline to 2.9 percent for the coming four quarters.

Reynolds also faulted PC makers, which he said grossly over-forecast holiday buying.

"Some of these manufacturers were planning 20 percent growth over last year, which was way too high," Reynolds said. "It wasn't until Thanksgiving they figured the buyers weren't coming. By then, it was too late to change."

PC makers and retailers may also have been blindsided by last year's free PC craze. Rebates from Internet service providers shaved up to $400 off PC retail prices, leading to an unprecedented sales boom in summer 1999.

NPD analyst George Meier said the rebates were a "great marketing gambit" that delayed the inevitable and created a false sense of security. "Had that not existed, we would have seen that decline last year, and this year's decline would have been sequential," he said. Instead of a smooth slowdown, Meier added, "sales just collapsed."

Saturation of the U.S. PC market greatly contributed to the problem, said ARS analyst Matt Sargent. "Demand has been grossly over-forecast because manufacturers and retailers failed to recognize we shifted from a growth to a replacement market."

The prospects for January are dismal because of the amount of inventory on dealers' shelves. If the product didn't sell during the lucrative gift-buying season, prospects for January are much worse, Sargent emphasized.

"PC products are like fruit," he said. "If they sit on the shelf too long, they begin to spoil."

Selling that fruit before it over-ripens may be too tough, Baker, Meier and Sargent said. Sales are so bad that Baker questioned whether PC manufacturers would benefit from drastically reducing prices after the holidays. Analysts had expected a brutal price war. Now, Baker isn't so sure.

"The worse things are, the less likely you are to see price cutting," he said. "The problems are much worse than the prices are too high." If consumers aren't spending on PCs during the holidays when pricing is already competitive, "cutting prices a couple of hundred bucks won't make much difference."

Sargent agreed that retailers and manufacturers could decide against drastic post-holiday price cuts.

"This is a fundamental shift in the demand for technology products," he said. "People aren't waiting to buy because of pricing or not buying because of pricing. People aren't buying because they don't need it."

 

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