Dell: Not the PC company you used to know

Dell's high-profile marketing push this summer showcased its new line of pink, green, and red notebooks. But the most important color for the PC maker right now is Best Buy blue.

Dell has officially signed up Best Buy as a retail partner, the companies said Thursday. Several models of Dell's XPS and Inspiron PCs will be available at 900 Best Buy locations beginning after Christmas, including the very consumer-friendly XPS M1330 notebook, Inspiron 1420 notebook, and the XPS One desktop.

For a company that built its fortune and reputation on selling its products directly to consumers for more than two decades, the Best Buy deal marks a major historical shift.

"That's like going from being committed to one religion to being pagan," said Richard Shim, PC industry analyst at IDC. "They needed distribution, particularly to consumer retail, and Best Buy, that's center stage."

"That's like going from being committed to one religion to being pagan. They needed distribution, particularly to consumer retail, and Best Buy, that's center stage."

--Richard Shim, PC industry analyst, IDC

The move makes sense for Dell as, more and more, consumer retail sales are driving the growth in the PC industry. At some point Dell was forced to choose strict adherence to its historical business model or go where the money is. Being in front of consumers so they can see and touch a notebook or desktop before they commit to the purchase is important in a technology world where, increasingly, image is everything.

Plus, most people buying computers aren't as focused on the specific graphics card or processor their computer has. Rather, they want to see what colors it comes in and how durable and heavy a notebook will be.

Dell appears to recognize this. "We think people's shopping habits will mandate we have a presence at retail. People really want to see (the products)," Michael Tatelman, Dell vice president of consumer sales and marketing, said in an interview Thursday with CNET News.com.

While it's not the first retailer Dell has partnered with, Best Buy is decidedly different. It's the largest consumer electronics retailer in the U.S., and it epitomizes Dell's new commitment to putting its products directly in front of consumers, rather than just on a computer screen or in a catalog. Now Dell, which pioneered the model that cut out the PC retailer, will be just one of the other names on the shelf as consumers stroll the aisles--right next to Apple, Hewlett-Packard, Gateway, Acer, and Toshiba.

There are many reasons why this is a huge cultural shift for Dell. Among them, it's a whole different way of dealing with customers and selling them products, and most of the people in the company grew up on the direct model, with less experience in the PC retail market.

But it's also a necessary move.

"It's a big step for them. It's risky, but it's a gamble they had to make," said Shim. Dell has been ceding market share to HP for several quarters. As of the third quarter of this year, Dell shipped 27.8 percent of PCs sold in the U.S. HP is right behind with 24.1 percent of PCs shipped. And now it has to fend off an assault from Acer in the notebook category.

What it has going for it
Having Best Buy as a retail partner gives Dell deep coverage of all its target markets in the U.S.: Wal-Mart for the value-oriented customer, Staples for the small or medium business customer, and now Best Buy for mainstream retail customers.

While it's tough to compete with companies like HP and the fast-rising Acer that prove they understand the retail market, particularly in regard to notebooks, Dell does have a few things going its way: brand-name cachet and a renewed focus on industrial design that will make customers--used to seeing boring black or gray notebooks--give products like the XPS M1330 a second look.

An ambitious turnaround plan has been in the works since company founder Michael Dell returned to the chief executive's office in January. In April, he told employees that the company's direct model "has been a revolution, but is not a religion."

"Emotionally, the company was ready for it," Tatelman said. "The message was loud and clear that we were going to go and execute a multichannel strategy."

Since then, there have been deliberate changes to get a new consumer-focused business off the ground, including hiring high-level people with experience selling products in a retail environment.

The new retail strategy was first unveiled in May, when the company announced that some lower-end desktops and notebooks would be available in Wal-Mart and Sam's Club stores. In the past six months, they've continued to add to the list of retail locations worldwide, including Carphone Warehouse in the United Kingdom, Bic Camera in Japan, Gome in China, and Staples.

Michael Dell said last week during the company's earnings call with investors that more retail partners would be announced in some of the largest countries in the world. Best Buy is certainly not the end of this. The Best Buy deal brings the number of retail locations that sell Dell PCs to more than 10,000 worldwide. Dell's Tatelman said there will be another announcement regarding the retail availability of the XPS One before the Christmas holiday and it won't be a consumer electronics outlet. He declined to provide further details.

Though Dell did try retail back in the early '90s, the experiment didn't last long, chiefly because the consumer PC market was nowhere near as robust as today. So having to compete for consumer attention on the same shelves as its top competitors is new territory for Dell.

"It's going to be hard for them to make this change," said Shim of IDC. Dell is "used to having a very intimate relationship with customers."

Part of that relationship is having the exclusive attention of its customers buying a PC to upsell them on additional Dell items when they come to the company Web site. "Now it's no longer Dell saying, 'Hey, buy our printer.' Now it's a retail sales guy saying that if you buy a Dell system you can buy any one of these (other) printers," Shim said.

Other questions remain too. Like, how much will this cannibalize Dell's current direct customers? Dell says it expects a "pretty broad mix of folks" shopping both in retail partner stores and on its own Web site, but declined to say what kind of overlap there will be.

Because Dell has only been selling through the retail channel in volume for a couple months, there's not enough data to tell if retail sales are affecting its direct sales, observed Stephen Baker, vice president of industry analysis for The NPD Group. The cannibalization "will happen, but the level of it is really undetermined," he said.

Also, the timetable may be off for Dell to truly cash in on PCs sold at retail. HP has been enjoying the spike in consumer retail sales for two years now, and growth does appear to be slowing. So did Dell miss the boat?

"There's plenty of growth left in (the) consumer (retail market), however I do think that the biggest growth is by the boards already," said Baker. "So to some extent they're a little late...There was a huge demand for notebooks for a whole bunch of reasons and Dell missed a big chunk of that."

[akozdra]

Cannibalization

What does that mean? It will eat into online sales?

[DrChester]

You like dell? Check this out after midnight!

http://www.gamespot.com/pc/

[The_Decider]

Same company

They can market their products anywhere they like and nothing has radically changed.

They can use whatever colors for their cases and nothing has radically changed.

They are the same old company. Low quality and poor service. What else matters?

[sanenazok]

Emotinoally Ready

I wonder how much money is paid to the guy who says things like "Dell is emotionally ready for retail sales." How do you measure that exactly? E-meter here we come!

Hillarious that the first non-homebrew computer I had was a Dell bought at Best Buy in 93 or 94. They were pulling out of retail so it was on sale. Guess will be buying one again next December.

[TV James]

You never get weight.

You never get to see how heavy a laptop really is, they're always bolted to the counters at Best Buy.

[bammike]

Drugs in use?

You would think Dell would have learned from the lesson of Gateway. They started selling computers in retail outlets and it was the downfall of the company, though a little poor management might have also contributed. Gateway has now been sold to a Chinese company for a fraction of its former value.


Mike

[Albertv]

Quality of after sales service "is" king going foreward

The after sales service is going to count for much more in the near future as the economy may plateau in the coming years. Get enough consumers thinking your after sales service stinks and it is bount to affect your future sales at 'any cost'. Before, Dell's direct channel melt down there were plenty of customers blogging about the lousy tech support they were getting and when consumers get mad that kind of news spreads fast.

Quality of support is a deal maker.

[drarkanex]

Whatever

Dell is one of the worst companies to deal with. After the numerous U.S. Layoffs they've had, good luck getting someone that speaks english. If you want someone that still speaks english, you'll have to sign up for the Gold Technical Support (which is still based out of Nashville, TN), otherwise, get ready to speak to Michael Towraghondi LOL You're best bet is to pay the kid down the street $50 to put together a computer for you with parts from Best Buy at this point.

[drarkanex]

er, edit

Change Best Buy to Newegg

[Llib Setag]

BLACK FRIDAY : Dell vs Apple

MACNN : Apple tops Dell in growth on Black Friday

Apple topped arch-rival Dell in growth on the busiest shopping day of the year -- Black Friday -- with a 111 percent increase in unique visitors over the prior year. That growth compares to a 29 percent increase for Dell, which brought the company 978,000 unique visitors on Black Friday and 1.26 million visitors on Cyber Monday.

Of the estimated 32.5 million visitors logging onto virtual stores on Cyber Monday, most were purchasing items like Apple's iPod and Nintendo's Wii game console, according to Nielson Online as cited by Fortune. Apple received 643,000 unique visits from home users on Black Friday, followed by 1.35 million unique hits on Cyber Monday.

[Llib Setag]

Business Week : Dell's Duldrums...

Remember when Michael Dell wrote his senior thesis on the automated direct to consumer business model for PCs thereby cutting out the "middle man extra costs of the retailers...?"

TODAY Dell has learned their lesson & started selling Dell POC boxes at Big BOX Retailers to catch up to all the others they are lagging behind in PC sales ( not servers & IT contracts ).

HP spanked Dell & Apple is now worth more than Dell is...WOW! good job Michael.
Time to go back to school, boy.

Don't believe me?
BUSINESS WEEK ARTICLE :

News Analysis November 30, 2007, 12:01AM EST text size: TT

Dell: Confounded by Costs

Restructuring expenses will take further toll on the computer maker's earnings, likely weighing on shares and delaying its turnaround
by Louise Lee

Disappointment with Dell (DELL) isn't over yet. The world's second-largest computer manufacturer posted fiscal third-quarter sales results that exceeded Wall Street expectations, but its profit performance and outlook for coming quarters left investors dismayed. Shares tumbled about 10%, to $25.25, in extended trading on Nov. 29, after the results were released, and continued the slide the following day. By late afternoon, Dell stock had lost more than 13% from the previous close.

Back under the watch of founder Michael Dell, who returned as chief executive early this year, the company unnerved shareholders with news it will "continue to incur costs as it restructures" and "these actions may adversely impact the company's performance." Dell's expenses are "still considerably higher than we want," Chief Financial Officer Don Carty said during the company's first conference call with analysts in a year.

The results suggest a long-running turnaround attempt at the Round Rock (Tex.) company may be proceeding more slowly than Wall Street anticipated. The company is struggling to emerge from almost two years of slowing growth and slipping market share. Dell's results contrast sharply with those of key competitor Hewlett-Packard (HPQ), which reported robust quarterly results and issued a rosy forecast on Nov. 19 (BusinessWeek.com, 11/20/07).

Key Expense Measures Rise
In the quarter ended Nov. 2, Dell recorded sales of $15.65 billion, exceeding Wall Street's estimate by about $300 million and representing a healthy 9% increase from a year earlier. Net income jumped 27%, to $766 million.

But expenses as a percentage of revenue, a key measure of how well the company is managing costs, rose noticeably. Selling, general, and administrative expenses rose to 12.2% of revenue from 10.6% a year ago. Total operating expenses rose to 13.2% of revenue, up from 11.5% a year ago. "People are disappointed that the revenue increase did not flow through to the bottom line," says Brent Bracelin, analyst at Pacific Crest Securities. "It doesn't look like the company has trimmed enough fat." Dell's operating income of $829 million was 5.3% of revenue, well below the 8% level that Dell posted in years past.

Earlier this year, Dell said it wants to reduce its workforce by about 10%, but as of Nov. 2, Dell had cut only about 2.5% of the 84,000 employees it had on Aug. 3. Carty insisted, though, that the company "is still driving to that [10% reduction] number." Carty added: "We've identified a considerable amount of low-value work." The company also is working to automate certain tasks to help it eliminate more employees. "We have more manual work going on than we need," he said. At the same time, he said that other initiatives, such as acquisitions or "new strategies," may mean keeping or hiring certain kinds of employees.

Gross margin performance, too, didn't meet some analysts' expectations. Gross margin inched up to 18.5% of revenue, from 16.6% a year ago, but still fell below the 19% analysts were projecting. The company blamed component costs, saying they didn't decline as steeply as the company was projecting. Shaw Wu, analyst at American Technology Research, questions why that's the case, when some of Dell's main competitors, including HP and Apple (AAPL) have recently enjoyed the benefits of low component costs.

Investors Doubt "Ultimate Litmus Test"
Dell has been struggling with falling market share and profitability problems since 2005. Former CEO Kevin Rollins and other top executives, including many veterans, left this year, and Dell was forced to restate four years of results following a lengthy internal accounting investigation. Over the last six months, the company has hired a raft of outside executives and has begun making acquisitions, a strategy it almost never used in the past. It also has changed its sales model and over the summer began selling PCs in retail outlets around the world, including Wal-Mart Stores (WMT) in the U.S. and Gome in China. That move has helped to slow the decline in Dell's consumer business. In the most recent quarter, revenue for its U.S. consumer business fell 6%, a smaller decline than in recent quarters.

Despite the problems with its expenses, Dell reported some brighter news: It said revenue growth in overseas markets was robust. Combined sales in Brazil, China, Russia, and India, four crucial markets, were 32% of overall revenue. In all, overseas sales accounted for 46% of revenue, up from 44% a year earlier. Dell generated $1 billion in cash for the quarter, which Carty called "the ultimate litmus test" of Dell's performance.

But judging by shareholder reaction following Dell's announcement, investors clearly are using other standards.

Lee is a correspondent in BusinessWeek's Silicon Valley bureau

[petechen]

Step 2 - properly separate your business and consumer lines

Consider this an evolution of the steps to better separate Dell's business targeted line (Vostro) from the consumer market - not only in product quality but also support. Keep in mind though, the consumer models - XPS, inspiron - will continue to come with crapware like the other BestCircuitMicroFryShack brands.

Staples (despite being a perfect small business distribution channel) is only distributing Inspirons (consumer models) which begs the question, is Dell planning on distributing/supporting Vostro through retail partners or only via online distribution?

[72901]

The Real Reason

Dell is changing because of its massive failure at customer support. They're now shifting that burden (customer support) to Best Buy.

[wmaynard613]

Outsourcing customer support

Attempting to obtain parts support for my Dell Dimension 8100 from folks who did not understand english and could not give me support was cause for me to stop buying Dell. I had to use sources other than Dell to obtain the necessary parts. Integrity once lost is seldom regained!

[lawrephord5]

dell not dead

extra customer base is good

[W2Kuser]

warning - Dell HD encryption back door

There has recently been a lot of hype for Dell offering new Hitachi/etc drives that provide whole-disk "bulk encryption".

But a word of warning: the BIOS in Dell's machines only allows people to set the "user" password while Dell keeps control of the "system admin" password.

This is a huge security risk because it means that Dell can give ANYONE the sys admin password to bypass the encryption and access your HD - in other words complete "back door" access.

There has been lots of speculation regarding if Microsoft put a back door in Vista's encryption feature, but it's amazing how little attention is being paid to the confirmed back door in Dell machines. It's even more amazing that businesses, with todays more strict data privacy & protection policies, allow Dell machines to be purchased.

See for yourself - just Google "Dell encryption back door" and you'll see TONS of confirmation.

[mjd420nova]

First Dell machine

The first Dell machine I worked on was in the early 80's when the made an 80286 based PC. The system board was a huge thing that had all the peripheral ports integrated into it. Had a design problem that caused the parellel port to burn out if you connected or disconnected anything while the unit was on. Many users had A-B switches for dot matrix and letter quality printers and thought it was garbage that they had to shut down to change printers.

[ramudd]

Geek Squad count not replace blower motor

They told me the could replace the entire power supply, which worked fine, but could not replace the blower motor that keeps the PS cool. That is about $120 verses $5. Go figure. So that lets Dell out of any future purchases for me.