Lower-Priced Pcs

Lower-Priced PCs Drove Strong Sales For Holiday Month --- Trend Helped Compaq, IBM And Others, But Retailers Saw More Mixed Fortunes By Gary McWilliams

01/08/1999 The Wall Street Journal Page A3 (Copyright (c) 1999, Dow Jones & Company, Inc.) Strong holiday sales of low-priced PCs proved to be a mixed bag for electronics retailers: Unit sales for December jumped 41%, outstripping earlier expectations, but a 20% drop in average prices crimped results for some. PC Data Inc., the Reston, Va., company that tabulated the sales numbers, estimates U.S. retailers racked up about $1 billion in PC sales for the final month of 1998, a crucial period that can make or break a retailer's results. Not surprisingly, says PC Data Senior Analyst Stephen M. Baker, "The lower the price, the more are sold." Analysts said the mixed results could lead to further consolidation among retailers and in the number of PC brands they carry. Skimpy margins on machines selling for $999 or less leave little room for forecasting errors. "I suspect we'll see retailers aligning themselves with just one vendor, or moving to holding less inventory," said retail analyst Ursula H. Moran of Sanford C. Bernstein. Still, the retail results portend strong fourth-quarter sales for some PC makers, such as Compaq Computer Corp., International Business Machines Corp., and Packard Bell NEC Inc., all of which cranked up production of $599 to $799 home-PC models. PaineWebber Inc. analyst Don Young said Compaq, which blanketed stores with three models under $1,000, "should have a heck of a quarter." It also augurs well for direct sellers Dell Computer Corp. and Gateway, which have maintained average selling prices of about $2,000 by focusing on repeat buyers. "The high-end has disappeared from retail, but it hasn't totally gone away. It has gone to Dell and Gateway," says Ms. Moran. For retailers, the increased unit sales don't mean a boom year for the bottom line. Average prices fell to $1,015, down 22% from year-earlier levels and reflecting the spread of home PCs beyond affluent families. Research MarketMaps LLC, New Canaan, Conn., estimates 49.5% of U.S. households own a PC, up from 43% at the end of 1997. "People buying PCs now are not willing to spend as much as the early adopters," said Vadim Zlotnikov, PC analyst at Sanford C. Berstein & Co. But, he said, newer buyers' interest in purchasing a PC to get to the Internet bodes well for continued demand. PC demand drove sales at stores open at least a year to double-digit gains at electronics giants Circuit City Stores Inc. and Best Buy Co. Best Buy, which saw a $399 model sell out almost immediately after its introduction, "had extremely good sales on low-priced PCs," says a spokeswoman. PCs were the best-performing product at Circuit City, fueling an 11% hike in same-store sales. Circuit City, which reported results yesterday, said total sales rose 18% to $1.57 billion. Even as cheap PCs drove demand, the falling price tags squeezed sales at CompUSA Inc. and Tandy Corp., which had hoped for stronger sales of higher-priced models. CompUSA, Dallas, said same-store sales tumbled a larger- than-expected 4.7% in December from a year earlier, and it issued a profit warning. "Consumers got a great buy," says Chief Executive Jim Halpin, who says the retailer was forced to discount during the month. Tandy, Fort Worth, Texas, saw November same-store sales flattened compared with the year-earlier period, and it stayed out of the low-priced fray. It said same-store sales for December rise a tepid 5%. Selling through its Radio Shack chain, Tandy's lowest-priced model was a $999 PC without a monitor or printer. Total December sales rose 6% to $587.2 million, helped mainly by strong sales of wireless telephones. By contrast, Dell Vice President Paul Bell says buyers were loading up on such extras as digital cameras and scanners to take photos and send digital images over the Internet. Dell said this year's best sellers had twice the memory and about twice as much storage as last year's. Likewise, Bart R. Brown, vice president of marketing for Gateway's U.S. consumer business, said the company hasn't "experienced a terribly dramatic slip in average unit price." New buyers also tend to spur ownership among their peers, say analysts. "If I have a PC, my friends may purchase one to talk to me," says Bill Ablondi, researcher at MarketMaps. "There's a snowball effect building up here."