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Viewpoint March 19,=20 2007, 12:01AM EST

A New Buzz to Fix Dell's Woes

To build cachet among consumers while avoiding the risks = of=20 retail sales, the computer maker should=E2=80=94get this=E2=80=94open = nightclubs=20

by Roger L. = Kay

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A lot of people are wondering right about now how Dell is going to = pull=20 itself out of the drink, particularly in the consumer segment of the PC = market.=20 The company gets about 15% of its PC business from consumers, compared = with an=20 industry average of about 42%. And the consumer business is hot, a = growth rocket=20 these past five years and the main arena for introducing exciting = technologies=20 like streaming audio and video.

Dell (DELL) has=20 always made a virtue out of necessity and excels at wrestling concepts = and=20 language into a form amenable to its goals. Dell's main avenue to buyers = is=20 through direct, rather than retail, sales. A market that Dell = dominates=E2=80=94say,=20 U.S. commercial desktops=E2=80=94is one that "gets" the direct model, in = Dell's=20 parlance; any market where it's below par represents "an opportunity." = By that=20 logic, consumer represents one vast opportunity for Dell.

Retail Realities

Consider where consumers are making their PC purchases. Most = consumers buy=20 through retail outlets, and as a channel, retail is gaining steadily on = the=20 direct approach. In 2002, retail accounted for 26.8% of all PC shipments = worldwide, while direct had a 33.0% share, according to IDC. By the end = of 2006,=20 those figures had shifted to 33.2% and 30.3%, respectively.

To explain why this should be so, despite earlier momentum in direct, = I'll=20 trot out Wayne's Theory (with a nod to Wayne Inouye, former chief = executive=20 officer of eMachines and then Gateway (GTW), who = made nearly=20 a religion out of retail and who meditated long and deeply on the = wherefores of=20 the resurgence of his favorite channel).

Wayne felt that retail had grown stronger first and foremost because = buyers,=20 especially inexperienced ones, like to see and touch the merchandise,=20 particularly if it costs more than groceries. For the same reason, the = overall=20 shift in the market to notebooks favored retail. Notebooks are more = personal=20 than desktops, and buyers like to check them out up close.

What's more, vendors expert in moving PCs through retail=E2=80=94for = example,=20 Hewlett-Packard (HPQ), Gateway, and Acer=E2=80=94figured out that to = compete against=20 direct, they couldn't let retailers mark up the goods. However, another = fact of=20 retail allowed retailers to sell near cost and still make money: Adding = on other=20 goods (e.g., software, peripherals, carry bags) to a PC purchase is = common and=20 highly profitable. So, vendors with supply chains as efficient as Dell's = could=20 sell PCs for no more than Dell because retailers were foregoing most of = their=20 normal 5% markup.

Finally, the advantage previously enjoyed by direct = sales=E2=80=94customers not=20 having to pay state sales tax on interstate purchases=E2=80=94diminished = when PC prices=20 declined. Saving 5% on a $2,000 box is worth $100, but 5% on a $500 = system=20 returns only $25, much less of a motivator.

Off Which Shelf?

Given that Dell must expand its presence in the consumer segment, it = really=20 has two main choices: traditional third-party retail, such as Best Buy = (BBY) and = Circuit City=20 (CC), = or "boutique"=20 company stores, such as those run by Apple (AAPL). =

The University of Chicago Business School recently published a paper = on=20 whether it's better to sell through a boutique or against competitors on = retail=20 shelves. In the course of their research, professors Christopher K. Hsee = and=20 France Leclerc discovered that if a product is perceived as above = average,=20 competitive comparison is detrimental. Think diamond brooch isolated on = an=20 expanse of blue velvet. On the other hand, a product perceived as below = the mean=20 does better offered against others.

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