Dell revitalisation may take it into stores

SAN FRANCISCO (Reuters) - Dell said on Thursday it is experimenting with new ways to sell computers, a first step that analysts say is needed if Dell wants to better compete with Hewlett-Packard and Apple.

Dell, while stopping short of saying it planned to open full-fledged stores, or sell through retailers, said it would do what it takes to reach consumers, who generate 15 percent of the personal computer maker's revenue.

Dell spokesman Dwayne Cox said the company remains committed to its 23-year policy of selling directly to customers, but is open to "experimentation."

"What we're really interested in is the most direct path to the customer and the relationship that develops by taking the most direct path," Cox said. "Clearly, we're going to do the experimentation necessary to determine what that path is for customers in existing and emerging markets."

The company last week hired Ron Garriques, the former head of Motorola's mobile phone business, to revamp the company's consumer business as head of a new division overseeing all of the company's worldwide consumer operations.

Since its founding in 1984, Dell of Round Rock, Texas, has bypassed retailers and sold computers directly to customers, first by telephone and now through its Web site as well. Dell in the past steadfastly resisted calls by analysts and investors to consider retail sales.

The company last year opened a store in Dallas where it displays, but does not sell its products, which consumers can order for later delivery to their homes. Two more such stores are planned for New York and Austin, Texas, later this year, Dell said.

It also operates about 190 kiosks in malls to showcase its products, but neither the stores nor the kiosks carry inventory.

"They have to either open their own stores or start working with the CompUSAs and the Circuit City's of the world," said Shaw Wu, an analyst at American Technology Research, who has "neutral" ratings on Dell and HP shares and does not own any. Dell "needs to adapt to consumers' tastes."

Higher retail sales of PCs to consumers helped Hewlett- Packard post better-than-expected results on Tuesday. Dell, however, has struggled with slowing growth for two years as prices declined across the industry, reducing the price advantage afforded by Dell's direct-sales strategy.

Dell said three weeks ago it expected its quarterly results to miss analysts' average forecasts. The company last month brought back founder Michael Dell to replace Kevin Rollins as chief executive after Rollins disappointed investors with a string of lower-than-expected results.

The company is scheduled to report fiscal fourth-quarter earnings on March 1.

Dell said Garriques's new unit would "set new standards for innovative product design" and show "leadership in providing the best customer experience."

HP took the top PC market share spot from Dell last year as it sold more computers through retailers, including CompUSA, which has more than 200 stores in the United States, and Circuit City Stores, which operates more than 600 domestic stores.

HP's PC unit posted an operating profit margin of 4.7 percent in the most recently completed quarter, up from 3.9 percent a year ago.

Dell's operating margin was 5.7 percent for the entire company in the quarter ended Nov. 3, but profitability in its consumer PC business, which Dell does not break out, was probably close to HP's level, Wu said.

The margins suggest Dell probably is no longer enjoying the advantage it once had from selling directly to customers because HP has benefited from the lower cost of computer components, Wu said.

"They need to find a way to have a retail component that allows consumers to touch and see the products they are trying to sell," said J.P. Gownder, an analyst at Forrester Research Inc.

In addition to selling through retailers, Dell should consider opening its own stores, like Apple's retail outlets that sell Apple Macintosh computers and music players, Gownder said.

Apple, which makes the popular iPod music player, has about 170 stores that generated 16 percent of the company's net sales in the most recently completed quarter, according to its latest quarterly financial report.

Dell shares were down 1 cent at US$24.30 in afternoon trading on Nasdaq. HP fell 52 cents, or 1.3 percent, to US$40.58 on the New York Stock Exchange.

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