Dell: Not the PC company you used to know

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."

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."