Is retail right for Dell?

Success at Costco could mean more shelf space elsewhere for Dell's PCs, some analysts suggest.

Dell's burgeoning relationship with big-box retailer Costco could be the first step to entering more retail channels, according to some analysts.

The recent appearance at some Costco warehouse outlets of a Dell 2200 15-inch laptop with a 1.7GHz 540-series Pentium 4 processor and 80GB DVDRW hard drive, priced for $899.99, has prompted some analysts to ask if Dell is breaking out of its direct online business model.

Costco is a "longtime good partner" of Dell, spokesman Mike Maher said Tuesday, noting that "one allotment of Dimension and Inspiron were provided to them well more than a month ago."

Maher declined to break out Dell's sales numbers for its products at Costco. He said Round Rock, Texas-based Dell is not planning similar retail partnerships outside of Costco.

But analysts suggested that additional retail partners could be just the thing to spice up Dell's online sales, which in the past have been augmented primarily by shopping mall kiosks.

Despite the low price and the drab gray color, the Dell 2200 laptop at Costco is a solid machine, according to Toni Duboise, a PC industry analyst at research firm Current Analysis. But it is a far cry from Dell's splashy XPS brand of premium PCs, Duboise said.

"It's an antiquated configuration...It pales in comparison to the other machines that now support 64-bit and dual-core Pentium chips," Duboise said.

Costco also has been featuring a Dell 6000 laptop for $1,299.99 and a Dell XPS 600 desktop media center with a 20-inch LCD (liquid crystal display) widescreen for $2,499.99. Both models come with a three-year warranty, which Duboise said is a good incentive for the small to midsize businesses that frequent Costco.

Dell is known for changing prices on the fly through a combination of just-in-time manufacturing and extensive real-time sales data. The blend has allowed Dell to balance its demand and supply and maintain a leadership position in unit sales.

However, market changes in the last 18 months have forced the No. 1 PC seller out of its comfort zone.

During the company's last earnings release, Chief Executive Kevin Rollins admitted that Dell's sales teams were too aggressive in selling its computers at a discount--$400 laptops, $300 desktops in some cases--but that the company going forward would keep costs in line and focus more attention on a balance of products, including XPS desktop and laptop computers.

Roger Kay, an industry analyst at Endpoint Technologies Associates, suggests that Dell is testing the retail waters like it did in the late '90s with Price Club, which was later acquired by Costco. Kay also recalls Dell's 2001 attempt to sell to retail shops in Japan.

"Right now Dell is struggling with consumers, and when a company has that problem, it tends to experiment with its business models," Kay said. "They make a small commitment to a new business method and then see how it goes and if things seem good, then the company can pump up the volume."

Dell's relationship with Costco is a good fit, Kay said, because it is a buyer's club that draws in small to midsize businesses, a core demographic for Dell.

"Dell wouldn't get the same response, say at a BestBuy, where shelf space is heavily contested," Kay said. "If Dell made a deal to enter that market, there would be great cries from Dell's rivals."

Dell could certainly use a boost of any sort to increase its sales, based on its last earnings report, Duboise said, noting that further partnerships with other retail partners could improve the company's standing.

"The Dell brand carries so much weight with consumers that if they did this in the future, their competitors would certainly take note," she said.

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