IBM has been the exclusive computer source for RadioShack since 1995. The loss of the account comes at a time when even IBM executives admit that the company's retail sales are lagging.
Although Radio Shack is not one of the top retailers in terms of PC sales volume, the deal is significant on a number of levels. RadioShack has a much broader geographic reach than most other retailers, pointed out Kevin Hause, computer analyst with International Data Corporation. By being the exclusive provider, Compaq gains coverage that other vendors by definition will not have.
Second, the deal could portend increased aggressiveness by Compaq in retail, a market that the company has been attacking fiercely through price cuts and a flood of marketing dollars. IBM, meanwhile, which had lost ground in the retail market last year, loses a valuable outlet for its machines.
"I wouldn't necessarily look for more of these deals, but I would certainly look to Compaq to stay very aggressive in the consumer market," said Hause. "They have been doing their own Sunday inserts...They want to be number one in retail."
Under the terms of the deal, Compaq will market a line of its Presario computers through RadioShack. While the computers will be similar to Presario models sold elsewhere, the units will differ from standard models, said Dave Edmonson, senior vice president of marketing and advertising at Tandy, which owns RadioShack.
In addition, Compaq will authorize RadioShack as an official service provider for Compaq and provide resources to build "store-within-a-store" programs.
Edmonson said that RadioShack narrowed the choices down to IBM and Compaq. Compaq was ultimately chosen because the company proposed a better plan for marketing peripheral computer devices.
"We plan to come out with a line of accessories--replacement mice, keyboards, other options," he said. "The most important aspect was the focus on the accessory business.The options from a financial standpoint were comparable."
RadioShack's goal is to make computer and computer peripheral sales account for 10 to 12 percent of the chain's current revenue.
William Runyon, a spokesman for IBM, said that IBM had focused on consumer and educational software in its proposal to RadioShack.
RadioShack's decision is the latest in a series of setbacks for Big Blue in retails. Last year, the company chose to focus on selling high-end consumer machines. Rather than go upscale, users gravitated toward sub-$1,000 computers, a trend that began in March. IBM did not have machines in that price point until November. IBM had also used RadioShack to market its machines made with Cyrix processors.
As a result, IBM's market share dipped. Company executives have said in the past two conference calls with analysts that IBM's retail offering needs to be overhauled.
Tandy's Edmonson said that his company had not been disappointed with sales of IBM computers. While the deal will not be fully completed until the third quarter, RadioShack will start selling Compaq machines in March.
Compaq executives described the agreement as a new means to broaden its reach. Compaq is already the world's leading PC manufacturer.
"Almost overnight, we will be able to increase our market presence by offering our products through up to 7,000 convenient locations. We believe this competitive edge will result in increased sales and brand awareness," Eckhard Pfeiffer, Compaq's CEO, said in a prepared statement.