Tech Industry

CompUSA takes huge stride

With the acquisition of its only national competitor, CompUSA has overnight become the dominant retailer for the major PC companies.

CompUSA is shaping up as a major force in the PC industry.

In tandem with an aggressive push into the market for custom PCs, services, and training, the acquisition of its only national competitor, Computer City, means that CompUSA has overnight become the dominant retailer for the major PC companies such as Compaq. Such market positioning will likely give the retailer greater influence than it has ever had.

CompUSA today said it will buy Tandy's Computer City operations for $275 million, in a bid to expand its computer retail sales chain, leaving consumer electronics chains such as Best Buy and Circuit City as its only major competitors.

"They are the only real computer superstore [with stores throughout the] North American market now," said Cameron Duncan, PC industry research analyst with Associated Research Services.

CompUSA, which had sales of $4.6 billion last fiscal year, already operates more than 150 stores. It will gain 100 more stores in the bargain, including six in Canada that will continue to operate under the Computer City name.

Some operations will be consolidated, but plans have not been finalized, the company said. Nonetheless, there are still plans to open 20 new CompUSA stores this year--at a time when the industry is experiencing a slowdown in PC sales and a decline in profit margins, to boot.

One possible reason for the expansion, analysts say, is that CompUSA aims to increase its already significant influence over PC makers--a move that should bolster the company's earnings.

"With the sales volumes they are able to command, the bargaining they will be able to do with individual vendors is unprecedented. There are some new opportunities in terms of negotiating for higher margins," Duncan said. This ability will be critical as sales of low profit sub-$1,000 PCs continue to increase.

At the same time CompUSA increases the number of storefronts it operates, it is also ramping up efforts that could place it in competition with the vendors that sell goods in its stores.

Last year, CompUSA launched its "American" line of customizable PCs. Conversely, Compaq, IBM, and Hewlett-Packard just recently started experimenting with selling custom-configured systems through kiosks located at retail stores including CompUSA. Analysts say CompUSA will have considerable clout in negotiating fees for those kiosks, and it remains to be seen how PC vendors will react to today's deal.

Annie Erner, vice president of equity research at UBS Securities, said the company is merely selling through all the channels that customers are buying from, including Web sites, and likely won't experience much backlash from PC makers.

Erner, who has buy ratings on Tandy and CompUSA stock, sees different benefits from the deal. CompUSA generates some 60 percent of revenues from retail sales, she estimates. Sales to corporate accounts along with technical services and training accounts for the remaining (and fast-growing) portion of revenues.

"As [CompUSA] builds relationships with more corporate accounts, they are building the business for services and training, which earn high margins. Computer City has not done a good job of this at all," Erner said.

CompUSA's move into services and training in turn has helped insulate it somewhat from the decline in average PC selling prices. The company may also benefit from terms of getting products sooner than other retailers, Erner notes.

CompUSA is also busy expanding its corporate sales division, because corporations tend to buy more expensive PCs than consumers.