Hopes dim for holiday PC sales rebound

Can PC sales slump turn around? Mark Bates, analyst, PC Data

The Grinch may steal Christmas after all, at least for leading computer makers.

PC companies and retailers banking on a sales pickup in the fourth quarter are bracing for bad news. Consumers are not flocking to buy new PCs during the holidays as anticipated.

	A bleak autumn Retail PC sales in the Unites States have been down consistently this fall, compared with similar periods last year.
	Week starting				Unit growth				Dollar growth
	Oct. 1				-9.27%				-21%
	Oct. 8				.9%				8.5%
	Oct. 15				-19.6%				-12%
	Oct. 22				-27.9%				-22%
	Oct. 29				-19.9%				-10.6%
	Nov. 5				-17.8%				-18.2%
	Nov. 12				-24.6%				-21.9%
	Source: PC Data

Sales, in fact, are downright dismal, with market researcher NPD Intelect reporting retail PC sales in October plunging 18 percent year over year. In addition, direct computer seller Gateway warned that its earnings per share for the quarter would come to approximately 37 cents a share, considerably below expectations of 62 cents a share, because of slow sales.

For the most recent week of data available, retail PC sales from Nov. 12 through Nov. 18 were down 24.6 percent from the same period last year by units and down 21.9 percent in dollars, according to research firm PC Data.

The news caps off a year of slower-than-projected PC sales and validates prognosticators who had warned of an overall market slowdown. A convergence of events, including a slowing economy, shifting sales to other technology products, and a saturated North American PC market, contributed to the unexpected sales slowdown, according to analysts.

"The retailers are nervous," said IDC analyst Roger Kay. "I heard...10 days ago (that) retailers were beginning to push back, saying, 'Things don't look good. The early season traffic isn't up to par.'"

That would have been about the time the first reports on October sales started coming in.

Retailers, dealers and catalog operations sold 605,000 PCs in October, according to NPD Intelect, down from 953,000 units in September.

That makes October the slowest sales month of the year, at a time when a sales rebound had been anticipated.

"The year in general looks like it will come in under par," Kay said. "We had been counting on a rip-roaring second half with Windows 2000 upgrades and anticipation consumer sales would be strong. It looks like that's not going to happen."

Retail PC sales from January through October were down 17.57 percent measured in units and 23.25 percent in dollars compared with the same period a year earlier, according to NPD Intelect.

Many analysts had forecast sales growth of more than 20 percent at the start of the year but continually revised their forecasts downward. At the same time, a string of profit warnings--from Dell Computer, Intel and others--rocked Wall Street as slowing PC sales appeared to be the trend.

Predictions miss the mark
Strong sales in January and February--more than 1 million units sold through all retail channels each month, according to NPD Intelect--led analysts and PC companies to overestimate 2000 PC sales.

By April, retail, dealer and catalog sales had dropped to 642,000 units, according to NPD Intelect. But a pickup in August and September alleviated concerns moving into the fourth quarter. Weak October sales apparently caught many PC makers and retailers by surprise.

Sales so far for November don't look encouraging, either, PC Data analyst Stephen Baker said. "They're definitely soft."

In fact, retail sales are getting worse week by week rather than picking up for the holiday rush, according to PC Data. With the exception of the week of Oct. 8, PC sales declined year over year--as much as 27.9 percent in units and 22 percent in dollars for the week of Oct. 22. November retail unit sales declines are brutal, down 17.8 percent the week of Nov. 5 and down nearly 25 percent for the week of Nov. 12, according to PC Data.

Several factors have contributed to lagging PC sales, which some analysts worry will not recover anytime soon. Baker and Kay both pointed to the economy as a contributing factor.

"The changing economic climate was visible at the beginning of the quarter," Kay said. "The stock market is a contributor to this. The Nasdaq is half what it was in March. Considering consumer purchases of PCs are completely discretionary, the economy is a big factor."

Going for gadgets
Another factor is the saturation of the North American PC market, where second-time buyers tend to avoid the impulse PC purchase and look for better deals, Baker said

"The second-time or more sophisticated buyers want more...RAM, a CD-RW drive and those kinds of things," he said.

Other types of high-end gadgets also tend to draw people away from PCs, which are no longer as exciting by comparison.

"I would phrase it as the cool factor," said NPD Intelect analyst George Meier. "PDAs (personal digital assistants, such as the Palm) are cool. Cell phones are cool."

In fact, while retail PCs sales are way down, sales of notebooks, peripherals and gadgets are way up.

The week of Nov. 5, for example, notebook sales rose 12.8 percent in units and 17.5 percent in dollars over a year earlier, according to PC Data. NPD Intelect had notebook unit sales up 8.44 percent for October.

While notebooks represent less than 25 percent of the combined PC and portable market, the sales increases are significant, Meier said.

"Notebooks even at a higher price are growing at retail," he said. "That portability thing and the cool factor all play into it."

Particularly with a fairly saturated home PC market, analysts see consumers shifting money they might have spent on a new system to other purchases, such as handhelds, peripherals and gadgets.

"If you've got a 500-MHz machine, do you need a 700-MHz machine for doing Excel spreadsheets?" Meier said. "You might instead spend $300, $400 or $500 on a PDA and delay the purchase of the next PC."

Sales of PC-related devices are booming, according to NPD Intelect. From September 1999 to September 2000, sales of flat-panel monitors jumped 463 percent, and PC cameras grew 254 percent. Other strong growth products included digital cameras, up 121 percent; home networking products, up 85 percent; and CD-RW drives, also up 85 percent.