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HP, others try direct sales

Joining Compaq and IBM, HP will experiment with its consumer sales model in an effort to match the low-cost practices of direct vendors Gateway and Dell.

NEW YORK--Joining Compaq and IBM, Hewlett-Packard will experiment with its consumer sales model in an effort to match the low-cost practices of direct vendors such as Gateway and Dell.

In one scheme, set to begin in August, all three vendors will try to sell custom-configurable systems through the same kiosk at Circuit City stores while still stocking mass-produced systems on store shelves. Systems ordered by kiosk will be shipped directly to customers.

An important factor accelerating the move toward a hybrid method of selling is the inventory problem that crops up whenever sales grow more slowly than expected or certain models don't sell. HP and others that sell through retail stores sometimes get stuck with unpopular systems that sit in dealer inventory, necessitating price cuts that put a damper on the PC maker's--and the store's--financial results.

Direct vendors such as Dell and Gateway are better positioned to minimize inventory buildup since they build consumer systems to order.

"We are planning to continue to expand consumer choice while working with retail partners to offer new ways to buy," said Chris Pederson, worldwide consumer brand manager for Hewlett-Packard (HP), in an interview with CNET NEWS.COM.

While most of the systems costing less than $2,000 will come in more-or-less standard configurations, there will be Pentium II-based systems that can be ordered with a variety of options, such as processor speed, networking capability, and memory size, Pederson said. The systems will be built by HP and shipped directly to customers, instead of distributors who then pass they PCs on to retailers.

HP joins a growing list of vendors willing to tinker with proven ways of selling computers in an effort to wring out more profit and efficiency from the sales process.

Although Compaq is participating in the Circuit City experiment, it is also rolling out a program at retailer Best Buy and others where it is the only participating vendor listed in the kiosk directory. Companies that have already started selling direct include Apple Computer, although the company does not offer resellers the ability to sell the customized systems.

HP notes that aside from the kiosk experiment, its consumer PCs are sold online through CompUSA and through its own special Web site. HP's site, however, mostly sells refurbished systems and peripherals.

While the vendors are touting increased choice as the big advantage to customers, HP, IBM, and Compaq are trying to narrow the advantage direct vendors have in managing inventory and its cost, analysts say, more than they are interested in offering customized computers.

Additional pressure comes in the form of industry wide price compression. While unit shipments in the United States are expected to increase by 14 percent in the second quarter, severe price pressure will limit revenue and profit growth for most PC makers, market researcher International Data Corporation said in a recent report.

On the other hand, some analysts wonder whether ordering a system and waiting for it to arrive runs counter to the whole retail buying experience, so the viability of this strategy is far from guaranteed.

HP's Pederson acknowledges that "The big question is, if customers are looking for systems, is there enough value in having a greater selection that they are willing to wait for?" He thinks HP has done enough research to conclude that there is a significant number of customers willing to participate in the industry's latest grand experiment.