Will "computer store" become an oxymoron?

A number of trends are conspiring to push PCs off retail shelves, even at stores where "computer" is part of the name. Intense restructuring and strategic changes at CompUSA and other superstores, a renewed push to boost direct sales by large PC makers such as IBM, and the "free" PC movement are making it increasingly difficult for stores to justify selling computers.

CompUSA said this week that it is delaying its earnings report one week, until August 30, "to provide more details of...strategic initiatives." Previously, the company said that new initiatives would, among other goals, "allow us to reduce our dependence on low-margin desktop personal computers."

Last quarter, the national PC chain said the average selling prices of desktop computers dropped from the previous year by 20 percent, though unit sales were up.

This comes in the wake of an earnings report from OfficeMax stating that its computer sales have become a drain on the bottom line. Good Guys, a large California-based chain of electronics stores, also said recently said that it is transitioning out of PC sales.

CompUSA, meanwhile, continues to "adjust" product layout at stores to focus on handheld computer technology, game machines, "smart" interactive toys, DVD movies and equipment, and MP3 Internet music distribution, according to a statement.

"[They are] getting the crap beat out of them quarter after quarter financially," said Roger Kay, analyst with International Data Corporation. "They have not been able to turn a buck in that business, and they're one of the better-established, higher-volume outlets. That's pretty bad for the others...[because] CompUSA is probably the premier outlet in retail."

Kay added that changes in buying habits do not bode well for computer superstores like CompUSA.

"What retail is good for is that segment of the population that wants the look and feel," Kay said. "That's usually the uninitiated. The portion that's buying a second or third PC is...more comfortable going online. We have pretty good data showing there has been a pretty good leap in multiple-PC households the last quarter or two."

He adds that the "uninitiated" are getting new places to shop, too. Gateway has opened more than 150 Country Stores nationwide, where customers get hands-on experience with PCs but still order directly from Gateway.

Taking the direct route
IBM and Compaq--both major presences at retail stores--are also working feverishly to sell more directly. This week IBM announced new consumer models and said that one of its consumer PC lines will no longer be sold at retail outlets. "There's a large segment of the population that will now buy online," said Mark Del Tufo, a manager at IBM's Aptiva group.

According to Lindy Lesperance, analyst with Technology Business Research, "Obviously the thing that is driving this trend is that the [average selling price] and the [profit] margins on consumer PCs are so low, the vendors can't afford to give any margin to any retailer they don't have to."

Though Compaq is not abandoning retail, it has significantly increased direct sales over the Web, said Bob Brewer, Compaq's director of sales and marketing for consumer-direct and retail configure-to-order.

In addition, the company depends more on 9,300 retail kiosks, where customers order custom-configured systems for delivery to the store or their home. Some models, such as the Presario 5700T and 5700N, which come with Intel's newest chips, are only available built-to-order at retail kiosks or directly from Compaq. Brewer estimated that this side of Compaq's consumer business is growing fivefold year over year.

Compaq is also relying more on Radio Shack for retail sales after replacing IBM early last year.

The "free" PC setback
Another factor contributing to the distress of superstores is the "free" PC movement.

"Retailers are more susceptible to losing sales through other channels than ever before," according to Allison Boswell of Allison Boswell Consulting. "With the offering of free PCs and new competition through Internet e-tailers, the environment is highly competitive."

Boswell said that in July, her firm asked retailers to gauge what business was lost because of these new consumer sales.

"Stores estimated that an average of 4.1 units per store were lost due to free PCs, and 3.8 units were lost due to Internet sales in July. This totals 7.9 units, which is equivalent to 13.2 percent of this month's PC unit sales," she said.

She added that retailers appear to be responding, however. "PC retailers and manufacturers are partnering with Internet service providers to offer free or very inexpensive PCs."

But the solution ultimately may be in arenas not related to PCs.

"What the opportunity may be for the retailers going forward is more of an information appliance business, and it may end up being a whole new model for them," said Technology Business Research's Lesperance.