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What Wal-Mart means to Dell

Direct sales aren't working the same magic they once did for the PC maker. Can it now cash in at retail?

Dell is adding a new dimension to its sales strategy, but it's unclear if this move can get the company back on track.

Since its beginning, Dell has prided itself on its direct-to-consumers sales model, but the company announced Thursday it will begin selling two of its Dimension desktop models in more than 3,000 Wal-Mart stores beginning June 10.

Though it's a significant change of strategy, it does not mean Dell is abandoning its direct sales model. "The direct model, we believe in it as much as we ever have," said company spokesman Bob Pearson.

It's not a completely unexpected move. Last month, founder and Chief Executive Michael Dell sent an e-mail memo to employees discussing the company's direction that said "the direct model has been a revolution, but is not a religion," according to The Wall Street Journal. And just last week, Dell made more waves in the retail community when he told Computer Reseller News in an interview that the company could be expanding into stores.

"I think that it is the equivalent of turning the Titanic around to avoid the iceberg."
--Stephen Baker, vice president, The NPD Group

Dell says it chose Wal-Mart because of how well it knows its customers. "Ninety percent of Americans shop in a Wal-Mart," said Pearson. "We're comfortable they know their customer experience."

The world's second-largest PC maker insists the Wal-Mart retail relationship is "not a pilot" program, calling it "part of a global retail strategy that you're going to hear a lot more about." Still, deciding to sell PCs retail is not a simple undertaking.

"I do think it's a very difficult cultural shift moving from selling direct to selling both direct and indirect," said Stephen Baker, vice president of industry analysis for The NPD Group. "I think that it is the equivalent of turning the Titanic around to avoid the iceberg. I'm not sure, it remains to be seen if that's the right way for them to revitalize their business, in my opinion."

Dell is under pressure to turn itself around. In the past year it lost its mantle as the world's No. 1 PC maker to Hewlett-Packard, and has seen a shake-up of management. Most notably, CEO Kevin Rollins was replaced by the company's founder in January.

Dell's worldwide PC shipments dipped by 6.9 percent in the first quarter of this year, which caused its market share to shrink from 18.2 percent to 15.2 percent, according to data collected by IDC.

Meanwhile, its main rival, HP, saw its PC shipments grow by 28.2 percent in the first quarter, compared with the same period a year ago. That lifted its market share from 16.5 percent worldwide to 19.1 percent, according to IDC.

The Wal-Mart factor
Selling through Wal-Mart is a good move for almost any company because of the exposure its products will get. It gives Dell a chance to reach a new customer base. Thus far, Dell has chosen to sell just two of its lower-end desktops, which isn't particularly risky. And Wal-Mart is a retailer that doesn't usually require an extended commitment.

"I think this is the proverbial putting your toe in the water without getting really, really wet," said Baker. "It's a way for them to test how they can really work with retail--how their organization is going to absorb selling through retail, how they can manage having products sold by outside third parties they can't control."

The dollar value of its new Wal-Mart sales won't be nearly as important or valuable as the experience it will give Dell as a retail newcomer. Altering its traditional business of selling desktops and notebooks directly to customers will require many changes, such as altering its supply chain and even how it advertises its products. A practice run will be likely be more valuable than the receipts it rings up, analysts agree.

"For Dell, it's not necessarily about the sales or sales volume. Even if they're shipping 10 of each SKU (stock-keeping unit) into all those Wal-Marts, you're only talking 50,000 units, which isn't a huge amount considering they sell a few million every quarter," said Baker.

The Wal-Mart relationship will also be a way to develop a retail track record. Once the first shipments sell through, Dell will be able to take the data--such as the rate at which units were sold--and go to retailers with which it does not have relationships and demonstrate Dell's ability to move products in the retail channel, which is what retailers care about, according to Richard Shim, an analyst with IDC.

Dell has flirted with retail before. In 2005, Dell laptops quietly showed up on the shelves of Costco. It also struck a similar deal with CompUSA in 1991. The Wal-Mart and Costco strategies are similar, since both retailers have wide distribution and like to move product very quickly, said Shim.

But Dell insists that the Wal-Mart relationship is different because the volume of product involved is significantly higher than it was with Costco, and the Costco deal wasn't part of a larger global strategy.

The challenge will be how quickly Dell can move. "They're getting a lot of pressure for this sort of thing to happen because their competitors are eating their lunch in the consumer retail space," said Shim. "It's definitely something they have to react to. The longer it takes them, the riskier it becomes."