Low-cost market all but finishes Packard Bell

Massive financial losses, mostly because of low prices in the retail market, ironically prove the undoing of a company that once relied on inexpensive systems and retail sales to become a contender in the PC industry.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
Packard Bell NEC all but threw in the towel today.

The Sacramento, California-based company announced massive layoffs, the termination of the Packard Bell consumer brand in the United States, and the pending resignation of its chief executive. (See related story)

The cause: massive financial losses, mostly because of low prices in the retail market. Ironically, earlier this decade Packard Bell relied on inexpensive systems and retail marketing techniques to become a contender in the personal computer industry.

In 1995, Packard Bell was the No. 1 retail PC company in the United States with a 15 percent market share, according to Dataquest figures. This past quarter, Packard Bell and NEC combined were not among the top five in the United States and showed year-over-year declines. Japanese conglomerate NEC owns a majority stake in Packard Bell.

The downfall, which has long been expected, comes amid a massive industry consolidation that has witnessed the top few brands corner the lion's share of sales.

"This is the last gasp for Packard Bell," said Schelley Olhava, an analyst at International Data Corporation.

The company, which perennially battled a reputation for less-than-stellar quality, began to stumble in 1996. But its slide accelerated with the arrival of sub-$1,000 PCs from major manufacturers. Compaq, Hewlett-Packard, and others started to emphasize super-cheap consumer PCs in early 1997.

Larger companies made up for lower prices by increasing the volume of their sales. Packard Bell, which was already losing money, saw declines in both prices and volume.

Compaq wrested the U.S. retail crown from Packard Bell in the middle of 1996. By the year's fourth quarter, Packard Bell's retail market share declined by 40 percent to 18 percent. Overall, however, the company claimed some 8.5 percent of the 7.7 million PC units sold, heading Dell, Gateway, and Hewlett-Packard.

Dell and Gateway eventually zoomed past Packard Bell largely on the strength of so-called direct sales, under which PC manufacturers shun wholesale and retail middlemen and sell directly to customers. At the same time, new low-cost leaders such as Emachines began gaining significant market share.

Company executives understood the trend. CEO Alain Couder, who took over in July 1998 to attempt a turnaround and prepare for an IPO, put his finger on the issue the day he took office. "There is no future in this business without growth. If you have declining revenue, you are in a death spiral in this industry," he said then.

Layoffs and executive departures
As reported earlier, Packard Bell plans to lay off approximately 80 percent of its workforce in a titanic restructuring process that will culminate with the resignation of Couder sometime in the first quarter of 2000. The overhaul comes because the company will likely lose $150 million this year, said spokesman Ron Fuchs, significantly more than the $100 million in losses it had set as a goal to investors.

As part of the restructuring, Packard Bell will also pull out of retail in the United States, the market where it made its mark. Packard Bell PCs will continue to be sold in Europe, Fuchs said.

Such upheaval keeps with Packard Bell's colorful history. Founded by a group of Israeli immigrants, Packard Bell takes its name from a defunct television manufacturer from the 50's. The founders, a group that included former CEO Beny Alagem, bought the name because it sounded like it was associated with both the phone company and Hewlett-Packard, several sources have said in the past.

In the first half of the decade, the company made its mark by selling its low-cost PCs in retail stores, a sales outlet often ignored and misunderstood by major vendors. Packard Bell was thus able to rack up market share gains.

Success opened a number of opportunities for the company. Groupe Bull of France and NEC were persuaded to invest; the latter now owns approximately 53 percent of Packard Bell. Chipmaking giant Intel too once sunk approximately $500 million into the company during a time that Packard Bell was tangling with Compaq, according to various sources. Intel's infusion eventually was taken over by NEC.

The company also snagged a sweetheart deal with the state of California that allowed it to take over an abandoned military base for a rent that some years came to around $1, according to a number of sources. The company further managed to take advantage of tax breaks by hiring out-of-work citizens.

Despite market-share gains and impressive, multimillion-dollar investments, however, the company often bled red ink. "We have stated that we have not been profitable for the past couple of years," said Mal Ransom, senior vice president of Packard Bell NEC, in July 1998.

Legal problems also plagued Packard Bell. In late 1996, the company agreed to pay $5 million to settle a fraud claim under which plaintiffs claimed the company incorporated used computer parts in new computers.

By 1998, when it brought in Couder, the company was already in a downward spiral. "Their units are poor. They are off in a market where their competitors are up and their selling prices are down," Roger Kay, computer analyst at IDC, said at the time.