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Retailers on the run

Computer retailers, fighting to boost sales in a business that has slim profit margins, are facing increasing pressure from mail order and online sales channels.

3 min read
Computer retailers, fighting to boost sales in a business that already has slim profit margins, are facing increasing pressure from mail order and online sales channels, analysts and researchers say.

That's going to make it even harder on electronics retail stores such as Best Buy and Circuit City and computer retailers such as Computer City.

Computers sales, which are still largely conducted in retail stores, are increasingly being purchased by mail order, according to Simmons Market Research Bureau in New York. The research firm found that of more than 180,000 adults surveyed, 1.6 percent purchased their computers by mail in 1994--up from 1.3 percent in 1993.

Potential buyers who are experienced computer users tend to visit retail stores to glean information and "kick the tires" of the equipment, only to later make their purchase by mail order or online service, according to Ross Cooley, chairman and chief executive of pcOrder.

"The potential threat of alternate channels for purchasing products is certainly on the radar screen of every retailer. They see it for what it is: a competitor to their format," Cooley said, the former general manager of North America for Compaq Computer.

Manufacturers that sell mail-order computers such as Gateway 2000 (GATE) and Dell Computer (DELL) recently posted strong third-quarter profits, noting increases of around 50 percent and higher sales of more than 35 percent over the previous year. "The direct mail channel is doing extremely well and I expect it to gain market share," said Michael Rosen, an analyst with Lazard Freres in New York. "I expect the direct mail channel to double its market share in the next four to five years."

CompUSA, which recently posted strong profits but has seen sales growth slowing, earlier this year purchased PCs Compleat to bolster its existing mail order business.

"We think there's a lot of opportunity in mail order," said Carol Elfstrom, a CompUSA spokeswoman. She added that mail order is one of seven businesses the computer retailer runs to diversify its operations.

She may be right, but mail order is not the only way to sell computer hardware. Computer products purchased online are expected to reach $140 million in 1996 and soar to $2.1 billion by the year 2,000, according to Forrester Research.

Customers who are comfortable with ordering products by mail are the most likely group to order their products from companies that allow online transactions, analysts and researchers say. And they note that this may allow some brick-and-mortar retailers to recapture sales lost to mail-order houses.

CompUSA, although it currently operates a mail-order business, is preparing to add electronic commerce transactions from its Web site.

Egghead (EGGS), the troubled software retailer, turned to the Internet last month to help bolster sales.

Egghead added sales via the Internet to its marketing channel, but the effort, launched in the last week of the company's fiscal second quarter, has yet to make a dent on its bottom line.

The company today reported a widening loss of $4.7 million for the second quarter, compared with $3.5 million a year ago.

Revenues have fallen 20.5 percent in the quarter to $80 million, down from $100.6 million a year earlier. Sales at stores opened at least a year, the benchmark to gauge a retailer's financial health, fell 22 percent from the same period a year ago.

"The advent of electronic commerce has been recognized and it's in an embryonic stage," pcOrder's Cooley said. "But the efficiencies it brings to the entire process are now quite clearly understood, and will indeed be a much larger portion of all the computers sold as more and more people take advantage of this capability."