Retailers are turning to one of the oldest tricks in the consumer business to get around the PC price wars: store-brand products.
Analysts who follow the retail market predict that there will be an increase in lower-tier, in-house computer brands from major and minor computer stores this year as margins on PCs from top-line manufacturers continue to erode.
Computers put together by contract manufacturers and given a store brand name are cheaper to make, acquire, and sell than PCs from makers like Compaq or IBM, according to Kevin Hause, an analyst at International Data Corporation. This way, there's potential for retailers to squeeze out a better margin and profits on these machines.
Buyers also understand that a no-name box can be just as good as a name brand, said Matt Sargent, an analyst for Computer Intelligence. "White box," or nonmainstream brand, computers account for approximately 25 to 30 percent of business PC sales. White boxes, however, account only 10 percent of superstore retail sales.
Evidence of the trend started in 1997. Last summer, CompUSA launched its "American" line of build-to-order PCs. Rather than sink in the marketplace like former CompUSA house brand computers, sales of the American line are rising, said David Goldstein, president of Channel Marketing Corporation.
"More and more retail customers are second- and third-time buyers and they don't want to deal with mail order," he said.
The American line, in fact, appears to be succeeding in a category close to consumers' hearts: price. The 333-MHz Pentium II American is one of the cheapest computers from a major outlet using that top-line processor. Computer City and Wal-Mart also have relatively inexpensive house brands.
Staples, Office Max, and Sears are other outlets either likely considering, or already ramping up, their own house brand efforts, various sources said.
Processor vendors Cyrix and Advanced Micro Devices could gain here as well, added Goldstein. The two companies already have relationships with this segment of the market and sell cheaper processors. "By the fourth quarter, we're going to see the sub-$500 computer" from different vendors, he noted.
House brand computers can cut numerous expense corners, said Hause. Major vendors, for instance, provide funds to retailers to publish inserts for Sunday newspapers to advertise computer specials. While these inserts will tout the products of the company providing the marketing funds, there is typically more than enough room on the insert to place ads for house brands, an advertising subsidy that benefits retailers.
In addition, retailers do not have to engage in the kind of intensive brand-building campaign that major manufacturers undertake to build their market shares.
A glut in manufacturing capacity helps, too. "Second-tier vendors can increase their volumes through this," said Hause, "Everex is looking to do this; Protiva is looking at it." There are also a number of quality contract manufacturers, such as SCI Systems, with manufacturing capacity. SCI already manufactures low-end machines for Dell, Compaq, and others.
Further costs savings come through the fact that many corporate brands come with numerous and largely unwanted software titles, said Goldstein. Studies by Channel Marketing show that most consumers use less than 20 percent of the software that comes with their consumer PCs. Most consumers want to use the applications and utilities they use at work. Unfortunately, many consumer PC vendors try to differentiate their home lines by including software not found on business PCs.
"If you use Microsoft Word at home, you will use Microsoft Word at home," he added. "But what comes with the consumer PC is Microsoft Works."
To correct the discrepancy, consumers pirate software from work. By leaving out these software bundles, store brands gain a price advantage, according to Goldstein.
Despite the trend toward house brands, Seymour Merrin, president of Merrin Information Services, predicted that most of these efforts face serious problems because the retailers lack the infrastructure for customer support.
Getting a computer from a contract manufacturer with a store brand is easy, he said. The difficult part comes in setting up adequate telemarketing efforts, help desks, and other support services that customers will require. While Goldstein pointed out that companies can outsource this function to the contract manufacturer, Merrin countered by pointing out that such a relationship still comes with a price tag.
"They are all trying and most will fail," Merrin said. "CompUSA is going to be the only one that succeeds. It already has the infrastructure from its corporate sales division."
One effort that could get around the support problem was announced recently by Intel. Under the new AnswerExpress program, customer can subscribe for basic hardware and software support for $14.95 a month. CompUSA, among other retailers, is marketing the service.
But like the major brands, inventory balancing will remain a problem, added Hause: "These guys are not used to doing forecasting."