Compaq takes small step to win PC sales

Compaq’s decision to begin selling its personal computers (MW July 31) direct to the public could be seen as an attempt at imitating rivals Dell and Gateway 2000, which have traditionally only sold direct.

But in the light of Gateway beginning US trials of retail format Country Store, it is obvious that all the big players in the PC market are making efforts to open up as many sales points as possible. And in the process they are blurring the sales landscape. Previously Compaq has only sold through retail chains like Dixons and Comet in the UK.

It is also further evidence that computer manufacturers are focusing on smaller businesses.

Compaq’s move is part of a growing trend to appeal to small and medium-sized (SME) businesses, of up to 500 people. For instance, Hewlett Packard recently launched a system for this market called the Hewlett Packard Office Centre.

Compaq will test its direct scheme in the UK for three months, selling its Presario 2212 machine for 899, supported by a 1m ad campaign. The US and European divisions will see how the trial works before launching their own. But sources say it will become a permanent fixture.

International Data Group director of research Richard Buckley says: “All of the big players have gone after this market since the start of the year. They are all following each other. However, to some extent companies have got involved in this market because their competitors have.”

The SME market is estimated to be growing at between six and ten per cent annually and last year accounted for 46 per cent of sales in the total PC market, valued at 5.3bn by research company Dataquest.

The market subdivides into two sectors: businesses with ten to 99 staff accounting for 28 per cent of the PC market; and businesses with 100 to 500 people making up 18 per cent, according to Dataquest.

“In the past there has been a tendency for the big players to concentrate on the large corporate clients who will order thousands of machines at a time,” says Paolo Puppoli, an analyst in Dataquest’s European PC division. “But in recent years, as more small-scale businesses have added IT to their operations, this sector has gained in importance.”

New corporate accounts are becoming harder to win as finance directors become aware of the cost of owning and running a machine.

But Compaq, to the surprise of many analysts, says that it is chasing clients who are smaller than the standard SME definitions. Marketing director William Knocker says: “This strategy is aimed at what we call micro businesses. These are very small companies who order in units of one or two. There are millions of businesses like this in the UK and, according to our research, about 40 per cent of them use IT.

“This is not a market we have really played in in the past. But now the numbers are there to support this move. This market is looked on as a hard sell, there is not a lot of repeat business and the units per business are small. But it is sizeable.”

Puppoli believes Compaq runs the risk of alienating thousands of small dealers across the country, which the trade refers to as “resellers”. He says: “Resellers will not be happy. These smaller players have no bargaining power and they will think ‘why should I sell Compaq computers when it is trying to undercut me by selling cheap computers direct to the market?’.”

Knocker says Compaq has taken care of the small dealer explaining that resellers will get an undisclosed tip fee if they refer customers to Compaq’s direct service. “That will allow resellers to do what they do best, which is concentrate on offering quality service and advice,” says Knocker. Analysts suggest the high street retail chains will be unaffected by Compaq’s decision.

Puppoli adds that Dell and Gateway will take more than just a keen interest in Compaq’s trial. “They will probably be both flattered and worried,” he says, “because Compaq has copied their model very closely. But in their favour they both have years of experience running this model which gives them a great edge.

“However, there are only so many people who will buy direct. And I think this market is close to reaching saturation point. I think that direct sellers will have to think about selling through retail channels in the next five years.”

A point obviously shared by Gateway which opened six Country Store retail outlets in the US earlier this year. It will assess their success at the end of 1997. Dell, which is heavily focused on the corporate market, says that it views Compaq’s move as an endorsement of its own business model.

But a source in Gateway’s marketing department admits that Compaq is a threat. “Compaq is obviously a threat because it makes very good computers. But our advantage is that we can build our computers to order while Compaq sells off-the-peg.”

Whether they sell off-the-peg, or not, Compaq’s move will demand a response from its main rivals.