Change in Industry Sales Trends Forces Dell to Alter Retail Model (DELL)

Includes: DELL, HPQ
by: William Trent, CFA

Dealbreaker noted the divergence between Hewlett Packard (NYSE:HPQ) and DELL (NASDAQ:DELL) and asks:

All of the sudden, people are touting the retail model, saying that it’s more convenient for people to go just get a cheap PC from a nearby electronics shop than it is to buy a computer online, and wait a few days for it to be customized and delivered — but again, what changed in the PC industry that people stopped caring about customization?

It may not be that people care less about customization but rather that the now super-low prices of PCs has turned the industry on its head in terms of efficiency. In the past, DELL’s model was more efficient because declining prices meant that having a low inventory and no retail markup carried a large enough advantage to offset the cost of shipping the PC.

Now, with the PC selling for $500 rather than $1,500, the shipping costs per unit are much higher and may actually make bulk shipments to retailers more cost effective than individual shipments to buyers.

Which is why last year DELL replaced free delivery with free “economy” shipping - delivery to the post office for pickup. Home delivery is now an added charge.

DELL 1-yr chart:

DELL 1 yr

DELL sales, 4Q'05-1Q'07 (projected):

DELL Sales