For years and years, HP and dozens of other companies took the abuse, the taunting, and the mockery. Quarter after quarter, day after day, the companies stuck in the bottom-feeding retail clique had to sit in the stands as Dell, the direct channel King of Prom, received all of the glowing accolades and rewards. Dell?s direct business model eliminated the pudgy retail middleman. Dell is more efficient. Dell is more customized. Dell is tailored to the customer?s every want and need and Dell gives it to them at a better price. For years and years they all heard it: HP, Sony, Toshiba, Apple ? why can?t you be more like Dell?
But just like any natural system, the PC and electronics industry lives at the whim of entropy. Over time, when computer prices could not get any lower and the world was just flooded with them, Dell?s direct business model hit a plateau. But stocks don?t care about entropy and pressures from Wall Street forced Dell to do the unthinkable and join the nerds at the retail table in the cafeteria. But doing business in retail is far, far more costly and complicated than anything Dell had ever seen from its comfy direct business model. Even scarier was that the companies Dell was joining had decades more experience in battling the retail wars.
The nerds had waited a long, long time for this day. Finally, the Prom King is on their turf and they are fully armed with spit-wads.
Six months after Dell?s computers and printers arrived at stores, the company has held its sales results very close to its chest. However, the company?s first efforts have been met with great resistance and the common challenges of being the new kid at the table. Dell?s biggest challenge is to feed that pudgy middleman, the retailers themselves, who constantly demand helpings of more and more money ? or what are otherwise known as marketing development funds. Marketing development funds help pay for shelf space, keep the displays looking good and decorated with promotional materials, and give incentives to employees who push the products to customers. Most importantly, the funds help the pudgy middleman pay for advertising, an area that Dell has particularly struggled in.
Since its debut at Staples last November, Dell has advertised its desktop and notebook computers 155 times, a relative drop in the ocean when compared to HP?s 1,356 total ad placements. Though HP works with vastly more retail outlets, the company is outpacing Dell at same stores. HP has placed twice as many ads than Dell at Staples and has tripled its rival at Best Buy. More startling is Dell?s lack of activity in PC Bundles, a sales package that links printer and computer sales and a tactic many thought would be Dell?s best bet to kick retail doors wide open. To date, Dell has not advertised a single PC Bundle.
Dell is learning that it can?t simply rely on its Prom King brand name to be successful in retail; it takes a lot of money. A recent lawsuit suggested that HP has over $100 million in marketing development funds dedicated to Staples alone.
That?s a really big spitwad.
Perhaps Dell?s biggest obstacle is that the retail business model contradicts how the company got rich to start with. Dell didn?t make its billions on computer or electronics sales alone, its profits were generated through complimentary products and services that were attached to each computer sale. With its direct business model, Dell was able to contain its customers and push additional monitors, cables, software packages, and (most importantly) extended service contracts. By attaching all of these add-ons to its computer sales, the company could turn a $599 unprofitable desktop into an $849 box of pure cash cow. In retail, Dell has lost control of its customers and is at the mercy of retailers, who pick and price products however they choose. Dell can?t sell $35 USB cables or their profit filled service contracts in retail and must count on the meager profits of its computer sales alone. It must turn Dell?s stomach.
The ones who first taunted the nerds are now reminding Dell that it takes a long time and a lot of money to be like the HPs, Sonys, and Toshibas. Even a company the size of Dell has to build marketing development funds, a consistent advertising campaign, and sales strategy for each and every retailer it works with. Those things don’t happen over night. For Dell to be a retail hit, the company eventually must push its other product lines, mainly televisions, through retailers and that takes a great deal of arm twisting (time & money).
Dell?s news is not all bad as it posted positive earnings last week and appears to have turned the financial corner. The company has also managed to distribute its ink and toner cartridges to retailers, a huge achievement for the company that will have a very positive impact on future profits. However, the retail road is a long one and Dell?s journey with the pudgy middleman will be a bumpy ride.
The nerds have waited long enough. They may proceed to wedgy.