Dell's Date With Destiny: Shape Up or Shut Down

Computer World recently published a thought-provoking piece on Dell (DELL) titled “Has History Caught Up With Dell?” The jist of the article is that many technology firms, from IBM (IBM) through Digital to Compaq, suddenly found their success running into brick walls. Some of these firms again succeeded, but only after painful restructurings. Others failed altogether. For DELL, they describe the challenges as thus:

Selling products directly over the Web was ideally suited to a time when the customer wanted the optimal mix of configuration flexibility, price/performance and ease of ordering. But the enormous, and often unused, proc­essing power and storage capacity of today’s PCs have made these factors much less important. Increasingly, customer buying preferences are polarizing in ways that are making life more difficult for Dell. Today, if all you want is a low-cost, standard PC, you can get a perfectly good one in about an hour down at the local superstore, whose thin margins are much harder for Dell to undercut. At the other end of the spectrum, many customers are now much more interested in fashion than function. As we have seen with cell phones and the Apple (AAPL) Macintosh, a significant portion of the market is willing to pay a premium for superior look, feel, color, shape, weight and style. Neither Dell’s brand image nor its reliance on off-the-shelf components is well suited to this challenge, and thus the company is now scrambling to improve the design of its offerings. Given its vast size, this won’t be easy.

We not only agree with the analysis, but we said much the same thing back in May:

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.

This 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.

We later noted that by opening retail stores with no inventory, DELL was just being stubborn. It’s going to take more than empty stores to compete in the current PC market.

DELL 1-yr chart:

Disclosure: Author is short put options (a neutral to bullish position) on DELL.

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