Sector Insight: Home computers - Volume over value

High-street computer retailers are feeling the squeeze despite booming sales figures, reports Jane Bainbridge.

THE BACKGROUND - The home-computer market has evolved rapidly, with desktop PCs, laptops and PDAs becoming essential items for the majority of households. Rapid developments in technology, especially ever-faster processing, have fuelled the expansion and encouraged the regular upgrade of equipment as older models become obsolete. The same developments, allied to an increase in production, have led to substantial price cuts since 2000. The emphasis on price and a willingness of computer-savvy consumers to buy online have put retail outlets under growing pressure.

The UK home-computer market - which includes sales of laptops and PDAs, or smartphones, as well as desktop computers - was worth £2.14bn in 2004, a 10% increase on 2000, and is expected to reach £2.25bn by the end of this year, according to Mintel.

However, a much bigger increase in volume sales has been masked by falling prices. Had these remained at the level of 2000, the value of the market would have increased 91% in the period.

The requirement to shift increasing quantities of PCs at cheaper prices has fuelled retailer consolidation. The number of independent computer retailers has fallen from 6720 in 1998 to 5400 this year, according to Mintel. In the same period, the number of retail outlets in the general electrical goods sector has fallen from 7500 to about 6700.

The decline in the number of retail outlets has been matched by the rising number of consumers buying computers online. According to Mintel, 33% of PC spending was handled online last year, compared with 25% in 2002.

The country's changing population profile appears to benefit the sector.

The 45-54 age group, which will see the highest rate of growth over the next five years, is also the group with one of the highest rates of computer ownership.

A very high proportion of those in this age range are computer-literate and can be expected to trade up their own PC or purchase computer equipment for their children.

Retail outlets

Specialist retailers account for just over 40% of UK computer sales.

PC World, owned by the Dixons Group, is the dominant player, with an estimated 21% share of the market.

Established in the early-90s, PC World has 147 stores, most in out-of-town locations and retail parks. The chain has built its reputation on low prices, good after-care packages and stocking a wide range of PCs.

It also sells online; a 'collect@store' scheme introduced this year allows online buyers to collect purchases from stores. 'Our research shows 66% of customers want face-to-face advice and to touch and feel the computers, especially laptops,' says commercial director Neil Old. 'You can reserve online, then get advice and service when you go in-store.' In line with this strategy, PC World recently dropped its 'Stamping down prices' ad strapline and replaced it with 'Best of both worlds'. The other retailers in the Dixons Group - Dixons and Currys - also sell computers alongside general electrical goods.

Competitive market

The collapse of The Computer Shop in July this year, when owner Granville Technology went into administration, testified to the competitiveness of the market. The company owned the Tiny- and Time-branded PCs, sold through its outlets and direct. Only 78 stores remained when the company ceased trading in July this year, out of the 300 at its formation.

Direct selling is a major channel for computer sales, with Dell the leader in this market. It sells only its own-brand computers, assembling them to match the specifications of consumers. Dell tends to appeal to experienced users rather than first-time buyers.

Appealing both to experienced users and first-time buyers, Apple is a rarity in the market - the only manufacturer that appears to engender genuine brand loyalty. Its positioning is stylish and cutting-edge, and its first UK store - opened on London's Regent Street in November last year - offers a brand experience rather than just a computer shop. Apple now has three stores in the UK and plans to open a further three. As well as selling its products, the stores stage live events and staff offer advice and tutorials.

Beyond the specialists

A number of non-specialists also have a share of the market. Kesa-owned Comet sells a selection of computer brands among its electric appliances and positions itself as low on price.

Catalogue store Argos no longer sells PCs, but does offer peripherals and software. Empire Direct, Amazon, Toys R Us and John Lewis all sell PCs, and Tesco offers a small number of computers in its superstores and Extra hypermarkets.

Computer sales generally reflect the state of the economy, with sales lower when consumer confidence slips.

Mintel predicts that the market will increase 28% between 2005 and 2010 to £2.9bn, with online sales growing at the fastest rate.

UK HOME-COMPUTER RETAILERS BY MARKET SHARE 2004 2002 % % Total specialist computer retailers 40.5 44.5 PC World 21.3 20.9 The Computer World/The Computer Shop 5.2 5.6 Manufacturers' retail showrooms 6.0 7.0 Other computer specialist retailers 8.0 11.0 Total electrical retailers 15.1 15.9 Currys 4.8 4.6 Dixons 4.3 5.5 Comet 4.0 3.8 Other electrical retailers 2.0 2.0 Non-specialist retailers 3.0 1.0 Direct sales channels 40.9 38.3 Online 32.9 25.4 Phone, catalogue, newspaper inserts, 8.0 12.9 mail order from manufacturers Source: Mintel Figures include laptops/PDAs and desktop PCs HOUSEHOLD OWNERSHIP OF PCS (% OF UK POPULATION) 2004 2003 2001 1999 % % % % 1 Ownership 69.0 63.5 51.6 37.3 2 Obtained in past 12 months 13.5 12.2 13.3 11.7 3 Obtained 1-2 years ago 15.4 15.4 14.1 11.0 4 Obtained longer ago 36.0 32.4 18.5 13.3 Source: GB TGI, BMRB 1999-Q2 2005/Mintel Base: 25,000 adults. 'When obtained' figures exclude 'don't knows'

ANALYST COMMENT

IAN LANDSBOROUGH, CONSULTANT, ACXIOM

The PC retail market has been changing at breakneck speed, with retailers having to adapt in the face of stiff competition and declining sales.

The collapse of Tiny Computers in July, with estimated debts of £70m, suggests how weak the UK market has been in 2005. As a result, the outlook is extremely cautious.

With the market maturing and laptops overtaking desktop PCs as the 'must-have' item, retailers face a challenging market. Consumers are also becoming ever-more savvy and demanding.

The latest PCs have to deliver more, not just in terms of capacity, but also in looks, and competition in the sector has fuelled an ongoing price war. Consumers have come to expect prices to fall while specifications increase, creating enormous difficulties for retailers. They also need to cope with the shorter lifespans of products, meaning increased levels of training to enable staff to sell increasingly complex machines.

At the same time, the retail sector has recorded its biggest year-on-year decline in sales for 22 years, according to the Confederation of British Industry.

The downturn means there are bargains available for consumers, but the situation is simply unsustainable for retailers, especially as their operating costs are rising well above the rate of inflation.

With current consumer purchasing based chiefly on price, recent sales of computers have depended on heavy discounting.

It remains to be seen whether this trend can be broken, and by which retailers. For the moment, it is definitely a buyers' market.

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