Brand Health Check: Dell

The direct-sales PC pioneer is struggling to maintain customers' loyalty in the face of fierce price competition.

Dell has been a pioneering brand ever since its conception in founder Michael Dell's University of Texas dormitory 24 years ago. But over the past year the world's biggest personal computer company has been caught napping.

Following poor first-quarter results, chief executive Kevin Rollins conceded: 'The competitive environment has been more intense than we had planned for or understood.'

Long priding itself on being the cheapest in the market, Dell has recently been dragged into a price war with competitors including Lenovo and Acer, the brand's profits taking a big hit as a result.

Dell's first-quarter results, published in May, showed an 18% year-on-year drop in profits, from $934m (£499m) to $762m (£407m). The company's share price has slumped by about 40% over the past year - and all this in a growing sector.

As Dell unveiled its results, rival Hewlett-Packard was boasting a 51% increase in profits over the three months to April, with net income rising to $1.46bn (£777m) over the period. Dell's year-on-year share of shipments fell from 16.9% to 16.5% over the same period, according to Gartner.

No longer able to distinguish itself on price, direct-seller Dell blended further into the crowd with last month's announcement that it was to trial two retail stores, in Texas and New York. While the stores will not stock Dell goods - they will offer consumers the chance to test its products, from PCs and digital cameras to printers and TVs, and order them - the move represents a significant step away from its roots.

Another obstacle looms on the horizon. Dell, along with other PC manufacturers and vendors, will have been disappointed by the news that Microsoft has postponed Vista, the latest iteration of its Windows operating system.

The consumer edition will not go on sale until January 2007 at the earliest, which will put off customers who would otherwise have bought a PC in the run-up to Christmas.

Can Dell reconnect with its successful roots, or will it become just another face in the crowd? We asked Draft London managing director John Minnec, whose clients include software company Computer Associates, and Hamish Grant, client services director at Clark McKay and Walpole, who oversaw Microsoft's direct marketing while at Harrison Troughton Wunderman.

DIAGNOSIS 1 - JOHN MINNEC MANAGING DIRECTOR, DRAFT LONDON

The rise of Dell, at a time when bricks and mortar retail and manufacturer operations including Tiny and Time descended into oblivion, was remarkable.

In this context, it is unsurprising that its less-than-brilliant first quarter has put furrows on analysts' brows - especially in a market that grew by more than 13% in the first quarter of 2006, compared with 2005.

Technology has become smarter and cheaper, with prices falling, putting margins under pressure. Dell has enjoyed a strong reputation for quality in the past, but this has waned as it sourced cheaper parts and components.

Reports of poor customer service are not exactly thin on the ground either.

With direct brands so reliant on a strong customer experience for repeat business, this is a worry.

Computers also remain remarkably undifferentiated as products. Only Apple really stands out. The rest are sold on price and key performance characteristics, and the big players' brands are indistinct, to say the least. Dell marks itself out as a direct operation, but there is little else on which to hang its hat.

REMEDY

- Focus hard on improving the customer service. Engage customers and reward their loyalty.

- Broaden the brand - find out what Dell means to consumers beyond the basic 'not available in the shops' message.

- Look to design to make the range more desirable to consumers.

- Provide better technical support to make the offering more desirable to business users.

DIAGNOSIS 2 - HAMISH GRANT, CLIENT SERVICES DIRECTOR, CLARK MCKAY AND WALPOLE

There is an old adage that over time all commodities become free.

In the early days, Dell positioned itself as the people's champion - cheap PCs for all, thanks to a very smart supply-chain model. But on the back of this came the commoditisation of PC hardware.

All the PC manufacturers now use the same processors, buy their hard-drives from the same factories in Taiwan or Korea, and get their displays from the same sources - so really, what is the difference between one PC and another? Dell has fallen victim to its own strategy.

It should come as no surprise that things have become so rocky after industry pioneer IBM bailed out and sold much of its PC division to Lenovo, allowing it to lower its prices.

The problem Dell now faces is that a company cannot build a price-based model when it hasn't got the lowest prices. The company has got into some bad habits. It got used to winning price wars, but can no longer take that for granted, and needs to be much more careful about the fights it picks.

REMEDY

- Focus on integration and bundling - get the services and added-value components front and centre and embedded in hardware sales.

- Formalise the channel structure: make friends and influence people by acknowledging reseller channel partners and looking after them properly.

- Sub-segment and develop higher-margin products. Not all consumers want beige or black PCs - add colour.

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