Stores Trying To Figure Out How To Sell Pcs To Consumers -- Shakeout Inevitable For Computer Retailers

When chip maker Intel and several major computer manufacturers roll out the next generation of personal computers tomorrow, they'll hope to usher in a new age of multimedia home computing.

But the new models, with beefed up audio and three-dimensional graphics, could at the same time make it even tougher for retailers to figure out how to sell computers to consumers.

The latest reminder of that difficulty was last week's announcement that Tandy will close its 17-unit Incredible Universe chain, including a store in Auburn, and close or relocate 19 of its 113 Computer City stores (though Computer City stores in Washington won't be affected).

As the $65 billion electronics-retailing industry consolidates, a further shakeout among computer retailers seems inevitable.

"I still think this is a growth category, but the PC is increasingly becoming a commodity, and the margins are not there," said Jeff Atkin, a retail analyst at Kunnath Karren Rinne & Atkin in Seattle. "I don't think this is any different from what happens in other retail sectors. The weak sisters are always the ones that shake out first. Lack of capital killed Ballard and Smith's Furniture."

Personal computers were first sold as items for do-it-yourself hobbyists, then by electronics stores such as Radio Shack, then by local or regional specialty retailers like Computerland and Seattle's once-dominant Ballard Computer. Most of those specialty stores, including Ballard, have become history. Two national chains - Computer City and CompUSA - remain, though each is facing problems.

PC sales seem to have hit a plateau, and Computer City is expected to lose $60 million this year.

Right now it's a confusing market for retail PC sales.

-- Giant warehouse stores like PriceCostco sell PCs as pure commodities, not far from 50-pound sacks of dogfood and automobile tires.

-- Chains like Office Depot and Office Max treat personal computers as business tools, to be sold along with office furniture and supplies.

-- Entertainment-oriented stores like The Good Guys sell them along with televisions, VCRs and audio gear.

-- Other chains like Circuit City and Future Shop sell PCs as household appliances, along with stoves and refrigerators.

-- Computer buyers who know what they want and understand technical specifications can also buy cut-rate, custom-built personal computers at small specialty shops such as Lucky Computers or by mail from major manufacturers such as Micron Technology, Gateway 2000 and Dell.

Mail-order sales are growing as a percentage of all PC sales as customers replacing older machines shop for specifications and price and are willing to forego the hand-holding they might get at specialty computer stores.

Lucky Computers, a Texas-based chain of 17 small stores, including four in the Seattle area and three in Oregon, also custom-builds machines. While it can't match the prices of some ready-made systems sold in bigger stores, Lucky shaves its costs by skipping national advertising, and many of its prices are competitive with those of large mail-order companies like Dell.

But increasingly, computer retailers, such as Lucky, are seeking business customers. "It's very difficult to make money with the walk-in home user," said Terry Cheng, store manager for Lucky Computers in Tukwila.

One reason is that prices for computers have fallen relentlessly over the past 10 years. Consumers are used to being able to buy more power, for less money, every year.

Retailers have had to shave their costs, and more may go out of business trying to compete. Fewer competitors eventually could mean less competition - and less incentive to keep prices at rock-bottom levels.

"Electronics pricing has been shoved downward so fast that there is very little room left" for further declines, said Jim Potts, former vice president of Fretter, an electronics chain in Brighton, Mich., that has filed for bankruptcy protection.

Many manufacturers hope the new multimedia computers due out this week represent a major shift toward entertainment that will bring the home PC out of the den and into the same room where the family watches television. The new machines promise easy Internet access, e-mail and beefed up graphics and sound. "We see that having lots of implications," said Dick Outcalt of Outcalt & Johnson Retail Strategists in Seattle. "This may change where your television is and where you use the Internet. It may change furniture. The four remotes on your davenport may become four remotes and a keyboard of some sort."

This expected evolution of home electronics will present new challenges to retailers who want to sell many or all parts of such a vision.

Incredible Universe, hailed when it opened in 1992 as having elevated electronics retailing to new levels, is a victim of its ambitious attempts to try to sell too many kinds of merchandise under one roof.

"They were trying to reach about nine different narrow niches of consumers," said Pat Johnson of Outcalt & Johnson. "But the household that needs to buy a new cooktop or a refrigerator may not be the same folks who want to buy a home theater. And they are not likely to be the same people buying home computers."

The Universe chain never turned a profit for Tandy, which has found its Radio Shack stores more rewarding.

"It is very difficult to sell more home computers, because the people who are the best customers, the people who need them, already have them," said Johnson. About 36 percent of U.S. households now own computers, and Johnson and Outcalt think that proportion won't increase dramatically any time soon.

"The presence of children is one of the major drivers for the purchase of a home PC," Johnson said. "And only 29 percent of the country's households have children."

Information from Bloomberg Business News is included in this report.