PC INDUSTRY SUFFERS After dismal '91, companies hatch new marketing strategies


Fort Worth, Texas -- The personal computer industry -- a

business that enjoyed dizzying growth during much of the 1980s -- seemingly hit a brick wall in 1991.

In an industry where double-digit expansion had become a fact of life, a flat performance during 1991 has introduced sobering realities that will shape the direction of the PC business in 1992 and beyond, analysts say.

Falling prices coupled with increasingly fierce competition has cut into profit margins that were once fat.

As a national recession tempers demand for PCs, anemic market growth in 1992 will prompt new strategies for many computer makers and retailers.

Retrenchment plans announced earlier this year by industry leaders such as IBM and Houston-based Compaq Computer Corp. might become standard procedure for other computer manufacturers, who will be forced to cut costs to stay competitive, said Bruce Stephen, director of worldwide computer hardware research for International Data Corp. in Framingham, Mass.

"We'll be seeing a very tough market in 1992. It's going to be a very intense, combative environment," Mr. Stephen said. "If anything, manufacturers will be turning the screws a little tighter to cut expenses."

At the same time, retailers will continue to search for new ways to sell computers to both corporate and home customers.

Computer resellers are focusing more on their marketing strategies as some launch operations that target one type of customer.

Tandy Corp., for example, will continue the rollout of its 'u Computer City superstore chain in 1992. Computer City, a 30,000-square-foot showroom featuring a wide variety of computer brands, is targeting home users and small businesses that need computer equipment.

Launched in 1991, Computer City already has eight locations, and 16 are slated to open this year. It represents Tandy's attempt to bring discount warehouse retailing strategies to computer reselling.

Computer City -- along with a variety of competitors such as Dallas-based CompUSA -- will try to tap into a growing market for home computers, said Jim Poyner, an analyst with Rauscher Pierce Refsnes in Dallas.

"1991 was the birth of a distinct home market for desktop computers," Mr. Poyner said. "The beachhead is being established because people are bringing stuff home from work and, more and more, they are needing to do that work on a PC."

But rather than buying the specialized "home computers" introduced by Tandy Corp. and IBM in 1990, home computer users are shopping for more powerful machines at lower prices, Mr. Poyner said.

The "price sensitivity" of home shoppers will help bring down the average price paid for a computer, Mr. Poyner said.

That, in turn, will lead to lower margins and a need for manufacturers to cut their costs to maintain profits.

Lowell Duncan, a Tandy spokesman, acknowledges the trend toward falling prices.

"If prices continue to drop, the guys that do well will be those with low-cost manufacturing capability," Mr. Duncan said.

"We think we fit in that category," he added.

Mr. Stephen of International Data Corp. said the downward pressures on cost will prompt some manufacturers to shrink operations.

But he does not expect many computer-makers to go out of business or merge with others in the next year.

"A lot of companies today already are running close to the edge," Mr. Stephen said. "But it still would take a lot to blast a company entirely out of the market."

Rather, Mr. Poyner suggests that some companies might focus on selling computers with the 486-based microprocessor -- the speediest and most powerful PC currently on the market.

Previously, the 486-based computers have been considered most cost-effective as the centerpiece of a small computer network.

But emerging applications, such as software that runs on the Windows program developed by MicroSoft Corp., can better use the power of the 486, Mr. Poyner said.

And the price of a 486 machine has dropped into the $3,000 range -- a level more acceptable to corporate customers, according to Mr. Poyner.

"The price has hit a sweet spot again where companies can afford to compare machines based on their performance," Mr. Poyner said.

Semiconductor-maker Intel Corp. might soon deliver the first of its 586-based microprocessor chips, which are expected to be significantly more powerful than the 486 processors now available. The more expensive 586 chips likely will be limited at first to selected specialty applications, Mr. Poyner said.

Even with new product introductions, however, the performance the computer industry still might hinge most on the health of the overall economy, said John Venator, chief executive officer of ABCD: The Microcomputer Industry Association in Schaumburg, Ill.

The decline in computer growth in 1991 might leave some pent-up demand for the market to capitalize on this year, Mr. Venator said.

Concerns over the Persian Gulf war considerably tempered demand for computers during the early part of 1991, he said.

Election-year pressures on politicians to jump-start the economy also might boost overall sales, Mr. Venator said.

"For those that have their heads screwed on right and are astute business managers, 1991 wasn't necessarily a bad year," Mr. Venator said. "But profit margins are extremely thin right now. I sure hope 1992 won't be a repeat of 1991."

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