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stores”branded as overcrowded, dif¬cult to navigate through, and regularly out of
stock”installing clear signage and lowered shelving to make items easier to reach and
sales staff easier to ¬nd (previous shelving had been warehouse style, ¬‚oor to ceiling,
obscuring sight). Inventory purchase and distribution was centralized, and high margin
products (such as software and accessories) were stocked up on instead of items dis-
continued for not turning a pro¬t. Premium store space was allocated for 2,000 software
titles, relegating hardware to the rear of the shop. Finally, the ¬rm focused on building
its value-added businesses, like service and support, to nurture and extend client rela-
tionships post-sale.


INDUSTRY AND COMPETITION
In 1996 computer superstores represented the largest retail segment of the $80 billion
fragmented and rapidly growing personal computer (PC) industry. Superstores account-




CompUSA
ed for nearly 13 percent of the total market and had a growth rate of 13.5 percent in 1995,
in contrast to the 11.5 percent rate reported for the whole U.S. PC industry.5 The entire
industry expected to grow at 15 percent p.a. for the next several years. Speci¬c markets
targeted for high growth included home users,6 business users, and current ¬rst-time us-
ers trading up for more advanced products. Growth was spurred by an expanding market,
wider hardware and software selections and compatibilities, decreasing prices, belief
that computers were necessary to personal, educational, and professional growth, explo-
sive growth of the Internet, and technological advances that prodded upgrades.
Computer retailers included computer superstores, mail order/direct dealers, of¬ce
supply superstores, large consumer electronics chains, mass merchandisers, and spe-
cialty retailers. Competition throughout the industry was intense, ensured by hardware
and software manufacturers that regularly cut prices and sought new distribution chan-
nels for product. In retail channels, branded low-margin products dictated increasing
sales volume per store to turn a pro¬t. While superstores had competed on broad selec-
tion and low prices to survive, ultimately they had to market higher price points, usually
the latest technology. Retailers differentiated from one another on technical support,
service, inventory depth and breadth, location, and other value additive components.
Exhibit 2 shows computer retailer statistics.
CompUSA competed directly with several retailers. Dell and Gateway 2000 were PC
manufacturers that sold direct (through mail order) to the end user. Computer City was
a national superstore competitor. Mass retailers that carried computers along with other
products fell into several categories including electronics chains like Circuit City and
Best Buy, of¬ce supply superstores like Of¬ce Depot and Staples, catalog/mail order re-
tailers like Global DirectMail and MicroWarehouse, software retailers like Egghead,
and department stores like Montgomery Ward and Sears. Analysts expected all these re-

.........................................................................................................................
5. Mitchell Bartlett, Analysts Report: CompUSA, Wessels Arnold & Henderson, September 12, 1996.
6. Household computer penetration was 39 percent in 1995, one- to two-thirds of which was already estimated to be
obsolete.
868 Case: CompUSA




138 Part 4 Additional Cases




tail segments to hold and increase their market shares due to both industry consolida-
tions and market share gained from smaller retailers that could not compete in an
environment where margins were squeezed to virtual unpro¬tability by larger players.
Computer City (a division of Tandy Corporation) was CompUSA™s computer super-
store competitor. Despite its similar concept, Computer City™s operating performance
was in stark contrast to CompUSA. With average store square footage at 22,500, and a
total annual revenue of $2.2 billion for 1996, Computer City™s 106 stores averaged annual
sales per square foot of only $925 compared to CompUSA™s average sales per square foot
of $1422. Analysts saw a similarity in Computer City™s rapid growth and poor store lay-
outs (i.e., high shelves) to CompUSA™s situation several years before its turnaround.
One problem that affected all computer retailers was the large amounts of inventory
carried. Product and technology obsolescence was a threat throughout the industry. Tech-
nology advanced at a rapid pace; products became outdated within months of introduc-
tion to the consumer market. Both hardware and software were subject to constant
upgrade or replacement as a result of improvements in underlying technologies or fea-
CompUSA




tures. If a product went obsolete, it was often dif¬cult if not impossible to unload at any
price, and the retailer was stuck with the surplus. CompUSA instituted provisions in sup-
ply contracts to help partially hedge against the risk of obsolescence. Further, the com-
pany™s high inventory turns (7.7 times in 1996) also cushioned against obsolete inventory.
In the 1990s, the retail environment was impacted by both changing consumer demo-
graphics and technologies. Computers were growing both more powerful and afford-
able, and were increasingly viewed as necessities rather than luxuries. In addition,
current users were upgrading to more sophisticated equipment. These and other factors
jump-started industry sales. While computer superstores seemed the logical vendor for
¬rst-time, technologically unsavvy consumers, their technology-soaked environments
proved overwhelming to shoppers trying to grasp the basics. This growing market found
relief at mass retailers whose mix of products, which included computers, offered envi-
ronments already familiar and less threatening, and boasted the added convenience of
noncomputer-related merchandise. The traditional superstore customer, who also fre-
quented the mail order channel as well as smaller exclusive computer boutiques, had
been a technology buff, repeat purchaser, or a knowledgeable ¬rst timer, but in order to
grow market share, superstores had to adapt their environments to also accommodate
¬rst-time buyers who were the potential growth market. In the interim, these clients were
expected to turn to mass retailers such as electronics and of¬ce supply stores.


CompUSA™s FUTURE
Under Halpin™s direction during 1996, CompUSA continued expansion, but with its re-
cent turnaround strategies and bottom-line focus fresh in mind. While the company still
looked for growth opportunities, it had started to veer from its traditional suburban sites
to also locate in urban markets, and had started to modify its store designs to adapt to its
new environs. Growth was also pursued through the previously untapped vehicle of mass
advertising”television, radio, and newspaper circulars. Print advertisements for stores
869
Case: CompUSA




139
Part 4 Additional Cases




were now full color, attention grabbing inserts in the weekend paper, replacing the ge-
neric black and white ROP newspaper ads the company had previously used. Television
and radio advertisements featuring the CompUSA mascot and resident computer whiz
“P.C. Modem” were introduced. CompUSA had also acquired PCs Compleat, a leading
mail-order reseller of computers, to strengthen its mail order business. Structurally, the
company had re-organized itself into operating units that would de¬ne its future business
strategy and drive growth.
CompUSA had divided itself into seven separate businesses to better take advantage
of market opportunities. These units were: retail, mail order, technical service and sup-
port, training, and sales to government, corporations, and educational institutions. The
company felt that an increasing proportion of its business would be from its institutional,
service, and training divisions. Exhibit 3 shows pro¬tability and revenues for CompUSA
divisions and product groups.

RETAIL. The company™s retail business had metamorphosed from a utilitarian and




CompUSA
threatening environment to a dynamic, instructive, and light-hearted place to shop.
Video and audio displays, in-store presentations, interactive kiosks, sample stations, and
a special section devoted to children offered shoppers timely and seasonal merchandise.
Hardware and software titles were discontinued if they did not generate sales. Rotating
themes and new releases encouraged impulse purchases, and sale associates were
trained to provide comprehensive customer service, offering total solutions packages”
product support, repair, and technical help along with the hardware purchase”that
would add value to the components and build a relationship with the consumer.
CompUSA dominated the industry in this segment.

MAIL ORDER. This was CompUSA™s highest growth business. The company took or-
ders over the phone at a central call center and then shipped from its distribution center
or directly from stores. CompUSA felt it had an advantage over other mail-order retailers
like Dell because it offered a variety of brands as well as convenient service and replace-
ment options by allowing returns and exchanges through stores. The acquisition of the
successful mail order ¬rm PCs Compleat was expected to add to growth as it had high
sales per employee (up to $1.3 million) and average orders of $1,700.

TECHNICAL SERVICES. This was the company™s highest margin business. For about
$100 the previously tedious and stressful task of setting up a computer would be under-
taken by the company, along with frontdoor delivery of the product. CompUSA would
also perform post set-up service like repairs. This service had become increasingly pop-
ular with consumers needing to integrate scanners, modems, and other peripheral equip-
ment with their computers. Technical services also included networking support, system
integration, software licensing, and over-the-phone services to the general public on a
fee basis.

TRAINING. CompUSA offered software training for businesses at their locations, and
in-house to customers. The company™s national presence allowed it to offer standard
training all over the country. Technical services and training combined contributed to
870 Case: CompUSA




140 Part 4 Additional Cases




less than 6 percent of sales but were being targeted for marketing and business plans that
would expand the units and grow sales.

CORPORATE SALES. CompUSA™s national presence allowed it to serve a corporation
at all the business™s operating locations, under one corporate account. For example, to
ensure uniformity of systems, CompUSA could provide identical software training for
employees of a national company, across the country, at the company™s various loca-
tions. CompUSA expected to spin off its corporate accounts into a separate entity over
the ensuing years.

GOVERNMENT SALES. Because of its low prices and national presence, the com-
pany was able to successfully bid for local, state, and federal government business.

EDUCATIONAL SALES. The company™s training centers and national presence was
again a key strategic element in acquiring clients.
CEO James Halpin explained the idea behind the distinct divisions:
CompUSA




We don™t think of ourselves as a retailer. We think of ourselves as a distributor of
computer products and services. But a distributor that touches the end consumer.
. . . We want to be dominant as a distributor, in all the channels we play, whether
it™s retail, corporate, government, education, training, mail-order, or technical
services. . . . I™ve spent a lot of time getting customers or getting people™s minds
to understand that we™re not a retailer, that we are a conglomerate, if you will. I
want our corporate customers to think of us as a corporate reseller. I want our
retail customers to think of us as a retailer, our mail-order customers, as a great
place for mail-order.7
By the fall 1996 publication of CompUSA™s 1996 annual report (CompUSA™s ¬scal
year ended June 30), the ¬rm had become the nation™s leading retailer and reseller of
computer products, generating earnings of $59.6 million on $3.83 billion of revenues.
(See Exhibit 4.) CompUSA boasted a total of 106 superstores in 33 states with average
sales per square foot of $1,422. Exhibit 1 shows CompUSA stock performance. At Sep-
tember 30, 1996, the company™s stock was priced at $54.
With 1997 just around the corner, CompUSA counted on riding the momentum of its
successful turnaround strategies driven by its seven businesses operating model by con-
tinuing to sell computers “any way customers wanted to buy them.”8 During the upcom-
ing year the company planned to open approximately 25“30 new stores, enter new
metropolitan markets, continue to diverge from a monolithic format by introducing
modi¬ed store formats to ¬t each market entered, and saturate current markets by lever-
aging existing advertising and operating activities and expanding the number of stores
in those markets.9

.........................................................................................................................
7. Kevin Ferguson, “CompUSA”James Halpin, President and CEO,” Computer Retail Week, November 18, 1996.
8. CompUSA 1996 Annual Report.
9. Mitchell Bartlett, Analysts Report: CompUSA, Wessels Arnold, & Henderson , September 12, 1996.
871
Case: CompUSA




141
Part 4 Additional Cases




EXHIBIT 1
CompUSA Stock Price Versus S&P 500
January 1994 Through September 1996
Index
Value Both Indexed to 1.00 As of 1/31/94
7.00


6.00


5.00


CompUSA
4.00


3.00




CompUSA
2.00


1.00
S&P 500

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