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The low-end crunch

The low-end crunch

The challenge facing smaller retailers and resellers has been made painfully clear by the stories that appear on this week's front page.

How's this for a triple whammy. As if margins haven't been shot to bits already by the $400 and $500 PCs being sold by major retailers like Tandy and Harvey Norman today, we will soon have the free PC. ARN's exclusive revelation this week - that in the near future Compucon will launch a free PC onto the Australian market - will send a chill down the spine of many resellers.

What must be particularly worrying for smaller resellers is that this market space has so far been the domain of the mass merchants because such a model demands huge volumes. I've been interested to see the shift in Harvey Norman's mindset because I recall very clearly Gerry Harvey commenting at a press conference only a couple of years ago that he didn't want a bar of the "cheapies" market. Harvey Norman would concentrate its efforts on the more expensive branded products because that was where the margin was, he said.

However, the free PC market is simply too big to ignore. When Compucon launches, the exclusive retailer it signs up is almost certain to be run off its feet. There is a pent-up demand by lower income households for computers they can afford, which has been demonstrated very clearly by the demand generated by cheap, second-hand computers offered by companies like the failed Business Boost.

Will only the largest resellers survive?

So let's assume margins are going to continue to be decimated and that the majority of the very low-end market is going to be dominated by mass merchants. On top of that, there is the direct threat from the major PC vendors who, not surprisingly, are desperate to defend their turf. Now that Hewlett-Packard has set the example, you can expect to see all the major vendors quickly follow. How each of them will involve the channel remains to be seen, but from what we have seen so far, even if the channel is used for fulfilment it is only a handful of larger resellers that get a share of the spoils. This week's revelation that Leading Solutions will fulfil exclusively for HP over the next six months is testament to that and Microsoft's online store in the US (previously code-named NITRO) also only fulfils through half a dozen big resellers.

Again, the smaller reseller is the one who misses out.

As if that wasn't bad enough, we're seeing and will increasingly see a whole raft of non-traditional retailers like book, toy and music stores, service stations and convenience stores dip their toes into the digital water with products like printer consumables. It will only be a matter of time before that extends to games and other software.

The bright side is that all this is very indicative that the market is continuing to grow at a phenomenal rate over the next couple of years with computers penetrating almost every household and every aspect of consumers' lives. The question is how do small resellers, and particularly small retailers, make money under the threat of such fierce competition? I'd like to hear your thoughts. E-mail me at philip_sim@idg.com.au


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