Can Dell Mount a Comeback?

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This week shoppers in a Dallas mall will bear witness to an oddity. For more than a decade, Dell has posted double-digit growth by selling computers directly to customers, most of them corporate clients. But two unfriendly trends have driven Dell to sell its wares at a place where chairman Michael Dell swore he would never be caught dead: a Dell retail store.

The first trend is the ever popular commingling of computing and entertainment in your living room. Yet Dell lives at the office. "We're seeing more and more of our technology intersecting with home entertainment," says Ro Parra, a senior vice president of Dell's home and small-business group. To entice gamesters and movie watchers, Dell has unveiled new models in its multimedia XPS line. The units range from a $3,500 desktop-notebook hybrid with a 20-in. screen and a remote, to a $2,270 gaming desktop with a swanky scarlet-and-gray exterior and high-end specs. Its purchase of Alienware, a leading seller of game computers, will give Dell cachet in that segment. Parra says Dell's stores give consumers a chance to see its multimedia PCs and laptops in a home environment, paired with some of Dell's other consumer goods like its flat-screen TV sets. The company expects to open more stores in the fall.

The second reason for Dell to go retail is more prosaic. For years, Dell's direct-shipment model proved especially good for selling to businesses, which generate 80% of its sales. But the business market is becoming more commoditized, and prices are in a free fall. So everyday shoppers are powering the industry's growth. The consumer market grew at twice the pace of the enterprise market last year, according to technology-research firm IDC. Result: Dell's stock has plummeted 52% in the past year. The company's sales grew a lackluster (for Dell) 14%, to $56 billion, in fiscal year 2006. Last Friday, Dell stunned Wall Street by warning that its second quarter would be a dog, sending the stock down 10% that day, to $19.91, and taking the NASDAQ with it. A resurgent Hewlett-Packard, meanwhile, has outpaced the industry; it announced in May that profits had grown 51% over the prior year.

Many of the challenges facing Dell seem to spring from the very innovations that made it a juggernaut. By selling direct, Dell keeps a lid on overhead and offers customized computers at competitive prices, with relatively swift delivery. As the price of computing dropped, Dell was consistently able to shed costs and maintain a price advantage over rivals. But this year Dell's competitors have attacked that price gap. HP slashed thousands of jobs and reduced the number of assembly plants, streamlining its supply chain and enabling it to go head to head with Dell on low-end machines. Retailers have also cut prices, even selling at cost and relying on upgrades and services for profits.