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A Contender in Computers : Packard Bell Mounts a Turnaround by Sticking to Low Prices, Mass Merchandising

March 01, 1994|H. G. REZA | TIMES STAFF WRITER

WESTLAKE VILLAGE — Two years ago, many observers questioned whether personal computer manufacturer Packard Bell Electronics Inc. would survive the market's relentless price cutting and cutthroat competition.

Packard Bell's sales were growing at five times the industry average, but its profits were nose-diving as fast as the dizzying rounds of cuts in the price of computers. The company canceled a $70-million stock offering intended to raise desperately needed working capital when investors were turned off by Packard Bell's $93-million debt and negative net worth of $4 million as of Dec. 31, 1991.

"When everyone got to look at their books, they were under heavy attack. Everybody, including us, was predicting Packard Bell's death. But they regrouped, withstood the barrage and came back strong. Their computers are everywhere now," said Bruce Stephen, an analyst with International Data Corp. in Framingham, Mass.

In less than two years, Packard Bell has rebounded to become the fourth-largest personal-computer maker in the United States in units sold, behind IBM, Apple and Compaq, according to International Data.

While some computer companies like Gateway 2000 sell personal computers through direct sales or dealers, Beny Alagem, Packard Bell's chief executive officer, has long followed a strategy of selling his IBM-compatible PCs in high volume and as cheaply as possible through mass marketers like Montgomery Ward, Price Costco, Circuit City and Office Depot.

The company was forced to move its headquarters and production facilities from Chatsworth to Westlake Village and Camarillo because of last month's earthquake. Its Chatsworth facilities, which were under lease, suffered extensive damage in the quake.

In 1993, Packard Bell's revenues grew 35% to $1.25 billion, from $925 million in 1992. Company officials expect 1994 revenues to hit $2.3 billion. This is a big change from sales of $676 million, and a loss of $798,000, in 1991. Although Packard Bell is still a private company and under no obligation to reveal its earnings, analysts who follow the company believe it is now profitable but they say Packard Bell's profit margin is only 3 to 5 cents for every $1 of sales.

Applying this formula to the $1.25 billion in revenues reported for 1993, Packard Bell earned a profit of between $37 million and $62 million last year. "They are nicely profitable. This company is making money," said Lloyd Greif, president of Greif & Co., an investment-banking firm in Los Angeles.

Although Compaq is considerably larger than Packard Bell both in units sold and revenues, officials of the Houston-based company are keeping a wary eye on Packard Bell. "Quality-wise, we still believe our products are much better. But you've got to give them credit. Packard Bell is a formidable competitor who is not going to go away soon," said a Compaq official who declined to be identified.

How did Packard Bell complete its turnaround from the brink of collapse less than two years ago to a company that now has larger PC makers looking over their shoulders?

"We have remained focused on our key channels of (retail) distribution. We remain committed to selling our products through retail channels" rather than selling PCs through specialty stores or direct sales, said Mal Ransom, Packard Bell's vice president of marketing. Packard Bell also claims to have been the first company to sell PCs with software included, enabling consumers to take a computer out of the box, plug it in and use it immediately.

Others offer a more succinct explanation. "Mass merchandising, low cost. That's their key," said Philippe de Marcillac, analyst at Dataquest in San Jose, who follows Packard Bell.

Packard Bell computers are affordable to consumers because the company sells them cheap and in volume to mass retailers like the electronics chain Circuit City. Last week, Circuit City stores were selling a Packard Bell Legend 115 model, minus the monitor, for $899 retail, only $50 more than what Circuit City paid Packard Bell wholesale for the machine. A complete Packard Bell PC with monitor, keyboard and processor ranges from $1,100 to $2,700 at retail.

But mass production and inexpensive products have not been the only keys to Packard Bell's fast growth. In 1993 computer maker Groupe Bull of France bought 19.9% of Packard Bell, investing an estimated $50 million in the U.S. company. Packard Bell also received $100 million in financing from Congress Financial Corp. of New York. The infusion of cash helped Packard Bell clean up its balance sheet.

"They're everywhere. You can't walk into a major retailer or discount warehouse without seeing their computers. They're not at 7-Eleven yet, but who knows where their product will appear next?" said Stephen of International Data.

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