Pile 'em high and sell 'em cheap may not be the most glamorous way to sell computers, but for Jan Murray's discount warehouse the sky is the limit. While most of the computer industry is in the throes of its worst ever recession, Murray can barely expand fast enough.
Last November he opened Europe's first computer superstore nestled in premises between Ikea and Toys 'R' Us on the A23 near Croydon. PC World is a giant warehouse stacked to the gunnels with computer hardware, software and gee-whizz accessories. Each weekend thousands of people flow through its doors; sales for the first year are likely to exceed £10 million. The venture has proved such a success that Murray has just raised £1.8 million funding for three more superstores in the London area, and he has his sights set on other cities for 1993.
Murray's expanding empire is founded on a trend that is causing heartache everywhere else in the industry - the fact that computers are becoming commodities, boxes of electronics selling at rock bottom prices. For most computer shoppers, low price is now the number one priority according to a survey by International Data Corporation (IDC). This contrasts with the situation a year ago when IDC found brand, service and support were the top three considerations. Consumer demand for low prices has coincided with huge oversupply in the industry, creating a price war ferocious even by PC standards. The average cost of a desktop machine crashed last year by 40-50%. All manufacturers have been hit. Earlier this year Alan Sugar, bullish boss of Amstrad, reported his first ever six-month loss, while Olivetti forecast that its 1991 figures would plunge L380 billion (£176 million) into the red. Also struggling is Texas-based Compaq, once the fastest growing company in the US. Even IBM has the blues.
But for Murray, the seemingly endless downward spiral of prices merely increases the market. "Obviously everyone suffers in a price war, but we suffer less than the rest." An affable 44-year-old, Murray learned his retailing skills running his father's electronics shops in London's Tottenham Court Road. In the mid-'80s he decided that computers were potentially far more lucrative than hi-fi and video recorders. After a foray into high street computer shops, he focused on mail-order. His business is now Europe's largest, with sales last year of £32 million.
But the market conditions now point towards out-of-town superstores as the next big money spinner, he reckons. "There are probably now just as many second-time buyers as first. The recession has made people far more cost conscious, and computers have become commodities. People don't see why they should pay 50% more for one machine than another when each runs the same software." The warehouse has advantages over mail-order because it is open seven days a week and there is no sending off money in advance, says Murray. "You get what you want instantly ... plus you can buy all the knick-knacks that your local dealer doesn't stock." Prices are about the same as mail-order and up to 35% below the high street.
Early last year, Murray set off on a reconnaissance tour of the US where the superstore idea was born. He visited Dallas-based CompUSA, which has a score of stores across the US, and Fry's Electronics of Silicon Valley. "I was amazed at what I saw ... The American superstores had machines piled high and people wheeling around supermarket trolleys picking them off the shelves." It is a far cry from the conventional high street computer shop where dealers charged generous margins in exchange for holding the hands of their technophobic customers. Small wonder 15% of UK dealers went out of business last year. Customers are using the price war to their advantage - many are now demanding discounts.
In the battle to cut margins some manufacturers have bypassed the dealer completely. The first to focus on direct selling was Michael Dell, a Texan who formed his company in 1984 at the age of 19. The dealer is a classic pig-in-the-middle, says Dell. "He can't do the high volumes, and the customers he does have are unsatisfied. This is why dealers are all bankrupt or bleeding to death on the floor at the moment. It's just the same as happened to the TV market in the 1960s, and it's not only in the UK, it's happening in the rest of Europe, Canada and the US."
Dealers should adopt either a very high added value approach, or concentrate on large volumes, he believes. "Trying to do both from the same operation is a disaster." But most manufacturers want to have the best of both worlds. They want their direct sales force to cream off the lucrative high volume corporate customer sales and profitable service contracts. Meanwhile they leave dealers to pick up the crumbs of business prospects. Dealers are so fed up they have formed a pressure group within the Computer Services Association, and published a charter of demands to manufacturers calling for improved technical support, servicing backup and help with marketing.
Paolo Tosi, managing director of Olivetti (UK), says that dealers just have to learn to change the way they do business. "Instead of shifting boxes to make their profits, they must concentrate on selling ancillary services - training, software installation, and maintenance."
His view is shared by Andreas Barth, Compaq's senior vice president for Europe. Compaq considered abandoning its dealers when it ran into difficulties last autumn, but decided against the move. "You've got to get to your customers somehow," says Barth. But although Compaq's traditionally high prices have provided comfortable margins for dealers, the company is seeking new outlets for a low-cost range planned for launch later this year.
Murray has confounded the critics who said, when PC World was launched, that the UK market was not ready for the idea. Moreover, even to his own surprise the superstore's appeal has not been confined to experienced, computer-literate customers. Lots of novices come to PC World, bright-eyed and eager to jump on the high-tech train. "Such customers are asked what they want to use the machine for and how much they are willing to pay. There is no need for technicalities. They don't want to know what chip is inside, or the clock-speed of the micro-processor, yet that is what the whole computer industry is geared to," says Murray. Most computer vendors have no idea of the sharp end of computer retailing, he reckons. "They like to make it all black magic and mystique. But that's rubbish. They are talking way above the heads of the average person who is now buying computers."
In such a market, one element is crucial - strong technical support. The customer needs to be reassured that if he cannot work out which bits to plug together, or how to load the software, help is at hand. To this end Murray has equipped PC World with a large maintenance area where the work-benches are lined with anti-static mats and engineers wear wristbands wired to the floor to prevent damage to chips by power surges.
As for the high street chains such as Dixons and Wildings, Murray reckons they'll be knocked out of the market because they won't be able to compete with his product range, technical back-up and heart-stopping prices. "It will be hard for the high street computer shops and small dealers to survive. What we've done will change the market forever."