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Lower-End PC Shortfall May Boost Margins

Retailers may have a rare opportunity to turn a nifty profit on PCs this holiday selling season when an expected shortfall of cheap PCs forces consumers to step up to higher priced machines.

With high memory prices reducing profit margins on low-end PCs even further, vendors are reducing the number of units to be shipped in the next two months in order to cut their losses, said Michael Flink, a retail analyst with Levin Consulting, Beachwood, Ohio, "As we get into the first week of December it will be very hard to find low-end PCs," Flink said. "At this point I think customers will start stepping up to mid-priced machines." He added that as long as the retailers don't cut their own throats with price cuts they could turn this to their advantage.

Flink predicted that such low-end specialists as eMachines will quickly sell out, while Compaq and Hewlett-Packard will tighten their supply of entry-level units.

Charles Smulders, PC analyst with Dataquest, San Jose, Calif., added that vendors may lower the amount of memory featured in the PCs or even raise prices. He also saw a leaner inventory pipeline as manufacturers strive to deliver products on an as-needed basis.

James Hollandsworth, Packard Bell NEC's senior VP of marketing, said his firm has decided to hold the line and not execute price cuts slated for later this year.

Some retailers have already been told to expect less.

"HP and Compaq told us we are only going to get 50% of the allocation we received last year," said Steve Hassell, PC buyer for American Appliance. "There won't be many places to turn to for a PC, and these are priced lower than last year."

Chuck Cebuhar, Sears VP/general manager of home electronics and home office, expects to see shortages of PCs this Christmas due to the earthquake in Taiwan, which is impacting chip availability. That situation is being compounded by IBM's departure from the consumer category.

For IBM the shortage could prove a godsend. Adam Levin, president of Levin Consulting, said despite IBM's announcement that it was pulling out of the retail PC business on January 1, Big Blue should do well as retailers scramble to keep their stores stocked.

Fear that the earthquake that rocked Taiwan last month would cause serious damaged to DRAM factories propelled prices of this component dramatically upward. While the expected shortage of DRAM has not materialized to any great extent, prices have remained high and vendors are reacting to this, Flink said.

Hollandsworth said vendors are finding it difficult to meet commitments made earlier this year. Packard Bell, he said, may benefit from the situation because its primary production facility is in California not Taiwan, though he did concede that Packard Bell is stretched to the limit due to an increase in orders.

The problems are not expected to impact on other computer product areas, as peripherals vendors see consumers shopping to upgrade their exiting units.

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