Case Study: Dell.

com
By James Maguire
March 3, 2003

Since its launch in the mid '90s, Dell's e-commerce business has been a poster child for
the benefits of online sales, says Aberdeen Group analyst Kent Allen. The company's
strategy of selling over the Internet -- with no retail outlets and no middleman -- has been
as discussed, admired and imitated as any e-commerce model. Dell's online sales channel
has proven so successful, says Allen that the computer industry must ask: "Does the
consumer need to go to the store to buy a PC anymore?"

Regardless of the company's past success, Dell is affected by two current trends in e-
commerce, says Forrester analyst Carrie Johnson. And only one of these trends works in
the PC giant's favor.

The early adopters were always comfortable buying PCs online, she notes, but the
general public has taken a while to catch up. "What we know about how consumers buy
online is that they start with low-ticket, low-risk goods like books, and they eventually
begin to trust the Internet more and graduate to higher end products like PCs and travel."

At this point, "Enough consumers have been shopping online for three or more years that
they trust the Internet to buy almost anything," Johnson says. "Which is why you see
apparel do so well now and even computers do so well, because it's not just the early
adopters buying online now. We've caught the second wave of online shopping."

But while this trend bodes well for Dell, says Johnson, another does not: due to a
slowdown in PC sales, what's fueling most of the online growth [in the PC market] at this
point are second hand sales of computers. Auction sites like eBay and uBid are enjoying
thriving growth rates in PC sales, she says, in contrast to new PC vendors like Dell. So
the challenge for Dell now is figuring out how to grow sales in a tough market.

The Front End

Launched as a static page in 1994, Dell.com took the plunge into e-commerce shortly
thereafter, and by 1997 was the first company to record a million dollars in online sales,
according to Dell spokesperson Deborah McNair.

After six strong years of online sales -- widely regarded by analysts as stumble free --
Dell has racked up some impressive statistics. In the last quarter of 2002, Dell.com
logged a billion page views, a company first. According to Dell spokesperson Bob
Kaufman, about half of the company's revenue comes from the site, which means
approximately $16 billion flowed through Dell.com in the last year.

A key part of Dell's success, says Aberdeen's Allen, is that the site offers consumers
"choice and control." Buyers can click through Dell and assemble a computer system
piece by piece, choosing components like hard drive size and processor speed based on
their budgets and needs.
"Their ability to allow people to custom design has traditionally been something that
they're ahead of the game with, and a lot of people are slowly starting to catch up now,"
Allen says. "But they continue to be viewed as the leader."

This direct contact with consumers gives Dell a competitive advantage, explains Dell's
McNair. "Because we know exactly what our customers are ordering, it's a 1-to-1
proposition. We get feedback on how our site is working so we're constantly making
tweaks to it to make the experience for our customers easier."

Certainly Dell's competitors see the advantage of the company's direct model, and to a
varying degree use similar tactics. But, says Gartner analyst Mark Margevicius, "The
other vendors have legacy ties to supply chains -- supply chains with distributors and
resellers. Those elements provide value and revenue to the IBMs and HPs of the world.
So they can't automatically switch on a dime. But those non-direct channels are also less
efficient. So Dell had the ability to cut margin without cutting profit."

Profit Source: B2B

While Dell's consumer sales are highly visible, thanks in part to a high profile TV
campaign, its business sales are a much bigger revenue source. "About 15 percent of our
total revenue is consumer business and the rest is B2B," Dell's Kaufman says. "Our major
focus in the IT marketplace is selling servers, storage products, network switches and
services to corporate customers. A lot of the e-commerce engine revolves around that."

Or, as Aberdeen's Allen notes, "B2C keeps them in newspapers a lot, B2B keeps them in
the black."

To facilitate B2B sales, the Dell site offers each corporate customer an individualized
interface. Using what Dell calls a Premier page, purchasing managers log on and order
using an interface customized for their company's needs. "They place the order, it gets
routed up to whoever in their company needs to approve it, then [the order] is sent
directly to us," McNair says.

The efficiency of the B2B system works in synergy with the consumer sales, Kaufman
says. "Remember, corporate customers are also consumers, so if they have a good
experience, they'll come over and buy a system for their home, or vice versa."

The Back End

Now that many e-tailers have built a customer-friendly front end, their back end supply
chain is a greater focus, says Aberdeen's Allen. "That's a lot of what you saw this past
Christmas: progress on making sure [e-tailers] weren't just capturing the order but were
fulfilling the order. That's where Dell is continuing to succeed."

Or, as Gartner's Mark Margevicius says, "You can give me the best e-commerce
experience but unless they've got the supply chain nailed, there's no way Dell is as
successful as they are today."
Dell's Kaufman says the PC maker uses the Internet to provide a "constant and seamless
flow of information among all different aspects of the company to drive the process." The
company's back end is calibrated to respond so closely to orders from the front end that
inventory is kept to a razor-thin, four-day supply. "We build systems only after a
customer has ordered them," Dell's McNair says, noting that this applies to desktop
systems as well as complex server orders.

Dell has no central warehouse facility but instead ships to customers directly from its
manufacturing plants. Based on customer location, a shipment may originate from a Dell
plant in Ireland, China, Brazil, Malaysia, Texas or Tennessee.

Making a Giant Bigger

As for how Dell expands from here -- having built a thriving e-commerce operation, but
faced with a slow market -- no analyst would hazard a definitive guess. But a recent Dell
announcement provides a clue.

Last July, the company began to experiment with kiosks in shopping malls. Since
launching the initiative, it has opened 57 kiosks in nine states. Recently, Dell announced
it is ramping up its kiosk presence by placing them in Sears stores.

The kiosks are mini-stores, about 10-12 feet wide, with basic inventory and Dell
salespeople. Dell's Kaufman explains that the kiosks enable mall shoppers to "go in and
touch and feel some of our product and then either order right there or go back home and
order."

So part of the e-commerce giant's expansion effort is geared, ironically, toward

traditional retail. Or rather, since the kiosks are tied electronically to Dell.com, they're an
odd hybrid: a brick-and-mortar mini-store with an e-commerce option. Analysts note that
one of the advantages of the Sears kiosk placement is that, in comparison to the Dell site,
the department store's foot traffic contains a higher percentage of women and shoppers
who are over 55.

Certainly, though, it appears that Dell's core focus will remain its direct e-commerce
model. Perhaps the best estimate of where Dell goes from here is more of the same, just
bigger and better. As Aberdeen's Allen observes, "With e-commerce, there's no end.
You're never done, it's constantly evolving, and it has to reflect the dynamics of the
market. If anyone thinks they can catch up to Dell, there is no catching up -- it's just
trying to stay ahead of the customer."