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

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.

“Our studies have shown that 70% of homes in the United States don’t have a personal computer. Many of the other 30% that have computers have old technology. That’s an awesome market. We’re targeting household penetration,” Ransom said.

Packard Bell is also attempting to penetrate the business market, but with less success. About 2,000 office workers polled by J.D. Power & Associates in a 1993 survey listed Packard Bell as below average in user support. “The main complaint from business users was that they had a difficult time getting help from Packard Bell when they experienced problems with their machines. The company’s consumer hot line was not very helpful,” said Adrian Heryford of J.D. Power.

Dell Computer ranked highest in customer satisfaction, followed by Compaq and Gateway 2000, the only companies rated above average in the study. Apple, AST, CompuAdd, Hewlett-Packard, IBM and Packard Bell were rated below average.

Packard Bell officials acknowledged the survey’s findings, but they claim the company was the first computer maker to offer consumers a toll-free help line in the United States, in 1988. The company claims the line handles more than 70,000 calls each week, 24 hours a day, in more than 30 languages.

Despite its recent success, the company still suffers from an identity problem. Packard Bell was founded in 1987 by Alagem, Jason Barzilay and Alex Sandel. The trio purchased the name Packard Bell from Teledyne Inc. for an undisclosed sum. Older consumers still confuse the Packard Bell name with the defunct company that manufactured television sets and radios. Others confuse it with the larger and better-known computer maker Hewlett-Packard.

Still, questions remain about the reliability of the company’s products. Do people buy Packard Bell computers because of brand loyalty or because they are the cheapest on the market?

“People buy our computers because they represent the top end of technology at the right price,” said Packard Bell’s Ransom.

Industry analysts said that Packard Bell computers are usually 10% to 20% cheaper than those offered by IBM and Compaq.

An informal poll of shoppers at Office Depot, Circuit City, Good Guys and Wal-Mart showed that Packard Bell computers are often purchased by first-time buyers looking for a less expensive model.

“My daughter is in high school and we thought it was time to buy our first computer. I bought a Packard Bell model because it was the cheapest I could find,” said Patricia Warner, who purchased a personal computer at the Office Depot in Woodland Hills.

A salesman at a Good Guys electronics store in the San Fernando Valley said that consumers whose first personal computers are Packard Bell models usually “upgrade” to IBM, Compaq or Apple when they purchase a second computer. “Normally, I don’t recommend Packard Bell. The only thing that makes them attractive is the price,” said the Good Guys salesman.

According to documents filed with the Securities and Exchange Commission, in 1991 about 17% of Packard Bell’s monthly shipments were returned to the factory for a variety of reasons. However, Ransom said that “returns and adjustments have improved considerably.”

But salespeople at several retail stores said that Packard Bell computers are returned for defects more frequently than other brands. A salesman at a Good Guys store said the Packard Bell Legend 605 on display did not work when plugged in the first time. When store employees opened up the personal computer, they found a wire that was not connected to the hard drive and corrected the problem themselves. “With Packard Bell, you can take it home, and if it doesn’t work when you plug it in, bring it back. Eventually, you’ll get one that works,” said the salesman.

“The return issue is not a quality issue,” Ransom insisted. Instead, he compared the returns to when “your wife goes shopping and buys a toaster. A few days later you decide it isn’t what you wanted and you take it back.”

One thing is certain: Packard Bell is poised for major growth in 1994. The company expects its sales to double this year in part by expanding its foreign markets in Australia, Europe, Asia and South America, where Packard Bell maintains offices. In addition, the company will introduce a new series of multimedia machines, including computers that can be used with compact disc-read only memory software and a line of notebook computers.

Packard Bell is not hampered by high overhead. The company leases most of its facilities and runs what one analyst called “a bare-bones, no-frills operation.”

“I was in there one day, waiting to meet with (Alagem). I was dressed in a business suit and felt out of place while waiting in the lobby. It was pretty Spartan, and there were people pushing trash cans through the lobby in the corporate office. It was pretty amazing,” said the analyst, who asked to remain anonymous.

In December, Packard Bell officials announced plans to move the company headquarters and about 1,200 employees out of Los Angeles. The new sites under consideration at the time included Palmdale, Salt Lake County, Utah, Portland, Ore., Camarillo and Newbury Park.

In January, four days after the Northridge earthquake, company officials told about 420 service center employees in Chatsworth they would have to move to new facilities in Utah and accept pay cuts of up to 30% or be laid off. Packard Bell said the jobs were being transferred to Utah in order to cut the company’s costs.

The rest of the company was forced to relocate temporarily to Westlake Village and Camarillo when its Chatsworth facilities were damaged. Ransom said the company had signed a one-year lease for the new facilities and added that the company will not make a decision about whether to move until later in the year.