Price wars take byte out of computer retail margins.

Profit pinch cited among other factors in Sun closure

Profit margins of computer retailers in Los Angeles County have been cut in half in the past year, sending a message to dealers that they will have to make adjustments or face even tougher times, retailers said.

Retailers said profit margins have been cut from about 20 percent per order to approximately 10 percent, a huge drop that has occurred even as industry revenue, which in 1992 was at least $700 million in Los Angeles County, has continued to climb.

Two weeks ago one of the largest retailers in the county -- Sun Computers Inc. -- unexpectedly closed down. Local dealers could not specifically blame the closing on the decline in margins but rather said it was probably a combination of factors that have affected all retailers in the still evolving business.

They said the Sun closing was probably caused by the company spreading itself too thin and poor inventory control, as well as the drop in profit margins. They said Carson-based Sun may not have had the service personnel to effectively staff 12 outlets and the company was probably unable to keep up with rapidly changing computer products.

Last week no one was answering the phones at Sun offices but a spokesman for one of the retailer's primary lenders said computer dealers in general are having a difficult time. The spokesman for San Francisco-based Transamerica Corp., a financial services firm, also said the company's commercial finance division has been forced to foreclose on several computer retailers recently. He would not be more specific in terms of numbers.

"We have financed many computer operations and it has certainly become a more difficult business recently," said Transamerica spokesman Richard Olsen. "There is a lot of competition, including manufacturing selling direct to users. But there is also much more price competition now and that has hurt their profit margins."

He said he did not know the specifics of the Sun matter but explained that Transamerica took foreclosure action on the retailer after it failed to meet payments on a loan that exceeded $1 million.

According to the Los Angeles Business Journal Book of Lists, Sun was the third biggest computer retailer in the county with 1992 sales revenue of $86.2 million.

"What is happening here is that it's becoming increasingly difficult to be a storefront retailer," said Chris Richner, sales manager for Overbyte Computers Corp., a Carson-based "reseller." A reseller is different from a traditional retailer because a reseller designs, sells and services computer systems that have been assembled specifically for a buyer. A retailer, on the other hand, usually just sells a system off a store shelf.

"Retailers are being hurt by manufacturers selling direct to consumers and by manufacturers cutting their prices. Retailers' overhead has not gone down but the prices of their products has, and that has cut into profit margins in a pretty big way," said Richner.

Asif Hudani, president of Infosystems Computer Center, which according to the Journal's List is the largest retailer in the county, said as more consumers and businesses buy computers, sales revenue continues to climb at double-digit rates every year. But the problem is competition from manufacturers and a more open distribution system, as well as lower prices.

"The technology is becoming less expensive and there are more manufacturers making equipment and selling it direct," he added. "The whole distribution network has changed and that means retailers really have to scramble to compete."

Among the major manufacturers that sell direct to consumers and businesses is Dell Computer Corp. in Austin, Texas.

A spokeswoman for Dell, Jill Shanks, said the company has not completely bypassed retailers, however. She said Dell, in addition to selling direct to consumers and businesses, is now also promoting its personal computers in such high-volume, general merchandise operations as Wal-Mart and the Price Club stores.

Shanks said Dell products are also available in specialty computer retail stores like Comp USA, which in 1992 had $90 million in retail sales in Los Angeles County.

"By going into stores like Wal-Mart we are reaching new customers through very high-volume outlets," Shanks said. "We believe we can better reach more individual users and small businesses through those type of stores."

Both local and national representatives of the retail computer industry said they were surprised by the closing of Sun.

"For a long time anybody could open a store and start selling computers," said Nathan Morton, president and chief executive officer of Dallas-based Comp USA, a chain of 43 retail stores in 28 cities in the United States.

"Now the whole distribution network has changed," said Morton. "There are a lot more products, a lot more users and in many ways the retail industry is getting much more specialized. I didn't know about Sun so I don't know what happened. But today in computer retail you have to have a concept to survive."