Hurricanes have driven up energy prices in the United States, but they have yet to brush up against the PC industry.
Now that the fourth quarter is under way, PC manufacturers have much to look forward to. This quarter is typically the busiest of the year, thanks to holiday sales to consumers and corporate spend-it-or-lose-it budgets.
The largest brand-name companies, including Dell Inc., Hewlett-Packard Co. and Gateway Inc., have all launched new consumer PC lines of late.
The companies continue to offer aggressively priced models starting at roughly $250 to $350 for a desktop, after rebates, and about $500 to $600, after rebates, for notebooks, according to an informal survey by Ziff Davis Internet.
Beginning prices for SMB (small and midsize business)-oriented PCs, which are generally slightly higher, range from about $350 to $400 for a desktop and start around $700 for a notebook. The companies also target high-end consumers with machines like Dells multi-thousand dollar XPS models.
Despite appearing to have little to no effect to date on the latest batch of consumer PCs or, for that matter, on prices of corporate machines, energy prices are starting to worry some in the industry.
Consumers and businesses are paying more for fuel—with the average price for a gallon of gasoline hovering around $3—and, with winter coming, face higher heating costs in many areas of the country as well. Those higher costs raise the prospect that at least some consumers and businesses will defer PC purchases.
At the same time, shipping costs—something PC makers must either eat or pass on to customers—have gone up across the board, due to higher fuel costs, an executive at Hewlett-Packard said.
“People arent likely to be deterred from buying something because theyre spending an extra couple hundred dollars on gas,” said Steve Baker, an analyst with NPD Group Inc. However, “The wild card [for retailers and PC makers] is things like cost of distribution and turning on the lights.”
Indeed, “We are starting to see some incremental costs in transportation, overall, in our cost structure,” said Sam Stzeinbaum, general manager for HPs North America Consumer Computing Business.
The rising shipping costs, which include higher bills for air freight and increases in ground shipping rates, are not considered to be significant yet, Stzeinbaum said, although rising transportation costs can squeeze profit margins.
“All the costs of transportation are definitely going up,” he said. “But as a percentage of the total cost of a product, its not a huge portion.”
Similarly, Dell, of Round Rock, Texas, has yet to see a material impact from higher energy prices, a company spokesperson said.
Still, rising shipping costs might eventually put a bigger squeeze on PC makers. As shipping costs go up or margins are squeezed in other ways—such as component prices—analysts say free shipping will be one of the first things to go, particularly for less expensive systems.
Aside from cutting margins, higher shipping costs can make it more difficult for PC makers to send people their orders for free, a powerful tool for motivating customers who buy direct.
Stzeinbaum said, “Its clear that free shipping is a very important attraction … But it does have a real cost. You cant give it away all the time. When youre selling a $250 PC, if you ship it for free, its pretty painful.”
Consumer Notebooks Are Flying
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HPs HPShopping direct sales arm has been advertising an HP Pavilion a1100 desktop for $249 after rebates and before shipping charges. The HPShopping.com site advertised free ground shipping on orders of $250 or higher on Monday.
Several computer models were also being offered with no-charge shipping. But many of HPs low-price and mid-price desktops, including the $249 model, were not included in the offer.
Dell, which offers free shipping more sporadically as a part of a revolving series of special offers, was offering no-cost shipping on Dimension desktops priced at $549 or more and Inspiron notebooks costing $849 or higher on Monday. But the offer included a $24 charge for handling.
The two computer companies normally charge $99 for ground shipping for a desktop or notebook. There were also offering numerous perks for SMBs, including rebates and no-charge upgrades to flat panel displays.
For its part, Dell will begin offering an additional shipping option on Oct. 10 that allows some consumers to pick up their Dell PC orders at the closest Post Office, a company spokesperson said, although she did not comment on how much the option might cost customers.
But where they might wax and wane on shipping charges, PC makers are much less likely to charge more for PCs, especially now when demand for PCs—notebooks in particular—appears to be holding up.
At the moment, consumer notebook PCs are “flying off the shelves,” at retail Stzeinbaum said, with unit sales growth rates in the 30 to 50 percent range. Desktops have also been moving along with single-digit sales increases, adding up to show little change in consumers behavior thus far.
“We have not seen anything like [a slowdown in consumer sales] yet. Theres obviously a concern that there may be a slowdown in purchasing at the consumer level because of these factors,” he said.
But, while it will watch the market carefully, HP has no plan to change any of its tactics, Stzeinbaum indicated.
Due to competition, PC makers are exceedingly reluctant to raise system prices for consumer or business machines.
Instead, if there were a slowdown in fourth quarter sales, the immediate reaction of some vendors would be to cut their retail prices by stepping up rebates or increasing assistance to retailers in order to spur demand from holiday shoppers, Baker predicted.
“Costs have been going up a lot all over the place for years—on plastics and resins and those types of things, for example. From an OEM perspective, theres always ways to offset those things. I cant think, in the PC market, where theres been a price increase. What [PC makers] usually do is slow the rate of price decline.”
Ultimately, if component price declines were to slow or reverse slightly, or if shipping costs continued to rise quickly throughout the balance of this year or in the early parts of 2006, PC makers might take action to maintain their system prices. But theyre likely to resist raising them, analysts predicted.
“PC vendors will go through all sorts of unnatural acts not to raise prices,” said Leslie Fiering, an analyst with Gartner Inc. “PC vendors are reluctant to raise prices. What theyll do is keep prices flat and de-feature the systems or find some other way to pick up the slack.”
Often the manufacturers try to bury a price increase by padding shipping charges or by cutting down features, such as RAM allotments, hard drive sizes or the length of a systems standard warranty, she said.
Thus, “Bottom line [price] would be raised, because you would have to add all these things back in. But system prices, which is what everyone looks at, would not be affected,” Fiering said.
However, Fiering added, “We havent seen it yet.”
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