PACKARD BELL SELLS MORE PCS IN THE U.S. THAN ANYONE. SO JUST WHO ARE THESE GUYS?
(FORTUNE Magazine) – Ever since Israeli-born entrepreneur Beny Alagem bought the name of a highly respected but defunct consumer electronics company in 1985--to give his new personal computer business instant cachet--people have been perplexed by Packard Bell. First it was consumers who were confused: Was this the company that made radios and televisions during the 1920s and 1950s? Was it a distant relation of Hewlett-Packard? An offshoot of Ma Bell? (The answers: only in name, no, and no.) Packard Bell compounded the confusion, marketing its PCs with the slogan "America grew up listening to us. It still does."
Now it is the company's competitors who are confounded--from last October through this March, Packard Bell Electronics sold more PCs in the U.S. than anyone else. Unlike IBM or Compaq Computer, former market share leaders that rose by selling largely to corporations, Packard Bell caters almost entirely to consumers, especially those who shop at such locales as Sears, Wal-Mart, Best Buy, and Circuit City.
The company laid the groundwork for its success in the 1980s by quietly forging relationships with department stores and consumer electronics dealers that had little or no experience selling computers. Other PC makers didn't pay much attention to this "alternate channel," preferring instead to focus on outlets that sold to businesses. But now that consumers are rushing to buy PCs-retail sales grew 29% last year, vs. 12% for corporate sales--Packard Bell is there to greet them, with more computers on more shelves in more stores than any competitor. Indeed, over half the shelf space allotted to PCs in stores such as Sears goes to Packard Bell. Small wonder the company's worldwide sales exploded in 1994, up 120% from the year before, to an estimated $3 billion.
One competitor is convinced that Packard Bell's success results from cutting corners. Compaq says the company has kept down manufacturing costs, and thus prices, by taking used parts from returned computers and recycling them in machines sold as new. Observers say it's hard to tell what impact such a practice would have on the cost of manufacturing a PC. Nevertheless, the Houston computer maker filed a lawsuit in April accusing its rival of false advertising.
Through a company spokesperson, Packard Bell says, "Returned parts that test to original equipment standards may be used in manufacturing computers sold as new." Furthermore, the company denies the charge of false advertising. CEO Alagem, 42, and other company executives insist that no such secrets explain Packard Bell's success. But Alagem is secretive about other subjects, especially the past--the company's and his own. Alagem took engineering and business courses at a California school in the 1970s--but only after repeated queries would the company specify the exact institution, California State Polytechnic University at Pomona. In 1983 he teamed up with fellow Israeli immigrants Alex Sandel, 52, and Jason Barzilay, 42--Alagem says he met them "at schools in the area"--to form Cal-Abco, a wholesaler of memory chips and other computer components. Then, in 1986, the trio formed Packard Bell, with Alagem at the helm and Barzilay and Sandel as more or less passive investors.
Alagem and his partners tried to take the company public in 1992. The prospectus Packard Bell filed to accompany the proposed stock offering revealed some of the reasons investors balked: Packard Bell had uneven earnings, lots of debt, and frighteningly high return rates--customers were bringing back nearly 17% of the computers they purchased, well above the industry standard of 5% to 8%. Nevertheless, a year after the offering failed, Packard Bell was able to find an investor: Groupe Bull, the French computer manufacturer, paid an estimated $75 million in 1993 for 19.9% of the company.
The prospectus also revealed that Packard Bell and Cal-Abco were closely entwined. The two companies had loaned each other money and shared a credit line, and Cal-Abco had supplied Packard Bell with PC components.
The founders' partnership extends even further. Alagem, Barzilay, and Sandel own at least three other companies: Reveal, which sells CD-ROM drives, modems, and multimedia upgrade products; MicroNet, a provider of memory upgrades; and Future Media Productions, which supplies Packard Bell and other hardware manufacturers with CD-ROMs.
Merely being asked to verify the companies' common ownership causes one partner to bristle. "Why are you hunting us down?" demands Sandel, CEO of Cal-Abco and Future Media. Explains another Cal-Abco executive: "The owners like moving quietly. Putting all the companies on one plate takes some of that benefit away." Meanwhile, Jason Barzilay, CEO of Reveal, says the five companies are completely independent: "There is a Chinese wall between the companies. The only commonality is ownership."
The men who run Packard Bell today--Alagem, COO Brent Cohen, and VP of marketing Mal Ransom--are a study in single-mindedness. All three repeat words like "vision," "spirit," and "focus" to describe what makes the company unique. Packard Bell prides itself on a lean organization, which makes it easy to spread the message. Ransom says "core management" consists of only 20 people, many of whom eat lunch together nearly every day.
How does management win the loyalty of the rank and file? Says Ransom: "We do not have a rah-rah meeting every morning where we do calisthenics and get injected with the spirit. It is the fact that when you get to the management team that is running all the groups, we all buy into the dream; we all buy into the vision." Ambiguous, perhaps--but there is ample evidence that Packard Bell's 3,000 employees have had an unusual ability to act quickly and in unison, like bees in a hive. The day after an earthquake damaged the company's Chatsworth, California, headquarters in January 1994, managers were fielding calls from folding tables set up in the parking lot while factory workers and executives moved equipment out of the buildings. This spring, floods forced a move from the company's European operations in the Netherlands to Angers, France, months earlier than planned. Says Ransom: "We've had the earthquake, the floods ...everything but the locusts."
According to its head seer, management's goal is surprisingly simple. "The vision of the company," Alagem says, "is to listen to what the consumer wants and to provide an innovative product with the latest technology--to become the voice of the people when it comes to the PC." That may not tell you much, but consider this: Packard Bell was first, in 1987, to deliver PCs with the operating system and some key software already installed, saving the consumer the headache of installing the basics; first, in 1988, to offer a toll-free support line; first, in 1991, to include an internal CD-ROM drive; and, crucial to last year's success, first to offer consumers computers driven by Intel's high-powered Pentium chip.
The company continues to deliver. Says Cohen: "We make sure that consumers are not treated like second-class citizens." The company even gives consumers more PC configurations than any competitor, according to the Retail PC Index, a brand-new study put together by the publisher of PC Magazine. The index also suggests that Packard Bell is indeed offering home buyers better value for their money than Hewlett-Packard, Compaq, IBM, or Apple. It compared PCs sold by leading manufacturers at eight major retailers with a "target" package that includes features most home buyers and small businesses now want. The best deal the index found in March was a Packard Bell multimedia PC, featuring a Pentium chip, lots of memory, a high-speed CD-ROM drive, a built-in telephone-answering machine, and a modem, that sold at Circuit City for $1,872, not including the monitor.
Packard Bell also responds to retailers with greater alacrity than its competitors. Last year, CompUSA's head of merchandising, Larry Mondry, suggested a series of improvements to one of Packard Bell's product lines. "Instead of saying, like some companies, 'Thank you for your comments, we'll change some things next year,' they said, 'Give us two weeks.' " Fourteen days later the company shipped him a new batch of PCs with the features he had requested. Marvels Mondry: "In a business in which some companies can't put out a new line in six months, they did it in two weeks."
Such turnarounds may happen even faster now that Packard Bell is assembling PCs at a new, highly automated plant in Sacramento. The company is moving headquarters and most operations to a former Army depot in the state capital. Packard Bell says it can make machines that use Intel's 486 chip early in the morning and others that use the Pentium by lunchtime on the same assembly line. Says Cohen: "Our components are the same ones that everyone uses, but we optimize the design so that our assembly is more efficient."
That responsiveness bolsters what Ransom calls a "wonderful relationship with dealers." Retailers like Sears seem to show a loyalty to Packard Bell that they don't give others. "Partnership is one of the most misused words in business," says Chuck Cebuhar, who runs Sears' home electronics division, "but Packard Bell is a great partner. They are as good and responsive as you can get." When Packard Bell first approached Sears in 1989, the company had had limited success selling PCs. Alagem and company created in-store displays and demonstrations, even training Sears salespeople. Sears' computer sales have tripled since then, and the company just gave Packard Bell its Product Development Source of the Year award for 1994. Wal-Mart and Staples have given the company similar awards.
Packard Bell works closely with retailers in other ways. Unlike manufacturers that insist on national advertising campaigns, Packard Bell depends solely on money it gives retailers to advertise in local publications. It also allows retailers to select from product lines marketed under several different brand names, like Axcel, Force, and Legend, a practice known as sub-branding. Retailers like this because it makes it harder for consumers to compare prices of machines with similar features at different stores. And Packard Bell has always made it convenient for retailers to return PCs that customers bring back. "Packard Bell's policies are easier for the retailers to deal with and comply with than those of their competitors," says David Goldstein, president of Channel Marketing, a retail consulting firm. "Other companies have rules that are designed to make it difficult to cheat, reflecting the view that the retailers are less than honest." For instance, while some companies will accept only returns accompanied by an order for new machines, Packard Bell makes no such demands.
The company garners more than just shelf space as a result of its close relationship with retailers. It also gets the early word from the sales floor about what customers want, and last year what they wanted were PCs that could handle multimedia CD-ROMs. So in July, Packard Bell brought out an entire new line of home PCs designed specifically for that purpose, featuring built-in stereo speakers and CD-ROM drives, and free multimedia disks. Sales took off, especially of machines driven by the Pentium chip, some of which were priced as low as competing PCs with the slower 486 chip. Compaq was caught by surprise and lost market share to Packard Bell. Compaq got around to releasing a Pentium PC for consumers only this April.
Consumers aren't always as enthusiastic about Packard Bell after taking their new computers home. Concerns about reliability, customer support, and product returns have dogged the company for the past few years. Packard Bell still lags behind in delivering timely customer support. PC Magazine's semiannual reader survey, most recently published in January, consistently ranks Packard Bell as one of the worst in the category of service and reliability.
Retailers and analysts say Packard Bell has gotten better. "They have clearly improved their return rates dramatically--they are probably close to the industry average of around 5%," says Andy Bose, an analyst at Link Resources, an industry consulting firm. In any case, service problems have done little to slow Packard Bell's sales. "The consumer has voted," says Bill Ablondi, an analyst with BIS Strategic Decisions. "There is obviously a group of people who haven't been put off by any problems Packard Bell has experienced with support."
Alagem and his team hope that customers will be just as oblivious to the Compaq lawsuit. One point at issue is the industry standard for dealing with parts from returned computers. Compaq says that any part it determines has been used will be resold only in PCs it clearly labels as "refurbished." The suit alleges that Packard Bell recycles used parts into computers it then sells as new--and even goes so far as to file off serial numbers to disguise the age of certain components. Packard Bell executives deny they file off serial numbers and claim the suit is without merit. Says Alagem: "Compaq has evidently developed a public relations strategy to divert our efforts and slow our growth."
Early reports from retailers suggest that customers aren't interested in the allegations, even though Compaq's April complaint was followed quickly by a number of suits filed by consumers. Says CompUSA's Mondry: "We canvassed our stores for about a week, and some customers asked about it in the first day or two, but then it died. This is a nonevent. Other than Compaq, nobody cares."
That's good news, because Packard Bell faces a formidable new challenge in the home market: Hewlett-Packard is out to beat Packard Bell at its own game. Says home products marketing manager Laurie Frick: "We have spent a lot of time figuring out how Packard Bell has its great relationships with retailers. It is not a big secret. It's about execution and meeting your commitments." H-P is pricing its first consumer PCs, which have been available since April in Circuit City stores, just above similar Packard Bell machines. The company, which already has strong dealer relationships through its printer business, will expand its consumer line to other stores later this year.
Compaq's lawsuit could nonetheless hurt Packard Bell's fledgling efforts to expand into the corporate market. Says Richard Zwetchkenbaum, an analyst at industry research firm IDC: "There is a lingering perception in the marketplace that Packard Bell is cutting corners. The lawsuit is indicative of that perception, and that message doesn't play well in the corporate marketplace."
Indeed, the company must overcome a number of obstacles before it plays as well in the boardroom as it does in the living room. Corporate buyers consider more than the price of an individual PC. Increasingly they look for companies that can help them reduce the total cost of their corporate network. That means lowering the cost of maintaining PCs over time, getting employees the software they need to do their jobs, and hiring computer jocks to make sure the whole thing runs smoothly. Unlike other companies that sell to corporations, Packard Bell has little experience with this side of the business.
Packard Bell's greatest potential may lie overseas. No. 4 in worldwide market share, the company saw its international PC sales grow 173% last year, vs. about 27% for the industry, according to IDC. It opened 15 sales offices in Latin America and Europe in 1994, and expects to add more this year.
But even marketing VP Ransom admits that the PC juggernaut cannot sustain the kind of growth it enjoyed in 1994. He expects sales to grow at least 30% in 1995, better than the forecast for the industry as a whole but a far cry from last year's triple-digit explosion.
Perhaps Packard Bell's biggest challenge is to grow and diversify while keeping the intensity of focus and vision that has served it so well in the consumer market. Ransom isn't worried. "We know who we are, and we know what got us where we are," he says. "It will not change us."
While industry experts agree that Packard Bell's expansion on several fronts is risky, they caution against underestimating the company. "By broadening geographically and reaching out for the commercial sector, they can continue to be among the hottest players in the PC industry," says IDC's Zwetchkenbaum. Tackling new markets takes money, of course, and many observers see another public offering in the near future. With so many people eager to understand Packard Bell's secret, its next prospectus may be the first to end up on the best-seller list.